Those of us who have seen software transition from perpetual licenses to recurring revenue SaaS businesses know there’s been a fundamental shift in how revenue is earned over time. Recurring revenue businesses have to prove their value and win the customer’s trust every day. It’s no longer enough to rest on the laurels of a high-value contract term.
Still, some relics of the old world make their way into SaaS businesses, including the way service teams are incentivized. Certain legacy patterns of thinking need to make way for a more modern approach to value creation for the customer. In the old model, customization was key to unlocking services revenue.
Even today, service teams are incentivized to create custom work to drive revenue, too often at the expense of complexity with the objective of retaining the customer for the long-term.
Rather than maximizing services dollars per project, SaaS companies need to rethink the way they incentivize service teams and align them more closely with product teams. Let’s look at how this collaboration can maximize customer lifetime value (LTV) and result in more retention and expansion opportunities for recurring revenue businesses.
Engage for recurring impact
During customer onboarding, service teams typically consult with the customer on their jobs to be done, or most urgent problems to solve. As a result, you’ll usually see a service team create a scope of work (SOW) for customization as a gate around promised work versus future work to prevent scope creep. While this backstops potential downstream project risk, it ultimately misaligns incentives, putting the focus on short-term revenue capture (more and more customization) at the expense of long-term lifetime customer value.
SaaS companies need to rethink the way they incentivize service teams and align them more closely with product teams.
In this model, the customer becomes frustrated by the level of customization required to make a given product functional. Eventually, the software becomes too difficult to manage and the customer churns. In an alternate model, the service team’s goal is to leverage as much from product as possible and implement a defined scope at a predictable price, with a flexible time and materials budget for out-of-scope work.
In doing so, the services and product teams (preferably on the same team) are aligned on the company objective of improving overall net dollar retention. Or, as a recent Harvard Business Review article puts it, in subscription models, recurring revenue is the result of recurring impact, and services are a key driver of this recurring impact throughout the customer life cycle.
A new model for commerce services
One of the biggest business challenges in commerce is replatforming. It’s a painful inflection point where the market (read: vendors) has conditioned merchants to believe that ripping and replacing a legacy system is the only option. That’s often where service teams come in and create a host of upfront custom work, leading to a vicious cycle where commerce platforms become cumbersome and virtually unusable all over again. It’s time to break the cycle!
I often advocate for breaking down the larger challenge of replatforming into smaller component parts. It’s the fastest path to delivering value and contributes to customer LTV. Instead of a wholesale replatform, teams can start small by choosing a single product line or problem to be solved, and pairing it with services activities that allow the customer to maximize their value with an existing product.
In this scenario, it’s important to pair services alongside the product team with each step. Let’s take a common problem to be solved with e-commerce catalog management as an example. During customer onboarding, a catalog modeling exercise delivered by the service team can help merchants understand their product set and variation/configuration options (e.g., sizes/colors, bundles/combinations, single items, etc.).
What are the problems that can’t be solved today? In the traditional catalog model, the tight coupling of product, price, and category limit the capacity for merchandisers to be flexible with their inventory. As a result, many rely heavily on promotions or discounts to solve pricing constraints. Options like dynamic bundling or pricing variations from B2B to B2C channels typically involve custom development work off-platform, which is difficult to maintain.
A catalog modeling exercise based on the “problems to be solved” question should lead to a fruitful collaboration between product and service team. For example, a service team could work on data migration issues and product integrations. That way, the merchant can leverage their existing commerce platform with new catalog capabilities, without having to navigate through a complete replatform. Future component replacements represent opportunities for new services projects, acting in service of customer LTV.
Key takeaways
While we’ve used commerce as a model to show how product and service teams might break a larger problem to be solved into smaller component parts, this strategy can be applied to any recurring revenue business. Some of the key takeaways include:
- Reduce hourly revenue goals on services; incentivize instead on LTV: $500,000 in services revenue today does not add up to multiples in the future, or worse, could add complexity for the customer in the form of custom work that isn’t necessarily needed for success. Come up with creative ways to break services into component parts over a longer period of time. Align and incentivize product and service teams to collaborate on solving common problems with existing products. In the long run, this collaboration may look like joint development of a product roadmap. In the near term, it looks more like guiding the customer on what is best to prioritize based on their implementation needs.
- Embrace a cultural shift: Instead of a traditional, borderline-adversarial relationship between product and service team, encourage collaboration between these two groups. The goal is to understand and effectively package existing products, instead of solving for gaps with custom work. This shift will both reduce complexity for the customer and create more opportunities to cross-sell and upsell, increasing customer LTV.
- Invite the customer to help define the product: In the model described above, traditional services evolve into a “servant services” role. The goal is always to think about what the customer wants, and guide them along the best long-term path. A best practice is to invite the customer into the product development process through micro-engagements with a customer advisory board (CAB). Instead of a traditional enterprise CAB that might meet once or twice a year to discuss big ideas, a micro-engagement involves more frequent, actionable meetings to develop products based on actual customer needs.
Above all else, recurring revenue businesses need to win the customer’s trust every day. You never know when your customer might make big changes — like a champion or SI partner leaving. As a result, it’s important to have multi-threaded accounts with multiple stakeholders, along with a services/product collaboration that thinks critically about the customer implementation as a team, every day. Prioritize openness and transparency with customers to build trust, and build team relationships by aligning incentives (rather than competing when you should be on the same team).