The steady rise of the cloud in the enterprise has been a game-changer, overhauling how companies run operations both internally and externally.
But the versatility of the technology has also had a major impact on how enterprise vendors sell their services, as customers want to scale and adapt their cloud models and expect their vendor to support them along the way.
Discussing what this means for the cloud industry, and indeed how it continues to prosper as a whole, is Martin Moran, EVP of Global Selling Services at ServiceSource, in our Q&A.
TechRadar Pro: How exactly do you value and quantify the business benefits of the cloud?
Martin Moran: With cloud computing becoming so pervasive and commonplace in our day-to-day lives and businesses, everyone has differing opinions on how to quantify the true value of the cloud.
On its surface, the cloud brings economies of scale that can be quantified through traditional metrics such as cost savings and performance improvements.
These accrue both to customers, who have an unprecedented range of options and the commercial freedom to exercise these at will, and to vendors who are able to make changes to their applications and have these immediately available to customers with no painful migration processes.
However, the real benefit of the cloud is the ability to do things that you couldn't otherwise do, and the unprecedented agility it affords.
The cloud allows for unprecedented aggregation of data across an industry, which can serve as the basis for "machine learning" and "prescriptive analytics." SaaS providers offer customers something that they simply can't do themselves.
Even if they had access to their own data and computer scientists, they don't have access to the breadth of representative data from multiple sources.
The whole promise of big data and the improved conclusions companies are able to draw from being able to process and interrogate truly vast amounts of disparate information is only possible due to the cloud.
In short, because of the cloud, we are in an early phase of the next generation of enterprise applications, where machine learning across large data sets enables better business decisions for the enterprise SaaS users.
An example in the consumer space is Amazon's recommendation engine, which customises the browsing experience for returning customers based upon their previous purchases, items in a virtual shopping cart, or items that have been rated and liked.
Amazon uses prescriptive analytics to tailor the experience for one individual based on analysing the patterns present in the enormous amount of data they gather across their entire user base.
It subsequently becomes more "intelligent" based on these choices and usage patterns – adding intelligence to proactively push previously unconsidered choices greatly enables better cross-selling performance.
Better still, so long as the choices are relevant, they are typically not 'dissatisfiers' to the customer experience – a key problem with conventional up and cross-selling techniques.
Best of all, there is little incremental cost in pushing these options to customers and thus the economics of conversion are much more favourable to the vendor – they are able to learn more about customers whilst selling more product.
So, how does one measure the value of the cloud? Clearly it can be measured in traditional terms of cost reduction, increased revenue, and customer loyalty due to improved service levels. Personally, what I find the most exciting is exploring the new ways big data and prescriptive analytics enables us to better serve our customers that simply weren't available to us before the cloud.
TRP: Why is a subscription business model becoming the future for cloud-based business? What benefits does it bring?
MM: I think the starting point for this question is that we should recognise that subscription business models are not new. They have been with us for quite some time. We can reflect on how in our own lives we have been using subscription models for many years.
A great example is if you subscribe to a particular magazine or a daily paper. The transition is the way the subscription business models are now becoming pervasive across the world of technology and it has been largely driven by the advent of cloud computing.
There is another dynamic that is important to understand. Today we are seeing technology acquisition and usage being fundamentally influenced by what is happening in the consumer world. If you think of this in terms of how in our own personal lives we use and apply technology in totally different ways than we did in the past, the same goes for businesses.
Our expectations now are that consumer and business should be closer connected. In the context of business, buyers and acquirers of technology have seen that they can now acquire the technology in a different way on a subscription basis. It is analogous in many ways to what is going on with cloud computing.
Cloud computing is fundamentally a utility and the usage is dependent upon the profile and value that is perceived by the end user. Therefore the acquisition of that service or that technology is much more aligned to a subscription base.
When we think about the benefits it brings to businesses, it gives them a significantly greater freedom in terms of technology choice, acquisition and indeed technology usage. What a subscription model gives for the end user or the end user business is the freedom to switch more frequently.
The fact that they are less locked in to a particular vendor or to a particular technology means that the end user or business can now actually think about technology, about how it continually offers benefit to their business.
Rather than a lock-in technology stack that may over time diminish in terms of value that it brings to the business.
TRP: How does a business navigate the cultural shift to selling in the cloud?
MM: It has been a huge cultural shift but it is important to recognise that it is not just a cultural shift in terms of the acquisition and deployment of technology. It is actually a fundamental cultural shift in the business model.
The new generation of cloud computing companies' business models are predicated largely on a subscription service. This means they think about customer acquisition and the lifetime value of a customer much differently than they would have done in a traditional technology model.
There is a cultural shift, not only in the way you sell cloud, but in the way you think about your customer in that context.
Selling motions have dramatically reduced, for example, in the past, when I was buying a CRM product, I would be looking at evaluating that CRM product not only from the point of view of functionality but also in terms of the whole entire technology stack from the database through application servers, web servers, user interface, all the elements of that stack.
Today I don't need to focus on the infrastructure. I simply need to be assured by the cloud vendor that it is secure, that it is reliable and that it is available. In today's world, most of those questions are being fundamentally answered.
So where I can focus on now, is how well that cloud service drives business benefit to me as a business. Thus procurement becomes less a technology platform-driven decision and much more about the perceived and real benefits to the business user.
That shifts the selling motion for companies selling cloud based services but there is also another really important aspect to this – how you think about the lifecycle value of your customer.
This is partly a question of economics and partly a question of longevity and success. If you think about it in the old world, if I bought software, I paid a significant license fee up front, which is a fairly significant proportion of the lifetime value. Annually as long as I kept that software, I paid a maintenance agreement.
As a provider of that software, a lot of that financial value, I gained up front. As a cloud provider I don't see that up front investment, what I see is the investment over time and normally to drive true customer lifetime value, it is going to take a number of years to get a real return on investment.
Therefore the dynamics change fundamentally. In the cloud world, I now have to think about that customers lifecycle value. I also have to think about what I need to do to make sure that customer stays with me over a protracted period of time.
That means I have to be much more focused when it comes to customer engagement. I have to be much more focused on understanding what my service provides to my customer and how they value that.
If I don't understand those things, I put myself in the position where the customer has the opportunity to switch much more quickly and at a much lower cost than would have traditionally been possible.
This also explains the emergence of the "customer success" function in cloud and subscription vendors' businesses; the economic model of the one-time, high value, big Capex-spend sale simply does not work any more. For both vendors and customers, this is a major readjustment with significant business consequences.
In this new world of the subscription economy and cloud based businesses, customer retention is the fundamental issue.
TRP: Why is vendor lock-in is becoming a thing of the past? What does that mean for the industry as a whole?
MM: From the end user perspective, it gives them much more freedom and much more choice in terms of the technologies they want to deploy in their organisation.
There would have been time where vendor lock-in was predominant. It was based on the fact that you paid for a technology stack, which was integrated, based on a number of technologies and applications and therefore, that in itself created a lock-in.
If I were buying a major ERP application in the past, I would have to invest a significant amount of money into that investment. I would then immediately have a vested interest in ensuring its success, which in itself, created another form of lock-in.
Where that has changed and why that has become a thing of the past is because I can now subscribe to any number of services, most of which I can actually try before I buy. Therefore I immediately get a better understanding of the business value it will bring to my organisation.
Ultimately, if I invest in a cloud subscription based business, and over time I find that it is no longer meeting my requirements and needs, the ability to swap out is much less impactful.
This is down to two reasons. Reason number one being that I haven't had to invest in the infrastructure. Reason number two is that it's subscription based, so I am not incurring a huge capital outlay at the beginning of the lifecycle.
With the speed of change in technology, I can be sure that the cloud technology I buy today will be commoditised within around three years. Therefore the ability to switch quickly, efficiently and effectively is a powerful incentive for me as a business.
As a result, vendors have to be much more aware of that. One consequence of this is that user interfaces have to be intuitive and allow easy access to functionality as users are much less likely to persevere with learning the idiosyncrasies of a particular piece of software.
In an interesting way, the demise of vendor lock-in is driving levels of innovation and change in our industry because now vendors have to be far more sensitive to the needs of their customers if they are actually to successfully retain them in the subscription economy.
TRP: What is the role of predictive analytics for cloud vendors?
MM: In the past, you went out to the market, did an RFP and you got a load of vendors to come and tell you how good their software was. They probably did a demonstration for you and then you had to buy licenses.
These licenses were perpetual licenses and attached to these licenses were support contracts. As a vendor, once I had sold those licenses, my motivations for understanding how you deployed those licenses was not a significant part of my business model.
I wanted you to be successful, I wanted you to use those licenses but the fact that you have paid for them, meant that the risk of usage was immediately transferred to the customer.
In cloud based solutions, particularly where services are driven as part of a subscription model, the risk of usage becomes a shared risk. What I mean by that is, in this day and age, if I buy a subscription service, it is as important to the vendor that I effectively use those subscriptions as it is to the customer. Why?
At the end of that subscription term, I would have the right as a customer to decide whether I want to increase my subscription or decrease. Interestingly enough, we recently did some research that showed for most companies, if they haven't driven adoption and usage within the first 90 days, the risk of attrition in that subscription rises exponentially. So why are predictive analytics so important in that world?
In a subscription economy, you must know and understand the behaviour of your customer. It is critical that you can drive your organisation to react to what your customer is doing and what your customer is saying.
Cloud based services must be able to take usage data and build intelligent insights and take intelligent actions against that usage data.
For example, if you bought 10 subscriptions of a service and you are only using four of them, I can start engaging with you as my customer to determine how I can increase your adoption.
For example, I may offer you training or explain the features of that service that you are not using. Perhaps the usage data, shows that you prefer using one service over another which gives me the opportunity to up sell or cross sell you to other parts in my service offering.
Usage data has to be managed in a way that you can predict behaviour and on that prediction you can take action. For cloud vendors, the ability to have predictive analytics is critical. The better adoption is, the greater retention is likely to be.
The opportunity to increase wallet share of your customer through better adoption and better retention is how you drive towards a customer lifecycle value.
In a business model where paid consumption of a product has to happen over time in order to provide an acceptable return on investment, rather than being heavily skewed towards initial acquisition only, predictive analytics are nothing less than essential.
TRP: How can cloud based businesses prevent customer churn?
MM: If your business is embracing a subscription model, then your own success relies directly on that of your customers. Unless customers realise real value from your solutions, they are not likely to renew, much less buy additional licenses or solutions.
The first step in optimising customer success is to measure and track it. Without a good understanding of where your customers are, you cannot take the right steps to correct problems or develop new revenue opportunities.
But tracking and measuring customer success at scale is a challenge. You don't have the time to conduct detailed interviews of every customer.
You need scalable, automated strategies for identifying customers that are having problems, as well as those that are good candidates for targeted cross-sell and upsell offers. That's where usage data comes in.
Usage data can tell you who is doing what, at what time, and how much. It's great stuff – and invaluable for tracking customer success. But there's more to usage data than meets the eye. It can even lead you astray.
To prevent customer churn, businesses need to:
Know their customers – gain end user insight and monitor customer health throughout the customer lifecycle
Evangelise their value – ensure customers achieve their ROI from your product or services
Personalise customer interactions – run in the right play at the right, based on the customer scorecard
Harness the right skills and incentives – Develop roles, training and processes that deliver a great customer experience
Continually optimise their performance – improve recurring revenue processes through KPIs benchmarks and A/B testing
TRP: What is the key to sustainable growth for SaaS and subscription-based businesses today?
MM: With the change in consumption from pay-to-own to pay-to-use, subscription businesses today must focus on maximising customer lifetime value. It's not only the key to growth, but also to profitability – and viability.
With so much revenue and all of your profit delivered after the initial sale, it's critical to keep customers longer and increase the amount they spend with you to exceed shareholder expectations.
To achieve this goal, you'll need to engage and consistently deliver value across every stage of the customer lifecycle. In the acquisition stage, the goal is to close as many of your target customers as you can while keeping acquisition costs low. So, it is essential to provide the right offers to the right prospects at the right time.
There are several ways to accomplish this, including the use of predictive analytics to engage prospects with relevant content or offers based on their digital buying behaviour. Pair best practices with the right metrics to track success throughout the acquisition stage – and beyond.
When you acquired the customer, you made specific promises to deliver value. How do you ensure that you meet those expectations? You'll need to set the customer up for success through effective onboarding.
Once your solution is deployed, is it actually being used? Is your customer realising the value of your product? Customer adoption is directly correlated to customer retention: If an end user is not loyal within the first 90 days, there is only a 10% chance he ever will be.
Empower your customer success team to ensure customers realise full value by monitoring on-going product usage at the end-user level. In the delivery stage, customers start realising the value you promised.
However, their businesses are constantly changing. You'll need to continuously monitor usage so you can proactively identify trends that may lead to customer churn or revenue growth opportunities.
TRP: What are the challenges to long-term revenue success in a SaaS model?
MM: It's hard to plan for the long term when you're just starting out. Try convincing a new graduate to contribute to a retirement plan – the immediate need for cash often trumps planning for retirement.
New SaaS-based businesses and established businesses adopting a subscription model face similar trade-offs. The best time to invest in ongoing customer loyalty and retention is at the outset. But actually making those investments is a challenge, for three key reasons:
Revenues are lean in early years of a SaaS business model
The payback from customer retention improvements doesn't start showing up in revenues for a few years
If you wait until the business is more mature, corporate culture and practices are often firmly established and change is difficult
To put this discussion in context, it's important to understand the difference between revenue patterns in traditional business models and subscription-based models.
Most business leaders are familiar with Geoffrey Moore's technology adoption lifecycle (from Crossing the Chasm.)
It essentially outlines a bell curve, with innovators, early adopters and the early majority shaping the first part of the curve, and late majority and laggards rounding out the end. When you map actual revenues to that curve, you get an s-shaped revenue curve.
Every industry has a variation on this curve, but with traditional business models, the general s-shape holds true. New product revenues from early adopters shape the front of the curve, and eventually become the foundation of your recurring revenues. Revenues eventually level off as you reach market maturity or near product end-of-life.
The three challenges to long term revenue success with SaaS are:
Challenge #1 – The early years are lean
The first years, when you're building the business, are particularly lean for SaaS-based businesses because there are no big upfront perpetual license fees to fuel growth.
Having lower revenues in the early years makes it harder to fund the business – leaving fewer resources for ongoing customer retention and nurturing efforts. New SaaS-based businesses (or those adopting the SaaS model) are likely to focus their limited marketing and sales resources on acquiring new customers in hopes of making that initial revenue curve a little steeper.
Challenge #2 – The payback from customer loyalty takes a few years
Customer retention improvements are an exercise in compounding interest. A relatively small change in renewal rates can have a major long-term impact in average customer lifetime value – but the difference takes time to show up.
The renewal rate includes not just the number of renewals closed but also the revenue amount of those renewals – including any discounts or upsells. A 15% improvement in renewal rates can generate between three and four times the customer revenue ten years down the road.
The SaaS businesses that invest in customer retention and development practices in the early years have a huge advantage as they mature. It requires an eye to the future.
Challenge #3 – Change gets harder over time
If you wait to focus on customer loyalty, the road is a harder one. By the fourth or fifth year of the business, organisational and cultural practices are already ingrained and difficult to change.
You may be heavily invested in a sales culture and compensation structure that values net new sales over recurring revenue. Reallocating sales and marketing is always difficult.
The time to plan for customer retention is when you're reaching out to your first customers. But if that ship has already sailed, you can still make substantive efforts.
Martin Moran, Executive Vice President of Global Selling Services, brings more than 25 years of technology experience to ServiceSource. Prior to joining ServiceSource, Martin spent ten years at salesforce.com.
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