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So often we work with product and service teams across the industry who apply traditional thinking when designing and pricing XaaS offers. Every piece of research TSIA has performed on this illustrates that this is a losing proposition. Let’s review here what’s at stake for the XaaS business, and why when it comes to XaaS offer development, traditional approaches are substandard. I’ll also reveal what’s required to improve the odds of success when designing and pricing XaaS offers.

What’s at Stake?

Let’s start with the fact that renewals are do-or-die in any XaaS business. For XaaS value propositions, almost ALL the revenue acquired in the initial sale is at risk at the time of renewal. This lies in very stark contrast to a revenue renewal risk of 38.5% for traditional software value propositions and just 16.6% of hardware offers.

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Source: TSIA 2019 Benchmark

Let’s now add that the renewal sale is a prescriptive process in which volumes of known renewal opportunities are transacted over a fixed period of time. Efficiency of that process dominates all operational factors in successfully transacting the renewal.

Abandoning Traditional Value Proposition Strengths

What’s assumed when we say ‘traditional’ offer? It’s typically a perpetual license to access a piece of hardware or software that delivers technical features with (not always) an attached technical support contract. The technical support contract is an annuity that is priced at approximately 20% to 30% of the perpetual license. As long as software technical upgrades are provided, and the technical support teams are responsive to the customer need, the renewal rates are strong, rendering these annuities quite profitable. The profit profile and high renewal rates of these technical support annuity contracts make them highly desirable and often difficult for companies to abandon in favor of XaaS. But abandon them they must as every industry trend is moving in this direction.

Embracing XaaS Value Propositions Challenges

When product teams are designing solutions within the XaaS business model, they are well advised to openly consider the unique challenges and requirements of the process. The product experience, the packaged offers, and pricing can either drive efficiency or create friction in the renewal sales process.

There are three big questions here:

  1. How do technology companies efficiently and cost effectively operationalize when almost all of their revenue is coming under renewal every year?
  2. What offer attributes prescriptively impact the realization of the value proposition?
  3. What processes drive scale into the renewals process?
     

For a customer to be willing to transact the renewal at 100% of the prior subscription value, they need to have fully adopted the solutions in the prior period and realized measurable value from the use of the solution ahead of committing to another subscription term.

Further, when we consider that 62% of all B2B technology renewals require some level of manual intervention,[i] companies would do well to consider sources of such manual process and strive to actively remove this friction, step by step.

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The XaaS Value Proposition Winning Play

Research shows that there are at least three critical elements to the formula for increasing the renewability of the SaaS value propositions:

  1. Collaboration with the renewals and the services teams when designing the value proposition.
  2. Making the value propositions as tangible as possible.
  3. Leveraging data and analytics to measure the value realization journey.

Let’s take a quick tour through each of these elements.

Team Collaboration

The research proves that the collaboration between the Product and Services teams result in higher volumes of renewal revenue.

When offer managers fail to engage the renewals or the Customer Success organization in the Discover, Design, and Create phase of value creation, they miss a golden opportunity to get insights into:

  • How customers perceive the value of the current products.
  • How customers want to consume products.
  • How customers experience the process of adopting and using the products.
  • How easy and effective the products are in enabling the CSM or renewal specialist to position the product for the next generation.

Making the Value Proposition Highly Tangible

In the discussion of value, the only opinion that matters is that of the customer. Making the value proposition highly tangible, with supporting calculations, increases the likelihood of renewal. Heading into the renewal cycle with a value proposition that was specifically designed with renewability in mind from the beginning puts the Renewals team in a significantly stronger position.

Aligning on the shared key value metrics of the supplier and customer becomes the foundation on which systems and processes can be built. Instrumentation of the solution to capture and expose these key value metrics are an essential part of making the value proposition tangible for the customer, which can become part of the proof point of value delivery at the time of renewal.

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Leveraging Data and Analytics to Measure the Value Realization Journey

Designing in the ability to capture usage and utilization of products, or designing the ability to capture the health of a product, provides invaluable insights to CSMs, renewal specialists, and support personnel as to the customer’s condition.

  • Are customers using the product? 
  • Is the product functioning as designed?
  • What specific features and workflows of the product is the customer using? 
  • How much time are users spending to complete key activities? 

All of these indicators (and more) assist CSMs and renewal specialists in proactively intervening in the customer journey to take actions that promote access to desired outcomes. TSIA research indicates that the sales process is much faster in the presence of analytical data that shows customers’ consumption patterns. Companies that have the ability to monitor customers’ consumption of their product are able to reduce the sales cycle to upsell premium service by approximately 30%.

Once a prospect becomes a paying customer, analytics qualified leads rise in importance.

An Analytics Qualified Lead (AQL) is an identified prospective sale that has resulted from the analysis of customers’ product use patterns.

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 Ultimately, product and service offer managers must create value propositions that not only realize the promised experience for the customer but also fuel the renewal efficiency for the business.

Additional Learning

The following resources are available to members of the XaaS Product Management research practice and are recommended for those interested in establishing and strengthening practice to improve the odds of success XaaS value propositions.

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In XaaS business models, almost all of the revenue acquired in the first sales is recurring revenue and therefore at risk at the time of renewal. This paper provides a detailed review of the value proposition attributes contributing to strong renewal results.

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Through this self-assessment scoring tool (LAER Efficiency Score), this paper examines the impact of your product, offer, pricing, and systems attributes and practices toward delivering customer value, profit, and scale.

The XaaS Product Management research practice has designed further frameworks and methodologies to establish and strengthen these recommended practices. Visit www.tsia.com/xpm for more information.

 
 
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Laura Fay

About Author Laura Fay

Laura Fay is the vice president and managing director of offers research and advisory for TSIA. She also serves as TSIA’s vice president of XaaS product management research. Laura is a technology industry veteran with over 30 years' experience driving business growth in the enterprise technology industry via leadership roles in product management, general management, product development, and customer success.

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