Maximizing SaaS Outcomes: The 6 Drivers of B2B SaaS Business Value
Editor’s note: Georgian Partners is privileged to have an experienced group of entrepreneurs and executives on our Industry Advisory Board, including Gab Goncalves, who served as the founder and CEO of PeopleAnswers for 13 years. PeopleAnswers provides predictive talent analytics software in the cloud, helping global enterprise customers reduce employee turnover and increase employee performance. Under Gab’s leadership, PeopleAnswers was able to translate its strong differentiation into 40 consecutive quarters of increased revenue growth and more than 96 percent annual client retention rates. PeopleAnswers was sold to Infor for $200 million in early 2014. In this seven-part series, Gab will share his experiences about how he created value at PeopleAnswers.
I’ve been lucky enough to have the opportunity to found, grow and eventually sell my own software as a service (SaaS) business called PeopleAnswers. Now, as a member of the Georgian Partners Advisory Board, I’m happy to share some of the things I have learned through my experiences as a founder and CEO.
There’s a point for every business when it becomes time to either exit or seek more capital. In today’s market, if a predictive analytics SaaS company has done a good job executing, it should be able to get a 5x revenue multiple. But if you do certain things right, I believe it’s possible to increase that multiple further. That’s exactly what I’m going to outline in this series. Specifically, I’ll look at how SaaS companies can increase their value from a 5x multiple to 7x or higher by executing well in six key areas.
But first let me make a disclaimer about this discussion. My perspective and experience is all B2B, and while the approach I’m about to describe works well for B2B, it might not be as effective for B2C.
The 6 Drivers of B2B SaaS Business Value
I believe that B2B SaaS businesses can create significantly more value than they would otherwise capture by focusing on the following six key drivers:
- Have a Clear Value Proposition
- Optimize Your Total Addressable Market
- Create a Defensible & Scalable Business
- Develop a Compelling Revenue Model
- Build a Team with Deep Experience
- Make Sure Your Customers Are Happy
Many of you are probably already doing most of the things listed above well, but you probably aren’t doing as good of a job as you could communicating that to your customers, investors, employees and other stakeholders. As a result, you’re not going to capture as much value.
I’ll address each of these drivers in future posts, starting here with the importance of having a clear value proposition.
Why Having a Clear Value Proposition Matters
In my experience, getting your value proposition right is about being able to clearly articulate in a few words what problems you solve for your clients and then making sure that those problems are compelling enough for people to spend money to address them. We didn’t start out being able to do this well at PeopleAnswers, but by the time we sold the company we were very good at it.
When we were five or six years into our journey, I brought in an experienced sales executive from SAP. He quickly looked at what we were doing and concluded that the way we were communicating our value proposition wasn’t good enough. So we quickly started the process of developing a new means to communicate our value to our customers. As a result, we identified four key value propositions:
- Employee Turnover – there are significant costs every time an employee walks out the door.
- Employee Performance – the increase in value to an organization for each percentage increase in productivity from employees.
- Hiring Processes – large companies have lots of costs associated with the hiring process due to the huge volume of staff hires.
- Risk Mitigation – there’s risk associated with people doing the hiring process differently in a large distributed environment; the ability to have a uniform hiring process reduces that risk.
These four key value propositions were then presented to customers as shown in Figure 1 below, using the concept of ‘moving the needle’ for each customer (i.e., by showing how we could positively impact their specific business):
This approach allowed us to structure a discussion about value in specific areas, such as employee performance, and what moving the needle meant for that customer. For example, “What does a 1 percent increase in performance mean to you?” In other words, we wanted to know what improving one of these areas was worth to our customers.
As much as possible, we also worked hard to back up our claims with empirical evidence, which I believe is critical to making a value proposition credible. For example, in the case of reducing employee turnover we looked at the case of one customer that was a large hospital system. Every time a nurse there quit it cost them approximately $50,000 to replace that person (factoring in recruiting fees, the cost of backfilling the position with an hourly nurse, training costs, etc.). That particular client told us that we saved them 1,000 nurses per year, which translated to $50 million in savings each year.
Another key part of PeopleAnswers’ value proposition was around improving employee performance. Once again it was baked into our baseline that we could measure the difference that our software platform made for individual clients. For example, we conducted a fairly broad study for a US retailer a few years after deploying our solution and were able to see a 9 percent increase in monthly sales. If you do the math, this observation becomes quite interesting. That particular customer had about 70,000 sales associates, each of whom had an annual sales quota of about $150,000. So in that instance a 9 percent increase translates to between $14,000 and $15,000 a year. Multiply that times 70,000 sales associate and you get another really big number.
Being able to quantify that and show the customer what kind of a difference we were making really helped us establish our value proposition and be able to communicate it in a very succinct and objective way.
My point here is that when you start thinking about value propositions it really isn’t about describing what you do, it’s about describing the problem you solve and backing it up with results.
Many tech companies are enamored with whatever widget they’re building and try to get that excitement across when they describe their product or solution. But that’s not really what value propositions are about. They’re really about describing the problem you’re solving for your customer. And since most customers spend money to either make or save money, if you can articulate your value proposition in such a way that you’re reminding them how you’re helping them save or make money, then you’ll have a much better and more effective value proposition.
To read the next post in this series, click here.