In traditional (legacy) software sales, companies make large up-front investments in software and then pay a smaller support cost throughout the life-cycle of the product. From an Independent Software Vendor’s (ISV) perspective, this puts the focus on the sales process and very little focus on customer satisfaction, since once the investment is made, a customer is stuck with whatever decision they made and have very few options to get out of a poor product or weak support. This also places an enormous amount of pressure on a sales organization for new customer acquisition and takes time and focus away from servicing existing customers. Software-as-a-Service subscriptions create predictable revenues for ISVs and better experiences for the customer.
Why SaaS Puts the Focus on the Customer
Software-as-a-Service is a completely different model than legacy on-premise software sales since companies are no longer making large up-front investments in software. Instead, they are paying a monthly or annual subscription for the use of the software. While some SaaS products, such as accounting, ERP, or financial reporting products, are fairly complex to deploy, most are easy to get into and easy to get out of and switch to other products. This means that ISVs need to put the focus on customer satisfaction and to ensure that their customers are receiving value for their monthly or annual subscription.
The Metrics that Matter
SaaS companies need to focus relentlessly on the metrics that matter.
MRR/ARR – Monthly or Annual Recurring Revenue is the lifeblood of a SaaS organization since sales revenues are spread out evenly over the subscription period. Recurring revenue is predictable and should be growing if customer Churn can be kept low.
LTV – Lifetime Value of the Customer. The most important factor that positively impacts this number is the length of time a SaaS company can retain customers. The way to do this is to make sure their expectations are being met and they are perceiving high value for the software.
CAC – Customer Acquisition Costs. Stated simply, CAC is the total sales and marketing costs divided by the total new customers in the same period.
Churn – Churn is the percentage of customers lost over a period.
In a SaaS model, having a high churn rate and low LTV are business killers. This is why setting proper customer expectations and proactively nurturing the customer relationship is so important for SaaS companies. If ISVs do this effectively, they win from an increase in MRR/ARR, and the customers win by having the use of great software that is meeting their needs and expectations.