Pricing & Revenue

Don’t Forget the Services Revenue

echojason@gmail.com'

Jason Lemkin

If you’re doing SaaS for the first time (or even the second), the whole idea of charging for “Services” may seem an anathema.  It sure did to me.

  • If your product is so easy to use that you barely need sales people, why in the world would I need to charge for implementation?  For support?  For training and engagement?
  • And isn’t it a bit unseemly to charge for services?  Doesn’t it sort of say your product is Old School?  SAP-level clunky?
  • And isn’t services revenue a friction-full waste of time anyway?  I mean, it’s not recurring.  It’s not true ARR.  Does it even count?  I’m a SaaS company.

Maybe.  Maybe for the 15% of the world that is like you and me, charging for services doesn’t make any sense, perhaps even anti-sense.

Screen Shot 2014-11-27 at 7.11.43 AMTurns out though, that in the vast majority of six-figure contracts, virtually every seven-figure contract, and quite a few five-figure contracts … there’s always a services component.

And it almost always seems to average out to 15-20% of the ACV.

I remember the first time I experienced this confusion myself, on one our first high-five figure contracts.  We had a brutal negotiation over price.  And then, at the end, they send us a Schedule for Services.  After getting beat down on pricing on the annual contract price … the Schedule for Services they send us (without me even asking) guaranteed us another $20k a year in services, with $250 an hour as the assumed price for the services.

I didn’t fully understand what was going on here until I became a VP in a Fortune 500 tech company.

But the answer, it turns out, is simple once you get it.

First, in medium and larger customers, there’s always change management to deal with when bringing in a new vendor.  And they not only understand there’s a cost associated with that (soft even more than hard) … your buyer wants to do the least amount of change management herself as possible.  If you can do the training for her for a few bucks and saves her a ton of time … that’s an amazing deal.

Second, in medium and larger customers, they often have no one to do the implementation work themselves.  So even if you weren’t saving your customer theoretical money by helping with implementation, roll-out, support etc. … they probably have no one to do this internally anyway.  You’re going to be doing some, a lot, or all of this for them.  They are OK paying for this, in the enterprise at least.

And most importantly … it’s how business is done.  And — budgeted.  When most larger companies enter a new vendor into their ERP system, they typically add an additional budget item or two along with the core contract price.  One additional line item for service and implementation, in most cases.  And in some cases, an additional budget for other add-ons necessary to make the implementation a success (e.g., an EchoSign on top of Salesforce).  Both of these are often line-item budgeted at 15-20% of the core contract value for the product.

So net net …

  • You probably can’t charge another 15-20% for services and implementation and training for a $99 a month product.  Well maybe you could, but it’s probably unprofitable and not worth it.
  • But, as soon as the sale gets into the five figures, considering adding 15-20% for Services.  You’ll probably get it.
  • And plan for charging, and delivering, additional services revenue in mid-five figure and larger deals.  The customers are happy to pay, and in fact, will expect it.

And if you don’t charge … you’re just leaving money on the table.  You’ll have to do the work anyway.  You may send negative signaling that you aren’t “enterprise” enough, that you aren’t a serious enough vendor.

And importantly, this extra services revenue still “counts” as recurring revenue if it’s < 25% or so of your revenues.  I don’t mean that literally (it doesn’t recur), but what I mean is that Wall Street and VCs and acquirers and everyone will still consider you a 100% SaaS company if <= 25% of your revenues are nonrecurring.  And you’ll get the same SaaS ARR multiple on those extra services revenues.

Same multiple.  No extra work.  10-25% more revenue.

Don’t leave the services revenue on the table.

Published on November 28, 2014
  • In your experience, do sales reps make commission on services/setup costs?

  • You won’t save money in the end by not paying a commission here. So I’d commission the reps on the full contract size. Otherwise, you have a suboptimal incentive structure.

  • Eric

    Interesting article, about sales reps commisions, I’d love to read an article about that. Soon I’ll start looking for some reps to help selling our product and I have no idea how much I should pay them; 15%? 20%? 30%? more? Both with and without a base salary. I’m reading tons of articles, but I’m still confused
    Thank you for sharing your knowledge!

  • Reality can get even crazier than fiction. I was with a SaaS company that built Customer Service add-ons for Salesforce. Our customers loved us. On nearly every contract that had Salesforce in house, they wanted to hire our Services group to “fix” Salesforce and bill it as an integration cost.

    It’d been years since they’d been able to get budget to hire Prof Svcs to work on Salesforce, and there was a large accumulation of things that needed looking at. We were the perfect excuse to roll all that in under a new justification that had new ROI.

    The trick is to understand how much is good business to take on and when it just becomes too defocusing. We established a rough rule of thumb that we would allow no more than half the services engagement to be unrelated to our product. That covered about 70% of the customers, and the others still took the deals on the theory they couldn’t get even that much work done on their Salesforce implementation any other way.

    With Big Co’s, it’s all about justification to get budget. Sometimes the shiny new thing justifies help for the mainstream tooling too.

  • Great article Jason. From our experience, there’s another benefit to adding PS to the offer, even at our average price point (about $250/mo).
    When we started requiring new customers to pay for an onboarding consulting package, we immediately saw an increase in the activation rate of new customers, and the cohorts consistently show that customers that have had some kind of consulting engagement have higher LTV and churn less.

  • Jason, our first customer is a 200 people company which bought 45 seats $8/seat/month. But we had to do some implementation and integrations. ACV for recurring here is $4K and implementation is also $4K.

    Is it to early for us to engage in this type of the deal? (we did the deal already) How many of these we should take when we have just 5 paying customers? Is it a distraction or the segment we should focus on (we’re not sure we want that segment now)?

    • You should do whatever it takes to make this customer a success. It’s the cheapest learning you can get.

  • Jason,

    At what point does your service’s revenue as a % of ACV become high enough, that you need to stand back and re-examine your product offering, pricing for your ‘core software’? At what point does it raise red flags that you really don’t have a software as a service, that you really have a service offering enabled through technology?

  • I think you’ll see if you look at public company comps <=25% if fine. <=15% won't even get noticed.

  • As a software consultancy, we often been called in to help with SaaS deployments, sometimes as a partner of the SaaS company, sometimes by the purchaser of the software. I’ve always found it interesting that there does seem to be something about a difference in mindset for product companies vs services companies, and launching services around your product requires a discussion on pricing, messaging, and staffing, which will likely be different than your traditional product development efforts. Even if that sounds daunting, the core message of this post is correct that as you climb into those 5/6/7 figure deals, companies will expect training and/or bespoke software integration services, so you need to be ready to fill that need, whether internally or externally.

Share This
[i]
[i]