Pivoting your company’s portfolio to subscription-based, recurring revenue offers, either in whole or in part, is a two-step intellectual journey for senior executives. The first step is deciding if customer demand is changing sufficiently enough to warrant making all the changes and facing all the challenges of effectively moving to XaaS offers. The previous five blogs have focused on that decision-making journey. Once you have made that decision, with all its myriad implications, you are ready for the second major step: What changes do I make in my go-to-market (GTM) model? That is the focus of our final blog in "The Digital Transformation Journey" series.

What Are the Most Important Go-To-Market Considerations for XaaS?

Your company probably has an extensive, hard-fought, complex, treasured but volatile GTM distribution model. It’s one that needs constant attention and has to be nurtured and cajoled each and every quarter to hit its number. You love it and you hate it at the same time. It has its strengths and its weaknesses, but one thing is for sure: you rely on it to power your revenue. The idea of changing it is, let’s just say, unappealing.

But like it or not, selling and delivering XaaS offers profitably requires new and different GTM capabilities within both your direct and indirect sales and delivery channels. Let’s explore some of the most important ones. 

But the subscription world is different. The profitability of the deal is (usually) not guaranteed by the initial contract signing. Quite the contrary.

Master LAER (Land, Adopt, Expand, Renew)

In traditional pay-up-front, CapEx sales, we often thought of the customer journey as “Sell, Implement, Support, Upgrade,” and we built our GTM to optimize that journey. But what we focused on most was the initial sale, because it guaranteed the economic success of the deal. We got paid up front for the product and the implementation and forced the customer to agree to a service/support maintenance contract that was highly likely to renew. Normally, all three activities were profitable and largely guaranteed by the initial contract signing.

But the subscription world is different. The profitability of the deal is (usually) not guaranteed by the initial contract signing. Quite the contrary. We used to joke that the worst place to finish in a deal is second, because you incurred all the sales costs right up to the bitter end, then your competitor got the deal. In XaaS, there is a new worst place to finish: first. That’s because you not only have all the sales costs in that deal, you might have also shouldered lots of free or low-margin implementation and education costs to desperately get customers onto the platform you spent so much capital to build. You might have performed many motions to drive user engagement or system volume. You might have also had numerous quarterly business reviews, and despite all that time and effort, the customer is not successfully consuming. The actual revenue you got was far below your actual costs, and then the customer doesn’t renew. It’s a real scenario and it happens too often. We know of companies who have actually settled with customers to the tune of tens of millions of dollars after the customer failed to consume at the level of their minimum commitment.

TSIA LAER model  

(Click image to enlarge.)
TSIA's LAER model consists of four steps along the customer journey: Land, Adopt, Expand, and Renew.

Instead of a Sell and Upgrade sales motion, you will need to embrace Land, Adopt, Expand, Renew, also known as the LAER model (pronounced layer). In this model, the customer is put through a systematic and continuous process of touchpoints beginning in pre-sales, all of which are designed to ensure high adoption, speed time-to-value, and ensure constant and methodical account expansion. Your current sales reps and partners might claim they are doing it that way today, but I can assure you they are not. Even the very best born-in-the-cloud companies who have been following LAER for years will tell you they still have miles to go before they are satisfied. We are all still experimenting with the myriad handoffs, data analytics, intervention strategies, and upgrade paths that comprise LAER.

The real fun begins when you…

Create a Customer Success Function

The role of your Customer Success team and customer success managers (CSM) is to follow a defined process to quickly and predictably deliver compelling business value from your solutions to each customer, thereby ensuring contract renewal and account expansion. If you don’t already, you will soon have this new function in your company. Depending on the size and scope of your XaaS business, you could have anywhere from dozens to thousands of CSMs within your organization monitoring and managing your customer accounts. Is Customer Success a Sales function? Is it a Services function? The answer is both. Can it affect who the customer sees as their trusted advisor? Yes. Will the Sales team view Customer Success as a threat? Potentially. Is it a function you really have to invest in? Absolutely.

Customer Success is both a Sales and Services function. - Tweet this!

Aside from having a good product-market fit for your XaaS offers, maintaining high subscription renewal rates is the most important single success factor in your XaaS business. We have learned that is best achieved through process, not through heroic acts. It’s not sales DNA, it's more services DNA. But CSMs have to be able to spot expansion opportunities and execute renewals when there is not a significant add-on opportunity. It’s a new hybrid role.

One of the byproducts of LAER is that sales rep activities in managing day-to-day issues with customers actually go down. The CSM picks up much of that, which includes the basic renewal and small cross-sell opportunities, resulting in what we call the “sales dividend.” That dividend is more revenue from existing accounts with less involvement of the sales rep. So what will you and your Sales team do with the sales dividend? Well, you could let the reps spend more time on the golf course, but I think you’ll instead want them to redeploy their time dividend to their highest and best purpose: landing new logos or significant expansions (selling new divisions or new solution families) with existing clients. Your best Sales teams will love that, while others might have gotten comfortable living off servicing existing clients and taking their renewals.

An Example of How We Use LAER at TSIA

So, LAER has two main benefits: First, it optimizes Expand and Renew within your subscription customers. Second, it frees up sales time to do more LANDing. TSIA is a proof point that this works. Four years ago, we actually separated the Land team and the AER team. The Sales team now only lands new logos and additional service lines to existing customers. The AER team (we call it Member Success) handles everything from onboarding through renewals and small expansions. The result? Renewal rates are up significantly, and at the same time, we are landing more new logo customers than we ever have. Our cross-sell rates are also at record levels. Was it hard and did it take a lot of psychological counseling for the Sales team? Yes it did. Am I glad we did it? Emphatically YES!

Clear Owners for All Renewal Types

One critical part of the GTM decision tree for XaaS offers is determining who handles which renewals and when. This is a decision that needs to be made, not only for your direct customers, but also for your indirect ones. You see, the Customer Success function also needs to be performed for your indirect customers. In some cases, partners will build their own robust Customer Success organization to perform AER for their customers, but not all may be willing or able to do that. As a result, you might be delivering a highly automated form of CSM to your indirect customers as well. The point is that all subscription customers need an AER motion and you need to figure out who and under what conditions.

I would submit to you there are five types of renewals:

  1. Renewals with significant expansion opportunities (Upside Renewals)
  2. Big dollar renewals with only minor expansion opportunities (Big+ Renewals)
  3. Big dollar renewals with little or no incremental growth opportunities (Big Renewals)
  4. Smaller dollar renewals with only minor expansion opportunities (Standard+ Renewals)
  5. Smaller dollar renewals with little or no incremental growth opportunities (Standard Renewals)

This breakdown can be very useful in assigning renewals. Here’s how:

Upside Renewals are renewals where there is a big opportunity to grow the account. They always pair the Land Sales team (the account manager, etc.) with the CSM. Together, they work the renewals and the Land Sales team gets the sales credit at 100%.

Before we can look at the others, you need to decide where you are going to draw the line between Big and Standard renewals. Is that line at $200K, $2M, $20M? It really comes down to how much you trust the CSMs and their brethren, the renewal sales specialists, to handle. Remember, they are armed with an amazingly sophisticated AER process! But at some point, the dollar size may make you more comfortable if a sales rep was always involved, or maybe you want Sales to walk the renewal through procurement. In any case, you need to draw a line in the sand.

So now that you have your break-point renewal value for the renewal levels 2-5, it’s pretty simple. The Big and Big+ renewals go back to the Land team/account manager who works with the CSM to execute the renewal. Your Standard and Standard+ Renewals are done by your CSMs, aided by renewal specialists who are also part of the Customer Success organization. The LAND team is not involved.

Warning: Your sales organization may not like having no involvement in those Standard renewals, and they really won’t like receiving no or only partial credit for these renewals. But let me ask you one simple question: If a standard customer is happy and is going to renew, maybe add on a little, and of that there is no doubt (all your consumption data and customer scoring analytics indicate conclusively) then why would you waste sales rep time to process it? And don’t forget, these are your biggest bucket of renewals. You have more customers in this bucket, meaning more renewal transactions of Standard+ and Standard customers, than probably all other customers combined. This is the sales dividend in action. Don’t involve them! Let them go sell a new customer. Trust me, as hard as sales will kick back, you need to implement a policy like this. You can free up hundreds of hours per sales rep per year with this policy. You can elect to give them full credit for these renewals and raise their quota a lot, or you can give them no credit, reduce their quota and have it all come from net new sales. Or you can do something in the middle. In any case, the math is awesome!

As I mentioned, all this applies equally to your partner ecosystem. They should be doing exactly the same thing. If they aren’t, then you will need to perform the AER for them. Enterprise and SMB customers in a XaaS model simply cannot prosper without it. The renewal rates will be unacceptably low. So in the event you are doing the renewal for resellers, you need to make the same set of decisions for them that I laid out for your sales teams earlier in this post.

Services touches your existing customers between 5-15 times moreevery year than Sales does. They advise, they support, they repair, and are also capable of observing, inquiring, or recommending. They truly are trusted advisors.

Rethink Sales vs. Services Motions

Sales sells and Services delivers, right? Not in a well-run XaaS business. 

There are two important real-time facts for you to consider in this discussion. The first is that Services discussions (and Services expertise) are being pulled up into pre-sales activities more and more every day. That is a trend that is going to accelerate. Whether its solution architects, consultants, or CSMs, customers want to talk with the experts they will actually be working with. They understand that their success actually rests with them, not just with the account manager. So your Services experts will be more involved in the LAND motion than they were in the past, which you want. Not that you want the extra sales expense (which is an unfortunate reality), you want to make sure that every customer is going to be a successful, high-volume consumer of your XaaS. Locking in the business outcome you will deliver and getting the right understandings and expectations set up front is key to that success.

The second fact is undeniable: Services touches your existing customers between 5-15 times more every year than Sales does. They advise, they support, they repair, and are also capable of observing, inquiring, or recommending. They truly are trusted advisors.

In the popular book Consumption Economics, we wrote what has since become a pretty familiar phrase in many tech sectors: “Helping will sell. Selling won’t help.” As Steve Frost, who heads up the Expand Selling research here at TSIA is fond of saying, getting services involved in account growth is the biggest no-brainer of all time. His calculus is mighty compelling. Services-generated sales leads from existing customers are a fraction of the cost of Marketing-generated leads, are more qualified, and close faster. But this process is also easy to screw up. You don’t want to violate that trusted advisor role, but rather, you want your service staff to truly do what they believe will help the customer. If that means they recommend something that costs a little money, so be it.

This blog series was written for senior executives who face very difficult decisions about how to pivot from CapEx to OpEx offer.

Pulling It All Together

At TSIA, we are in the extremely unique position of being under NDA (non-disclosure agreement) with hundreds of the world’s largest, most successful, and fastest growing tech companies. We hear the good and the bad, the truth and the exaggerations, but mostly, we study how practices lead to results. We base our recommendations on facts, not opinion, and have the biggest database of technology business practices in the world. We double and triple-check every input, allowing us to gather real-world insights that are being implemented within some of the top tech companies in the world. The newer the business model, the more valuable that insight is, and XaaS is a perfect example. After all, we literally wrote the book on it, the Technology-as-a-Service Playbook, that is.

This blog series was written for senior executives who face very difficult decisions about how to pivot from CapEx to OpEx offer. I remember a few years ago, I was sitting in the office of the chairman of a $3B enterprise software company who was cutting over to XaaS from on-premise. At one point in the conversation he sat back in his chair and said, “We thought this was just about pricing and hosting,” when the reality is, it’s about a lot more. It’s the most constructive and necessary disruption to the operating model of your business since your company was founded.

At some point in this journey, you may find yourself at a difficult crossroad. Your customers are clear that either you begin to offer your solutions in an XaaS model, or they will go elsewhere for their new business. At the same time, your CFO, who believes in the transformation, is also telling you that this pivot will cause you to miss expectations and the stock price could really suffer. Your board of directors echoes the sentiment, but you’ve been in tough spots before. So have I, for that matter. You have to make a decision about your real responsibility. Is it to the short-term share price? Then don’t pivot to XaaS and think about an exit before too long, or embrace the long-term market trend personified by your top customers and risk taking your lumps with the analysts. We can prove to you that is the winning stock strategy, even in the short term. 

Get Help Where You Need It with TSIA

One final point: You may have the concept of industry associations in an intellectual box. For the most part, I would agree, but TSIA is a strange animal. We are a fast growing, for-profit business that employs data scientists, researchers, and experienced industry executives in a 1-2-3 discovery motion that is ridiculously rigorous. We specialize in providing board-ready insight and have our fingers on the state-of-the-art pulse of profitable XaaS in a way no other company does.

I hope that you’ve enjoyed our six-part conversation about digital transformation, and please reach out to us at TSIA if you would like us to help your company by applying our disruptive advisory model like we are helping everyone, from Microsoft to GE. 

Read more posts in "The Digital Transformation Journey" series:

 
 
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J.B. Wood

About J.B. Wood

J.B. Wood is president and CEO of TSIA. He is a frequent industry speaker and author of the popular books, Complexity Avalanche (2009), Consumption Economics (2011), B4B (2013), and Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business (2016), and has appeared in leading publications, such as Fortune, The New York Times, and The Wall Street Journal. He works with the world's largest technology companies on strategies to extend their innovation platform beyond the lab and into the customer experience, particularly in the age of cloud and managed services.

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