Maximizing SaaS Outcomes: How to Build a Compelling Revenue Model
Editor’s note: This is the fouth post in a series in which Georgian Partners’ Advisory Board member, Gab Goncalves, describes how he created value at PeopleAnswers, the predictive talent analytics software company he founded in 2001. If you haven’t already, we encourage you to read his previous post on creating a defensible and scalable business, or starting at the beginning of the series in which he outlines the six drivers of B2B SaaS business value.
One of the key reasons why PeopleAnswers was acquired for $200 million in 2014 is because we had a compelling revenue model. We’d been focused on getting it right since the beginning and all of that hard work eventually paid off. Between 2003 and 2013, we had 40 consecutive quarters of consistent, positive growth. Even in 2008, at the height of the global financial crisis when much of the world was melting down, we sailed ahead.
That’s the kind of ideal outcome that entrepreneurs dream about. It’s also one of the factors that made us an attractive acquisition target. Of course, to get great results, you’ve got to put a lot of thought into creating the right revenue model for your customers and your business. For us, that meant:
• Recurring revenue is king (part 1): We chose to maximize recurring revenues from the beginning. Our goal was to achieve predictive, long-term revenues. We forfeited setup and activity-based fees (the more you use it, the more you pay) for the certainty of a fixed amount of revenue each month of a long-term contract. By rolling setup fees into our recurring fee, we removed a barrier to sales and locked in a slightly larger monthly fee for the life of the customer. And, by avoiding activity-based fees and setting up a minimum recurring amount for the long term, we gained visibility into our revenues multiple quarters in advance. Plus we were protected from business cycles (i.e., the 2008 financial crisis).
• Recurring revenue is king (part 2): We would walk away from opportunities where customers wanted to pay us month-to-month or would only commit to a few months at a time. At a minimum, we engaged on a 12-month term that was auto-renewable whenever possible. As our customer base grew and our execution risk to new customers decreased, we asked for and were awarded more and more multi-year agreements. We also didn’t give customers any outs in the term of their agreements. Sometimes we had to fight hard for this last point, but we were always able to get it.
• Don’t limit your upside (part 1): We knew every year that the next year’s revenues would be at least 10 percent greater than the current year’s. By keeping renewal rates high and allowing our recurring revenue to grow organically with our clients, we had built-in revenue growth. Instead of charging a fixed fee per client (and limiting upside), we established a base monthly fee and then developed incremental tiers that were tied to the scope of use. For example, retailers were charged a fixed per-store fee each month; the more of their stores that used our solution, the more recurring fees we would get. At least 10 percent in revenue growth every year came from our existing clients paying us for using our solution on a larger scale (e.g., more stores, more line of businesses, more employees, etc.).
• Don’t limit your upside (part 2): We very rarely sold enterprise contracts up front where customers could use us for all parts of their business for one fixed fee. We came to realize that by always limiting the initial scope by geography, division or lines of business, we were able to achieve much higher incremental recurring revenue from that particular client as they saw the value we provided and expanded.
• It’s all about renewals: In any recurring revenue business they say that “you can’t fill the bucket if you have a whole on the bottom.” My stance was that it’s more important to renew a client than it is to sign up a new client. Every unhappy client that doesn’t renew tells three potential clients, while every happy client that does renew tells three other potential clients. That math is overwhelming. It’s also important to realize the cost of acquiring new clients. In our case, it used to cost us almost 10 months of a new client’s revenues to pay for the marketing, sales and setup costs associated with signing up that client. Unless you keep them for multiple years, the customer acquisition costs will eat up your profits.
• Building a diverse customer base. We knew that if 90 percent of our revenue was tied to one customer, we would be putting ourselves at risk. So instead, we distributed our risk across lots of different customers that spanned a variety of verticals. By doing so, we were able to shield our business from the negative effects of a customer canceling their service or a particular vertical having a bad year.
All of these factors combined to give us a very effective revenue model that yielded results and appealed to investors.
So what’s all of this mean for you? If you take away one thing from this post, it’s that you need to be really thoughtful about your revenue model and your approach to charging and upselling your customers. As you develop your model, look for opportunities to minimize your risk by diversifying you customer revenue. You also want to demonstrate that you’ve got a very consistent and predictable revenue stream. If you’re smart about how you quantify your growth and where it comes from, you’ll find that your business is a lot more attractive to potential investors.
Like what you’re reading? Then check out the next post in this series about building the depth of your team.