Growth Insights for CEOs

Profitable, Recurring Revenue Streams - Part 3

Posted by Blaine Mathieu



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Transitioning Your Business Model to Grow Your Business-as-a-Service

More and more companies are realizing that transitioning their business to an as-a-Service model is the answer to driving higher growth, more profitable, and stable revenue streams. In Part 1 of this series, you learned how to know if it's time to think about embracing an as-a-Service model. In Part 2 we dove deeper into what an as-a-Service model is and discovered how ready your company is to transition to one.

In this installment, we will cover how to actually create an as-a-Service model in your business and take it to market efficiently and effectively. The next and final article in this series will discuss the key metrics to track and capabilities to nurture to ensure you execute this transition successfully. 

This series makes no assumptions about prior experience with as-a-Service models. It is equally applicable to companies that have technology at their cores and those that don’t. A massive amount of content has been written on related topics and the main goal here is not to repeat or replace that, but to simplify and help you begin – or at least consider – the journey.

Part 3 – Taking XaaS to Market Successfully 

Like any successful product or service, a XaaS (Something-as-a-Service) business needs well-defined goals, a clear positioning, and an integrated go-to-market model. While each of these areas could take an entire book to cover in detail, I’ll highlight some important elements as they particularly apply to XaaS.

Defining Your Growth Goals and Roadmap 

A good practice for any business trying to grow is to complete the following ‘growth roadmap’ exercise. The steps are simple, using the grid below:

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  1. Put your overall growth target for next year in the middle
  2. Now indicate on the chart what percentage of that growth you intend to come from each quadrant

This exercise is best done as a team, with each executive team member (or even board member) doing it independently and then you can compare, discuss, and consolidate the answers into a single statement of strategic intent. I also recommend doing this over a three-year time horizon with annual breakdown, given that XaaS transitions (or launches of new offerings) will take some time to be fully realized.

Obviously, whichever part of your business you are considering transitioning to XaaS would fall into the New Offerings category (two right quadrants) unless you are focused on improving or perfecting an existing XaaS offering. 

One note of caution that I will reinforce again in Part 4: it can be difficult for businesses to simultaneously execute against a XaaS and non-Xaas model – especially for the same offering. Many elements of the go-to-market model are quite different between the two models and being ‘stuck-in-the-middle’ is never a strong strategy or execution plan.

A Clear Positioning

Now that you have high-level growth goals in place for your XaaS offering over the next few years it’s time to think about one of the most critical elements of successful sales and marketing: defining a clear position in the market. 

Simply put, the ‘positioning’ of your XaaS solution describes why it matters, what it does, why it’s relevant, and how it’s different. These elements are encapsulated nicely in the following generic positioning statement:

To <key target market>

<Solution> is the <category in which it competes>

that <key competitive advantages>

so customers can <key customer benefits>.

Believe this because <proof points>.

Can you clearly describe your new XaaS solution with this framework?

To understand the power of positioning, think back to how many times you have heard of a new business or product, went to their website, and left two minutes later thinking “I have no earthly idea what these guys actually do!” Unfortunately that reaction is far more common than you might think and it might even be happening to you since it is so difficult for you to see your own message through an outsider’s eyes.

Note that ‘positioning’ is a strategic construct. Although the positioning statement (as above) will likely never be used verbatim in your marketing, it is the foundation for ‘messaging’ – the messages that your marketing and sales efforts actually deliver to the market. Unclear positioning results in an ineffective message. 

So the next step in bringing a XaaS solution to market is to create the positioning statement for it. In my experience, it is difficult to spend too much time and effort on this initiative since it so central to your success in the market. In short, the following ‘positioning workshop’ could be completed to create and test a strong positioning (this example assumes positioning a new XaaS offering): 

Pre-workshop:

  • Understand the market and prospects: Assign someone from the team to compile (or create) the necessary background information that will enable a valid discussion across your team. Specifically, the better you understand potential buyers’ pains and motivations as well as competitors’ offerings (including their own positionings) the more powerful your own positioning discussions will be. Don’t do positioning in a knowledge vacuum! 

Workshop:

  • Bring the key stakeholders in your organization together: These may include executive team members, board members, and key marketing and sales people. Five to eight people is a good group size for brainstorming many possibilities. As tempting as it might be: positioning should almost never be done by the CEO sitting in a room alone. (Even if you are the sole founder and employee of a new venture, get help and involvement from others.)
  • Decompose the elements of the positioning framework: For each element, brainstorm with the group and attempt to reach agreement (based on your understanding of the market and the nature of your XaaS solution). Less is more. Too many benefits, differentiators and – especially – target markets result in fuzzy positioning with little market power. You may want to break each element (target, benefits, differentiators, etc.) into its own discussion session vs. trying to do it all at once. This is an area where outside facilitation can be very useful.
  • Bring it together: Bring the elements together and see how they fit. This will take a few cycles of iteration since they are obviously co-dependent. The result will be a complete positioning statement that the team agrees makes initial sense.

Post-workshop:

  • Test: Get outside the building! Call three clients and test the positioning statement with them. Do they understand it? Does it sound valuable? Can they accurately repeat it back to you in their own words? Do the same for three members of your target market that aren’t yet clients. Be cautious: unless your testing is done by an unbiased third-party it is very easy to fall into ‘selling’ mode vs. testing and learning mode.
  • Finalize: Based on your testing it is almost certain that you will gain insights that will lead to tweaks to your original positioning statement (and maybe more than just tweaks). Get the group back together and finalize based on what you learned. Congrats!

When you are thinking through the customer benefits element of the positioning statement the interesting concept of ‘Outcomes-as-a-Service’ is worth giving extra consideration to. Rather than thinking of the benefits of your XaaS solution in terms of what it’s features do, try to think of them in terms of the ‘outcomes’ that your customers desire. These outcomes are what your customers are actually paying for. Your XaaS becomes the ‘outcome delivery mechanism’.

For example, the Blue Apron Meals-as-a-Service, discussed in Part 2, provides convenient deliveries of groceries along with a recipe, ready-to-cook. But the real ‘outcome’ they are delivering is the satisfaction of having prepared a healthy, fresh, meal for yourself and (often) a loved one. If you can envision a valuable outcome for your customers, you have the basis of a powerful benefit statement for your XaaS solution. 

Important: You may need to repeat this entire process a few times to reach the most powerful positioning for your new XaaS solution. Don’t give up and don’t cut the process short! Positioning new products – and especially those using new business models – is probably one of the most essential and challenging strategic marketing efforts you will ever undertake. 

Go-to-Market for XaaS

Now on to the main event – how to take your new XaaS solution to market! What this requires is a go-to-market ‘plan’ – basically a description of the methods your organization will use to achieve specific goals with prospects or customers. 

The most critical thing to keep in mind with XaaS go-to-market plans is that they require a level of continuous integration between the elements that is far more necessary than for non-XaaS offerings.  The reason is that non-XaaS offerings generally follow a step-by-step process where the steps are connected in a linear fashion:

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Step 2 follows after Step 1 is complete, Step 3 follows after Step 2, etc.

With XaaS solutions, these should no longer be thought of as discrete steps but, rather, a continuous flow where each element is happening all the time and in close conjunction with each other. 

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Fundamentally, these two contrasting constructs embody the core difference between non-XaaS and XaaS. Most of what I discuss next essentially boils down to the strategic and tactical implication of this difference to your go-to-market plan.

To be a little more specific, core elements of a go-to-market plan include (at least) the following:

  • Strategic product roadmap
  • Pricing model
  • Channel/partner model
  • Corporate communications model
  • Demand generation model
  • Prospect engagement (sales) model
  • Customer success model

Delving generically into each of these elements is beyond the scope of this article – instead I will focus on some of the particular characteristics of each element that tend to be unique or particular to XaaS models.

Strategic product roadmap:

Whether your XaaS offering involves a physical product or not, the concept of ‘roadmapping’ the evolution of that offering is important because customers will be expecting that their subscription includes continuous, ongoing improvements and enhancements. Of course, these are not done just for the sake of adding new bells-and-whistles, but all in the service of increasingly delivering on the valuable outcomes you are delivering to them. 

For non-XaaS offerings, the goal is generally to create as many features up-front, deliver them as one package, and then create and release new versions of the offering at discrete points in time. Think of this as delivering a large (but infrequent) ‘burst’ of new value (reselling it to the customer each time). With XaaS offerings, on the other hand, you are sometimes better to only gradually deliver new capabilities – even if they are ready all at once – in order to deliver the constant stream of increased value over time that customers are expecting to receive with their subscription. 

A caution: Continuously providing new and enhanced value can go a long way to helping retain customers for the long term, but managing constant change can also be difficult for them if not handled prudently. Always think carefully about the ‘usability’ of your solution in terms of how easily a customer can consumer it over time and adapt to any changes. Also note how critical Customer Success function (discussed below) is to a XaaS offering. 

Pricing model:

Probably more has been written about effective pricing for XaaS offerings than any other element of this model. That’s because when most people think about XaaS, the first thing that comes to mind is the ongoing, recurring (subscription) pricing model. A few initial thoughts about transitioning to a XaaS pricing model:

  • Think in terms of value-based pricing where value is based on the outcomes that you are delivering
  • Where to start? Assuming you are transitioning from a non-XaaS model: you do have a starting point! They were paying for something before – now they are paying for so much more value
  • To that point: don’t underprice. The value is now higher, the outcomes are clearer. Don’t simply take your pre-XaaS price and divide by the time between repeat purchases in your current model
  • One way to avoid underpricing: segment your target customers. Some will be more willing to pay for enhanced outcomes, others won’t be willing to pay as much (because the outcomes are less valuable to them). Rather than offering a lowest-common-denominator price, segment your offering and price accordingly
  • Finally, beyond basic segmentation, don’t overcomplicate your pricing model. The best models are easy to explain and understand. Test your model with prospective clients just like you tested your positioning statement as discussed earlier

Channel/partner model:

Historically, XaaS offerings have not made extensive use of channel or distribution partners due to challenges in working a partner into the continuous cycle of creation, delivery, and consumption I described earlier. It’s much simpler when a product is created, a partner sells or distributes it, you give them a cut of the revenue, and then on to the next deal.

As more and more offerings shift to the XaaS model, companies have begun to figure out how to involve channel partners more closely (and you can imagine how motivated channel partners are to not being shut out of the business). This mainly requires a mindset shift on both sides – think in terms of adding a ‘channel’ circle to the diagram above. Compensation is often based on a percentage of the first year’s subscription revenue with the percentage declining (or being eliminated) over time depending on how important the partner is in the ongoing support and delivery of the service. 

In the end, channel partners can be extremely helpful in getting your XaaS offering to market – but only if they (like you) are ready to truly embrace the XaaS model. Effective partners are already doing this with other clients – be wary if you are their first!

Corporate communications model:

In the sense I am using it here, ‘corporate communications’ refers to activities designed to get your message out to the market that may not be easily or directly attributable to demand generation. Such activities could include public relations, industry analyst relations, investor relations, social media, and general brand marketing. 

The key distinction here, again, is to think in terms of customer outcomes. The more your corporate communications vividly describes those outcomes, the more likely your prospects will see themselves as experiencing them and being willing to closely engage with you in an ongoing subscription model. This is the ‘air wars’ of messaging, laying the groundwork for successful ‘ground wars’ focused on demand generation.

A special note about XaaS communications for public companies (or those that want to become one): It is critical that both investors and financial analysts clearly understand the intent, goals, and execution plan around a XaaS transition. This is especially important – as I will discuss more in Part 4 – since revenue recognition will be delayed and company profitability will likely take a hit in the short-to-medium term. Happily, unlike a decade ago, investors have come to better-understand the value and power of recurring revenue models and are more willing to forgive some of the shorter-term impacts as long as they clearly understand your intentions and financial model.

Demand generation model:

Now to the ‘ground wars’ of messaging – tactically executing against a marketing plan that drives leads, opportunities and, ultimately, recurring revenue. The essential principles and practices of demand-gen marketing are not that different for XaaS offerings although one fairly recent methodology is worth giving deeper consideration to: Account Based Marketing (ABM). 

The ABM approach is used most often if target customers are mid-to-large sized organizations and focuses on driving continuously increasing ‘engagement’ levels with prospects using some of the concepts of 1:1 marketing popularized at B2C companies. Since buying decisions in such companies are rarely made by a single individual, the concept involves targeting stakeholders across the organization and measuring those engagement levels until a critical threshold is reached. This concept matches a XaaS model quite well since – with that model – the notion of driving continuous, ongoing engagement needs to happen as much after the sale as it does before. 

Prospect engagement (sales) model:

As with demand generation, many of the practices that are used to build an effective sales machine still apply to a XaaS model, with a few particular differences to note:

  • Salesforce compensation: As the pricing model changes, so does the variable compensation model for your direct salesforce. Somewhat similar to the channel partner compensation discussed earlier, it is often the case that salespeople keep a certain percentage of the contracted recurring revenue over some period of time (often the first year) and then a smaller (or zero) percentage after that. Having said that, it is becoming increasingly common to compensate salespeople over the entire life of the client, to ensure that the mindset of sales matches the XaaS strategy and does not remain ‘fire and forget’
  • Another common element of prospect engagement is the use of the solution itself. Many XaaS solutions offer some kind of free trial in which the solution becomes a key marketing and selling tool. Don’t think this applies only to internet services – with some creative thinking virtually any XaaS solution can use a similar approach. If your solution is not its own most effective salesperson then you are missing some incredible revenue generation opportunities

Customer success model:

Customer success (support, service, account management, or whatever it is called in your organization) is the outer ring of the continuous go-to-market cycle and it is truly more critical in a XaaS model than ever before. Since customers are subscribing to an ever-evolving ongoing service, your customer success function is core to the solution itself and to the valuable outcomes that it delivers. In a very real sense, customer success IS part of the product, customer success IS part of the marketing, and customer success IS part of the salesforce. 

This requires both a significant mindset shift and an execution shift for most organizations that think of the customer service function as largely being a cost-center, staffed with relatively low-paid employees or contractors, that are far from the strategic core. Increasing focus over the last decade on Net Promoter Scores and other measures have helped highlight the importance of this function but still not as strongly as a XaaS model requires. 

(By the way – if you aren’t measuring your Net Promoter Scores on an ongoing basis – start now. This will turn out to be a critical XaaS metric as we will discuss further in Part 4.)

Since the customer success function is effectively part of the solution, and since the solution should be selling itself, it follows that customer success now becomes a critical part of the selling machine. This is not only about customer retention (another critical XaaS metric) but about customer expansion (upsell and cross-sell). In most XaaS companies, customer success and sales work very closely together to manage the growth of each client account. 

Bringing It All Together 

The most critical thing to remember is that driving growth with a XaaS model requires well-defined goals, a clear positioning, and a highly-integrated go-to-market model. Hopefully this article has helped you pull some of that thinking together. 

After all this it still feels like we have only scratched the surface! Since you have made it this far, subscribe to my blog at the bottom of this page and definitely read Part 4 of this series that will review key XaaS metrics and provide some final suggestions on how to successfully execute your XaaS transition.

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Topics: CEO Choices, CEO Marketing Vision, CEO Business Strategy, SaaS

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