New Customers vs. Churn: SaaS Opportunity or Problem?

Ann All

Back in June I wondered whether the relative lack of maintenance fees earned by software-as-a-service providers might have played a part in the failure of SaaS business intelligence provider LucidEra. After all, software giants like Oracle are getting an increasing share of their profits from maintenance fees, not new licenses.

 

And by "increasing share," I mean a huge chunk. As InformationWeek's Bob Evans pointed out last week, license upgrades and support was the only category in which Oracle enjoyed healthy revenue growth in its fiscal second quarter. In fact, Oracle's maintenance business is defraying losses it is suffering elsewhere.

 

Still, even with this cash cow, on-premise software providers have it tougher than their SaaS counterparts, opines David Cummings on his B2B Tech Entrepreneur blog, because it's easier for SaaS providers to sign new customers. He writes:

With Software as a Service (SaaS) vendors, assuming a high renewal rate (90 percent is considered very good), new customers represent additional recurring revenue that is layered onto the existing revenue base. One of the benefits of SaaS, besides the obvious things like more predictable cash flow, growth, etc is that there's no limit on revenue growth as long as new customers are signed up faster than customers leave (churn). This presents an opportunity for SaaS companies to grow indefinitely -- something that was historically much more difficult for installed software companies.

I'm not sure about "indefinite" growth. There are only so many customers, even if SaaS providers manage to wrestle lots of them away from traditional software competitors. And there's plenty of SaaS competition too, though SaaS market consolidation will take care of some of that.

 

There's also that matter of churn. SaaS providers promote the ease of switching solutions as a selling point. Leaving a SaaS vendor is not painless, as I wrote last February, but it is considerably less painful than a rip-and-replace of on-premise software. While existing customers are largely satisfied with their SaaS applications and plan to maintain or increase their SaaS investments, their satisfaction levels aren't exactly through the roof, according to a Gartner survey released in July.

 


Not only that, but Gartner found some organizations that evaluated SaaS solutions found them wanting. Of those that evaluated SaaS solutions and chose not to deploy them, 42 percent cited cost and 38 percent integration issues, while 33 percent said SaaS didn't satisfy their technical requirements. Gartner analyst Twiggy Lo said the results were "somewhat disquieting" for vendors.

 

I found an interesting flux analysis of SaaS revenue by DevelopmentCorporate at Slideshare. According to the analysis, from last January, transactional usage fees account for 60 percent of SaaS revenues, with per-user or per-seat fees accounting for 20 percent of revenues, followed by fees for services such as archiving, private labeling or special connectivity (12 percent) and setup/customization fees (8 percent).

 

Drilling down, DevelpmentCorporate found that while new and existing customers made up for attrition (as Cummings says they should), the numbers aren't as lopsided as SaaS providers would like. Twenty-four percent of existing customers spent more, for a year-over-year increase of $263,729. A 10 percent increase in new customers added $97,865, for a grand total of $361,585. In the other column, existing customers that spent less accounted for a $116,938 drop. Customer attrition dropped revenue $115,607, for a total of $232,545.

 

A lot seems to ride on existing customers. (As is the case with more traditional providers. See the Oracle example. But with it easier for SaaS customers to walk away, SaaS providers can't pile on the kinds of maintenance fee increases we've been seeing from some on-premise software providers.)

 

The top 10 existing customers drove 51 percent of the year-over-year (2007 to 2008) growth, with the rest of existing customers driving 20 percent of growth. What happens if any of the top 10 customers decides to leave?

 

About those maintenance fees, is there anything customers can do about them? As IT Business Edge's Loraine Lawson wrote, it's a good idea to periodically review software licenses and get rid of unneeded ones. Here's more good advice from Computer Economics. Dated 2005, it's still relevant today:

  • Be pickier when buying software in the first place. The vendor may offer a big discount on additional modules. But cha-ching, the vendor based on the list price of those modules. So if you won't implement until later, don't buy until later.
  • If you aren't using all of the modules you purchased, consider canceling maintenance on the modules you are not using.
  • If you plan on buying additional software from the same vendor, see whether you can negotiate a better deal on existing modules in exchange for buying additional modules.
  • Consider using third party maintenance and service providers.
  • More radically, consider canceling maintenance for older or less critical systems.


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