Digging Economic Moats for Your XaaS Business | Gainsight Pulse 2016 Keynote
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www.tsia.com Take a peek at the Gainsight Pulse 2016 Keynote by JB Wood of TSIA. TSIA’s new book Technology as a Service Playbook details the specific tactics that SaaS and other subscription model companies must employ to achieve solid profitability. Over time, they must evolve their business and financial models in specific ways. They must know what pillars for success should be embedded into their offers and their customer engagement models in order to facilitate not just current success, but future profits. In this session, we will examine the six economic moats that have made tech such a profitable industry and how most cloud companies are MISSING them! Specifically, we will focus on the critical role that Customer Success organizations can play in building economic moats that help you maintain competitive advantage, keep customers on your platform, and most importantly, produce profits.
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Digging Economic Moats for Your XaaS Business | Gainsight Pulse 2016 Keynote
- 1. ©2015 Gainsight. All Rights Reserved. Digging Economic Moats for Your XaaS Business J.B. Wood, President and CEO, TSIA
- 2. ©2015 Gainsight. All Rights Reserved. Our mission is to increase revenue and profit performance of technology companies by optimizing service businesses.
- 3. ©2015 Gainsight. All Rights Reserved. Our Global Footprint 3 65+ Countries | 500 Memberships | 300 Tech Companies 80% are Fortune 100 Tech Firms
- 4. ©2015 Gainsight. All Rights Reserved. Our Research-Intensive Model 115 Deep dive audits 1150 Benchmark analyses 7K Analyst inquiries In the last 4 years… In the last year… 130K Benchmark data points 515K Survey data points 4
- 5. ©2015 Gainsight. All Rights Reserved. "I skate to where the puck is going to be, not where it has been.” - Wayne Gretzky
- 6. ©2015 Gainsight. All Rights Reserved. 2009 2011 2013 “We have a problem…” “A new purchasing model is coming” “Industry transformation” A Journey… “Profitable XaaS” 6 Coming This Month!
- 7. ©2015 Gainsight. All Rights Reserved.
- 8. ©2015 Gainsight. All Rights Reserved. Tech & Service 50 Index vs. Cloud 40 Index TSIA TS50 TSIA Cloud 40 8
- 9. ©2015 Gainsight. All Rights Reserved. Revenue Multiplier (market cap/revenue) Average:Q4 2015 5.6 1.4 1.7 1.7 1.8 1.8 2.1 2.6 5.1 5.5 5.5 5.6 5.7 6.1 7.5 7.9 8.1 8.2 8.6 10.4 14.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Lifelock RackSpace IntraLinks LivePerson Jive Software Constant Contact RealPage Cornerstone Ondemand Athena Health Medidata Google Qualys LogMeIn SalesForce Veeva Systems Demandware Ultimate Software NetSuite ServiceNow Workday 9
- 10. ©2015 Gainsight. All Rights Reserved. However, The Mountains Are Eroding… 0 5 10 15 20 25 LivePerson MarinSoftware EGAIN Brightcove Numerex RackSpace Carbonite JiveSoftware Bazaarvoice IntraLinks Lifelock inContact Channeladvisor BarracudaNetworks BottomlineTechnologies RealPage RingCentral Benefitfocus CornerstoneOndemand Marketo VeevaSystems LogMeIn Textura Demandware AthenaHealth Google Medidata SalesForce FleetmaticsGroup SpsCommerce RedHat Cvent Qualys NetSuite UltimateSoftware Splunk Proofpoint GuidewireSoftware ServiceNow Workday Current Last Year 10
- 11. ©2015 Gainsight. All Rights Reserved. GaaP Profitability Problem Not Going Away At Scale 11
- 12. ©2015 Gainsight. All Rights Reserved. The Slowdown Fish PROFIT LOSS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ Time COST REVENUE Profits Losses Growth Slowdown costs revenue 12
- 13. ©2015 Gainsight. All Rights Reserved. The Slowdown Fish PROFIT LOSS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ Time COST REVENUE Losses Growth Slowdown New Investor Messaging “Hyper-Growth” “Growth + Profits” 13
- 14. ©2015 Gainsight. All Rights Reserved. Why aren’t we already there?
- 15. ©2015 Gainsight. All Rights Reserved. Economic Moats – What Drives Sustained Tech Profitability? 6. Virality/Low Cost of Sales 4. Network Effect 3. Economies of Scale Economic Moat 5. Diverse Revenue Streams 2. Unique Capabilities 1. High Switching Costs 15
- 16. ©2015 Gainsight. All Rights Reserved. Economic Moat - Traditional Tech Alignment Virality/Low Cost of Sales Network Effect Economies of Scale Medium Medium Low Economic Moat Traditional Tech High High High Diverse Revenue Streams Unique Capabilities High Switching Costs 16
- 17. ©2015 Gainsight. All Rights Reserved. Economic Moat XaaS 1.0 – All Same or Worse Virality/Low Cost of Sales Network Effect Economies of Scale Medium Medium Low Economic Moat Traditional Tech High High High Diverse Revenue Streams Unique Capabilities High Switching Costs XaaS 1.0 Medium Low Low Low Medium Medium 17
- 18. ©2015 Gainsight. All Rights Reserved. The Cost of Sales Problem
- 19. ©2015 Gainsight. All Rights Reserved. Sales and Marketing as a Percentage of Revenue 50% 40% Workday Licensed Software Rackspace Google 30% 20% 10% 0% 52% 60% 40% 38% 29% 14% 13% Saas Companies Salesforce 19
- 20. ©2015 Gainsight. All Rights Reserved. XaaS Revenue Waterfall 20 115% $115m 100% $100m End of Year Revenue: Total $’s End of Year Starting ARR: Total $’s Available to Renew at Beginning of Year 90% $90m Retention Dollars Upsell Dollars Cross Sell Dollars Customer Churn Dollars Downsell Dollars Retention Rate = 90% Expansion Rate = 25% Churn = 7% $3m Downsell = 3% $7m Upsell = 10% $10m Xsell = 15% $15m YoY Growth Rate = 15% Source: TSIA SRG Cloud Benchmark Study 20
- 21. ©2015 Gainsight. All Rights Reserved. Effectiveness Efficiency Data Quality Stickiness Quantity Who Land New Customer LAND ADOPT Descriptive Analytics Predictive Analytics Outcome Analytics Consumption Analytics Platform Cost-Effective Selling Channels Data-driven and CGT-driven Lead Gen X-Sell Sellers Renewal Sellers Upsell Sellers Large Upsell Sellers EXPAND RENEW Outcome Engineering Customer Success Team Customer Service Teams Customer Growth Teams TSIA LAER Model – The Key to Reducing Cost of Sales 21
- 22. ©2015 Gainsight. All Rights Reserved. Economic Moats XaaS 2.0 Virality/Low Cost of Sales Network Effect Economies of Scale Medium Medium Low Economic Moat Traditional Tech High High High Diverse Revenue Streams Unique Capabilities High Switching Costs XaaS 1.0 Medium Low Low Low Medium Medium XaaS 2.0 Medium 22
- 23. ©2015 Gainsight. All Rights Reserved. The Revenue Diversification Problem
- 24. ©2015 Gainsight. All Rights Reserved. The Three Profiles of Xaas Future Value Aggregator Unit of Consumption by Customers (users, pageviews, clicks, etc.) Confident in Pricing/ Revenue Model Revenues Growing Faster Than Expenses Profitability Horizon Mid-Term Wedge Current Profit Maximizer 24
- 25. ©2015 Gainsight. All Rights Reserved. FVA Profit Horizon PROFIT LOSS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ Time Future Value Aggregator COST REVENUE 25
- 26. ©2015 Gainsight. All Rights Reserved. The Three Profiles of Xaas Rapid Growth (usually triple-digit) Future Value Aggregator Unit of Consumption by Customers (users, pageviews, clicks, etc.) Confident in Pricing/ Revenue Model Revenues Growing Faster Than Expenses Profitability Horizon Not yet No 5+ years Mid-Term Wedge Current Profit Maximizer 26
- 27. ©2015 Gainsight. All Rights Reserved. MTW Profit Horizon PROFIT LOSS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ Time Mid-Term Wedge COST REVENUE 27
- 28. ©2015 Gainsight. All Rights Reserved. The Three Profiles of Xaas Future Value Aggregator Mid-Term Wedge Current Profit Maximizer Growth (high double-digit+) Unit of Consumption by Customers (users, pageviews, clicks, etc.) Confident in Pricing/ Revenue Model Revenues Growing Faster Than Expenses Profitability Horizon Yes Yes, maybe barely 3 to 5 years 28
- 29. ©2015 Gainsight. All Rights Reserved. CPM Profit Horizon PROFIT LOSS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ Time Current Profit Maximizer COST REVENUE 29
- 30. ©2015 Gainsight. All Rights Reserved. The Three Profiles of Xaas 30 Future Value Aggregator Mid-Term Wedge Current Profit Maximizer Growth, could be slowing Unit of Consumption by Customers (users, pageviews, clicks, etc.) Confident in Pricing/ Revenue Model Revenues Growing Faster Than Expenses Profitability Horizon Yes, usually multiple Yes Current to 3 years
- 31. ©2015 Gainsight. All Rights Reserved. Friction Extremes 31 Easy Acquisition Easy Adoption Maximize Margin EASY PROFITABLE
- 32. ©2015 Gainsight. All Rights Reserved. The Friction Curve 32 FUTURE VALUE AGGREGATOR MID-TERM WEDGE CURRENT PROFIT MAXIMIZER Harder Purchase Decision Easier Purchase Decision Higher Profits Per Customer Lower Profits Per Customer
- 33. ©2015 Gainsight. All Rights Reserved. Iron Triangle Portfolio & Pricing Customer Engagement Model Financial Keys Key XaaS profits decisions live in these three areas
- 34. ©2015 Gainsight. All Rights Reserved. The 3x3 of XaaS Portfolio And Pricing Customer Engagement Model Financial Keys FUTURE VALUE AGGREGATOR MID-TERM WEDGE CURRENT PROFIT MAXIMIZER • Revenue mix • Margin and profit targets • Sales and marketing • Key performance metrics • New customer landing strategy • Adoption framework • Customer expansion model • Renewal responsibility • Technology offer definition • Value-added service offer definition • Offer(s) pricing model Harder Purchase Decision Easier Purchase Decision Higher Profits Per Customer Lower Profits Per Customer 34
- 35. ©2015 Gainsight. All Rights Reserved. XaaS Revenue Streams TOTALS Revenue Streams Technology Subscription Premium Annuity Account Services Professional Services Transaction Revenues Aggregate Business Model % of Company Revenue COGS% GM% S&M% R&D% G&A% OI% 35
- 36. ©2015 Gainsight. All Rights Reserved. LowAverageHigh Gross Margin Profiles (TRIMMED RANGE) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% SOFTWARE PRODUCT GROSS MARGIN SUBSCRIPTION GROSS MARGIN ANNUITY SERVICES GROSS MARGIN PROJECT SERVICES GROSS MARGIN TRANSACTION SERVICES GROSS MARGIN 36
- 37. ©2015 Gainsight. All Rights Reserved. Bundle Growth Chart ATTRIBUTE Portfolio Components Core Offer Tech Support Module A Tech Support Outcome Services FVA STAGE NEAR-TERM WEDGE STAGE CURRENT PROFIT STAGE Core Tech Subscription Adjacent Modules Attached Services Operational Services Adoption Services Information Services Outcome Services Basic Basic Consulting Tech Support Basic DiverseCompleteSimple 1 5 10 TOTAL NUMBER OF OFFER BUNDLES Core Offer Module A Implementation Premium Data Supplement Core Offer Module B Implementation Managed Services Premium Data Supplement Advanced Analytics Pay for Performance 37
- 38. ©2015 Gainsight. All Rights Reserved. FVA Revenue Streams TOTALS Revenue Streams Technology Subscription Premium Annuity Account Services Professional Services Transaction Revenues Aggregate Business Model % of Company Revenue 90% 10% 100% COGS% 40% 40% 40% GM% 60% 60% 60% S&M% 60% 15% 56% R&D% 20% 20% 20% G&A% 15% 15% 15% OI% -35% 10% -30.5% 38
- 39. ©2015 Gainsight. All Rights Reserved. Competitor A’s Price Competitor B’s Price Core Subscription Prices and Margins Get Squeezed! 39
- 40. ©2015 Gainsight. All Rights Reserved. Expanding the Portfolio of Offers ATTRIBUTE Portfolio Components Core Offer Tech Support Module A Tech Support Outcome Services FVA STAGE NEAR-TERM WEDGE STAGE CURRENT PROFIT STAGE Core Tech Subscription Adjacent Modules Attached Services Operational Services Adoption Services Information Services Outcome Services Basic Basic Consulting Tech Support Basic DiverseCompleteSimple 1 5 10 TOTAL NUMBER OF OFFER BUNDLES Core Offer Module A Implementation Premium Data Supplement Core Offer Module B Implementation Managed Services Premium Data Supplement Advanced Analytics Pay for Performance 40
- 41. ©2015 Gainsight. All Rights Reserved. MTW Revenue Streams Revenue Streams Technology Subscription Premium Annuity Account Services Professional Services Transaction Revenues Aggregate Business Model % of Company Revenue 70% 20% 10% 100% COGS% 35% 35% 65% 38% GM% 65% 65% 35% 62% S&M% 45% 12% 8% 35% R&D% 18% 10% 5% 15% G&A% 12% 12% 12% 12% OI% -10% 31% 10% 0% 41
- 42. ©2015 Gainsight. All Rights Reserved. Strategic Diversification ATTRIBUTE Portfolio Components Core Offer Tech Support Module A Tech Support Outcome Services FVA STAGE NEAR-TERM WEDGE STAGE CURRENT PROFIT STAGE Core Tech Subscription Adjacent Modules Attached Services Operational Services Adoption Services Information Services Outcome Services Basic Basic Consulting Tech Support Basic DiverseCompleteSimple 1 5 10 TOTAL NUMBER OF OFFER BUNDLES Core Offer Module A Implementation Premium Data Supplement Core Offer Module B Implementation Managed Services Premium Data Supplement Advanced Analytics Pay for Performance 42
- 43. ©2015 Gainsight. All Rights Reserved. CPM Revenue Streams TOTALS Revenue Streams Technology Subscription Premium Annuity Account Services Professional Services Transaction Revenues Aggregate Business Model % of Company Revenue 55% 20% 15% 10% 100% COGS% 25% 25% 60% 10% 29% GM% 75% 75% 40% 90% 71% S&M% 42% 10% 5% 5% 26% R&D% 20% 10% 5% 8% 15% G&A% 10% 10% 10% 10% 10% OI% 3% 45% 20% 67% 20% 43
- 44. ©2015 Gainsight. All Rights Reserved. The Profitable Economic Moats of XaaS 2.0 Virality/Low Cost of Sales Network Effect Economies of Scale Medium Medium Low Economic Moat Traditional Tech High High High Diverse Revenue Streams Unique Capabilities High Switching Costs XaaS 1.0 Medium Low Low Low Medium Medium XaaS 2.0 Medium High High Medium High High 44
- 45. ©2015 Gainsight. All Rights Reserved. Customer Success Will Play A Central Role in Profitable XaaS 2.0 • Drive down sales costs • Optimize waterfall economic performance • Diversify revenue streams A Lot More Than Just Adoption and NPS!
- 46. www.tsia.com Reserve Your Copy: http://info.tsia.com/xaasplaybook Introducing TSIA’s New Book
- 47. ©2015 Gainsight. All Rights Reserved. Digging Economic Moats for Your XaaS Business THANKS! J.B. Wood President and CEO
Editor's Notes
- Mission: Tech companies are all looking for growth in revenue and profits. We help them achieve this by optimizing their service businesses. We understand the strategic, financial and operational levers that lead to improved financial results and are laser focused on how to optimize around them.
- Global Footprint: We work with hundreds of technology firms, both large and small, around the world. We have over 300 member companies and 500 active membership subscriptions. 80% of our members are from Fortune 500 firms.
- Research-Intensive Model: Our model is highly data-driven. Through our engagements with members that include deep dive audits, benchmark analyses, analyst inquiries, and special studies, we collect and analyze hundreds of thousands of data points that we synthesize into our research and recommendations. We know what works and play that back to our members to help accelerate results on the metrics that matter.