The traditional on-premises software distribution model is fast becoming a thing of the past. While it’s still relevant in some contexts, it has been largely upstaged by the advent of SaaS. The rise of the subscription economy, driven by the numerous benefits of adopting SaaS, including lower costs and greater flexibility regarding upgrades, means that SaaS is here to stay; it has firmly established itself as the business model of the foreseeable future.
Transitioning from on-premises delivery to SaaS is by no means a simple undertaking; it necessitates a systemic change in practically every aspect of the business. It is, nonetheless, a shift that businesses must make, lest they risk being left behind in the market. Here are a few of the key challenges that a company making such a transition would face:
Disruption in the Revenue Stream
One of the most significant and quickly apparent effects of this transition is the impact on revenue. The shift from up-front, lump-sum payments to a series of smaller, more frequent payments is an intimidating and disruptive one. Realistic expectations are important; remaining revenue-neutral through this transition is nearly impossible. In the long run, SaaS can deliver appreciable cost benefits due to improved and continuous recurring revenue and overhead reductions, but the transition itself is often costly. It’s the responsibility of the organization’s financial experts to reassure investors that revenue is, in fact, incoming, albeit delayed.1, 2
In a SaaS model, asynchrony between incoming revenue and business expenses is a given.
In a SaaS model, asynchrony between incoming revenue and business expenses is a given. This has to be taken into account for profit and loss management, cash flow management, forecasts, liquidity risk calculations and the like. It should also be kept in mind that in such a model, it naturally takes longer for a new product to reach the break-even point. As a consequence, the metrics used to measure business performance will have to differ from those used in an on-premises model.1
Power Balance Favors the Customer
Customer centricity is important in on-premises delivery, but it’s nothing short of critical in SaaS. This is a simple consequence of the very structure of a SaaS model. Given the shorter licensing periods and relatively insignificant costs of SaaS applications, consumers exhibit little or no hesitancy in switching to alternative solutions if they’re dissatisfied with the level of functionality or value provided. Considering the maturity of the SaaS market, chances are that they’ll find what they’re looking for. Clearly, knowing and giving customers exactly what they want is key to success .3
Fortunately, SaaS applications provide insight into customer behavior in the form of product usage and engagement metrics. These metrics can help determine which features are being utilized as intended and which ones aren’t. This information, supplemented by testing data and feedback, can be used to modify the application as necessary to ensure customer delight, and by extension, product success.4, 5
Altered Dynamics of Value Realization
In a typical organization that delivers on-premises solutions, it’s no secret that there’s often discord between the sales and customer support teams. The root cause of this can usually be traced back to unrealistic sales targets. Under immense pressure to convert as many prospects to customers as possible, sales representatives have been known to make false promises to them. This then puts the support team in the unpleasant position of having to explain to these new customers that the product they just bought isn’t quite what they thought it was.6
For a SaaS-based organization, maximum value is realized with the retention of customers in the long term; the initial sale is no longer the most profitable part of the customer journey. In fact, Customer Acquisition Cost (CAC) could take as much as a year or more to recover, which means that those customers who churn before the completion of that period will result in a net loss to the company. As such, it’s in the organization’s best interest to get sales and support on the same page, ensuring that prospects in the latter stages of the sales funnel are those that can genuinely derive value from the solutions on offer.3, 7
There’s no questioning the starring role that SaaS has to play in the business landscape; it’s now a matter of which organizations can successfully adapt to this landscape and which ones will wither away in it. Transitioning from an on-premises delivery model to SaaS is undoubtedly a herculean task, but considering these key challenges during the planning phase should set up an organization with the best chance for success.
References:
https://www.parthenon.ey.com/po/en/perspectives/crossing-the-chasm
https://www.siriusdecisions.com/blog/on-premises-to-saas-product-management
http://www.information-age.com/road-isv-saas-are-vendors-prepared-challenges-123461438/
https://www.pipedrive.com/en/blog/sales-customer-service-teams-aligned
https://www.gainsight.com/blog/3-critical-steps-aligning-sales-customer-success/
