Microsoft PowerPoint - TFP-RationalizingTraditionaltoSaaS-080404

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Drew WrightApril, 2008

Rationalizing Traditional Software Pricing to Software as a Service (SaaS)

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Technology Finance Partners (TFP)

Customer Finance

Programs

Pricing Consulting

Sales Tool Creation

Business CaseAnalysis Service

ROI / ValueConsulting

Financially Oriented Sales and Marketing Consultants

Revenue Optimization Sales EfficiencyField Level Support

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Why Rationalizing Traditional to SaaS Matters

Traditional VendorsNeed to respond and compete . . . but need to understand and forecast business impact

SaaS Providers Helps in anticipating competitive response and in developing TCO conversation

SaaS Start-UpsLikely competing with traditional and provides a competitive benchmark when developing pricing.

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Estimated Cumulative Costs

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Months

Cum

ulat

ive

Cos

ts

Internal Subscription

Subscription vs. Perpetual (A Customer’s First Impression?)

Software & Maintenance

Seasonality

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1 6 11

16

21

26

31

36

41

46

51

56

MonthM

onth

ly S

pend

Based on Peak Need

Based on Actual Use

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Estimated Cumulative Costs

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Months

Cum

ulat

ive

Cos

ts

Internal SaaS

The Real Total Cost of Ownership & The Underlying Opportunity

Patches and updates

Version Upgrades

Hardware Refresh

Revenue Optimization

Hardware & MaintenanceImplementationFacilities, ConnectivityOperations Management

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Falling in to SaaSC

usto

mer

Fin

anci

ng

Subs

crip

tion

Pric

ing

Whit

e Lab

el via

MSP

On Demand Option

Software as a Service

Revenue

Business Operations

Firewalled Division

Transformative

Start Up

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From the Trenches: SaaS Poster Child

Employee Spend Management

Select Data from Annual Income Statements (000s)Year 1999 2000 2001 2002 2003 2004 2005 2006 2007Total Revenue 37,809 35,704 41,099 45,097 56,737 56,550 71,831 97,145 129,107Cost of Ops 18,633 27,832 24,961 21,987 23,214 23,264 28,450 37,846 43,711S & M 28,993 38,581 24,941 16,669 14,549 14,329 17,484 22,907 34,154R & D 19,371 31,212 16,449 10,606 10,356 8,773 9,336 12,445 15,866G & A 10,385 14,795 10,729 6,800 6,710 7,295 10,319 14,458 18,759Other 8,859 2,167 266 1,490 1,140 1,140 1,140 2,420 2,965Operating income (48,432) (78,883) (36,247) (12,455) 768 1,749 5,102 7,069 13,652

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007Revenue Growth 87.8% -5.6% 15.1% 9.7% 25.8% -0.3% 27.0% 35.2% 32.9%Cost of Ops 49% 78% 61% 49% 41% 41% 40% 39% 34%S & M 77% 108% 61% 37% 26% 25% 24% 24% 26%R & D 51% 87% 40% 24% 18% 16% 13% 13% 12%G & A 27% 41% 26% 15% 12% 13% 14% 15% 15%Other 23% 6% 1% 3% 2% 2% 2% 2% 2%

First Even Switch

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Stepping Up to SaaS

Customer Financing

Subscription Pricing

White Label via MSP

Revenue

Business Operations

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Step 1: Customer Financing

“As the popularity of SaaS increases, expect vendors that can provide vendor-led financing options and payment alternatives to use them to combat the SaaS offerings.” – Forrester

Cumulative Cash Flow Comparison

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

Financed + Maintenance Subscription

License & Maintenance

Maintenance Only

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Stepping Up to SaaS

Customer Financing

Subscription Pricing

White Label via MSP

Revenue

Business Impact

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Step 2(a): Field Driven Subscription Pricing . . . “The cocktail napkin approach.”

Too simplistic, too onerous . . . and you’ve got control issues!

License + Maintenance

------------------------

-------

Term

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Step 2(b): Rational Subscription Pricing . . . Agnostic Flexibility

Pricing committee’s view of agnostic pricing

Acceptable payback on licenseNo impact on maintenanceLevel of commitment (term and minimums)Risk factoredTime value of money factored

Sales view of agnostic pricing

CompetitiveCommission neutral (on a deal by deal basis)Ability to respond at the deal level (discounting)Contractual flexibilityOpportunity to make more money

14 Interactive conversion tool available at www.tfpllc.com

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Stepping Up to SaaS

Customer Financing

Subscription Pricing

White Label via MSP

Revenue

Business Impact

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Step 3: Partnering with Managed Service Providers (MSPs) . . . A Simple Equation?

SoftwareMaintenanceImplementation

Application DevTech Support

SoftwareVendor

What is your core competency?

SaaS to theEnterprise

UsersProgram Manager

FacilitiesLocationsHardwareNetworkingOperationsBilling

MSP

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Estimated Cumulative Costs

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Months

Cum

ulat

ive

Cos

ts

Internal SaaS

Picking the Right Partners

Revenue Optimization

Balancing the MSP’s strategic valuewith

Your level of participation

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Impact on Revenue

Customer Financing

Subscription Pricing

White Label via MSP

Revenue

Business Operations

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Simple Comparison – Revenue Recognition

$0$200,000$400,000$600,000$800,000

$1,000,000$1,200,000

1stQtr

2ndQtr

3rdQtr

4thQtr

5thQtr

6thQtr

7thQtr

8thQtr

9thQtr

Quarterly Revenue

Perpetual Subscription Pay per Use

Cumulative Revenue

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

1stQtr

2ndQtr

3rdQtr

4thQtr

5thQtr

6thQtr

7thQtr

8thQtr

9thQtr

Perpetual Subscription Pay per Use

Note: Installment payments provides payment plan of subscription with revenue recognition of perpetual . . . longer term subscription commitment can be funded to obtain cash of perpetual

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Revenue Impact of Application Mix (Go / No Go)

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Impact on Business Operations

Customer Financing

Subscription Pricing

White Label via MSP

Revenue

Business Operations

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ChannelSales

ChannelSales

From the Trenches: Channel Conflicts

Customer

DirectSales

ChannelSales

Partner

Partner

Partner

Field Support

SalesMngmt

Customer SaaSProvider

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Proposed Pricing at 40% Margin•Software•Maintenance•Preliminary Field Level HW Architecture•Budgetary Dedicated PS Headcount

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Cumulative Revenue Cumulative Cost

Resultant Margin and Payback•Software•Maintenance•Refined HW Architecture•Refined PS Estimate

From the Trenches: Operational Impact of Providing a Turn Key Solution (being too good of a partner)

Payback

18% Margin

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Top and Bottom Line Impacts

Need to have the rigor of a start up, but could see substantive R&D andoperations gains if software platform unified to one version and delivered as a multi-tenant Web service

Short term hit (unless purely incremental); proper design can create predictable annuity growth

On Demand / SaaS

Expected operational costs around partner management, sales ops, order fulfillment . . . higher cost if “turn key” / minimal efficiency gains

Short term hit (unless purely incremental); proper design can create predictable annuity growth

Subscription (w/ MSP)

Lowest cost optionUp front revenue recognition & can drive incremental revenue

Customer Finance

Bottom LineTop LineApproach

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. . . from “Bessemer’s Top 10 Laws for Being “SaaS-y”By Byron Deeter, Bessemer Venture Partners (Feb 25, 2008)

Your key business metrics are: CMRR (Contracted Monthly Recurring Revenue) and Cash - “Bookings” is for suckers.

It takes at least $300K of CMRR to climb the Sales Learning Curve -Stop at three sales reps until at least two of them are making $100K MRR quotas.

Separate your “hunters” and “farmers” - As soon as you’ve climbed the Sales Learning Curve, begin ramping your sales force by hiring renewal-oriented account managers.

Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand.

Single instance, multi-tenant - Have only one version of the code in production. Really. “Just say no” to on-premise deployments.

ann.flynn@tfpllc.com drew.wright@tfpllc.com