Digging Economic Moats for Your XaaS Business | Gainsight Pulse 2016 Keynote1. ©2015 Gainsight. All Rights Reserved.
Digging Economic Moats for Your XaaS
Business
J.B. Wood, President and CEO, TSIA
2. ©2015 Gainsight. All Rights Reserved.
Our mission is to increase revenue
and profit performance of technology
companies by optimizing
service businesses.
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Our Global Footprint
3
65+ Countries | 500 Memberships | 300 Tech Companies
80% are
Fortune 100
Tech Firms
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Our Research-Intensive Model
115 Deep dive audits
1150 Benchmark analyses
7K Analyst inquiries
In the last 4 years… In the last year…
130K Benchmark data points
515K Survey data points
4
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"I skate to where
the puck is going to be,
not where it has been.”
- Wayne Gretzky
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2009 2011 2013
“We have
a problem…”
“A new purchasing
model is coming”
“Industry
transformation”
A Journey…
“Profitable XaaS”
6
Coming
This
Month!
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Tech & Service 50 Index vs. Cloud 40 Index
TSIA TS50
TSIA Cloud 40
8
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Revenue Multiplier (market cap/revenue)
Average:Q4 2015 5.6
1.4
1.7
1.7
1.8
1.8
2.1
2.6
5.1
5.5
5.5
5.6
5.7
6.1
7.5
7.9
8.1
8.2
8.6
10.4
14.1
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0
Lifelock
RackSpace
IntraLinks
LivePerson
Jive Software
Constant Contact
RealPage
Cornerstone Ondemand
Athena Health
Medidata
Google
Qualys
LogMeIn
SalesForce
Veeva Systems
Demandware
Ultimate Software
NetSuite
ServiceNow
Workday
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However, The Mountains Are Eroding…
0
5
10
15
20
25
LivePerson
MarinSoftware
EGAIN
Brightcove
Numerex
RackSpace
Carbonite
JiveSoftware
Bazaarvoice
IntraLinks
Lifelock
inContact
Channeladvisor
BarracudaNetworks
BottomlineTechnologies
RealPage
RingCentral
Benefitfocus
CornerstoneOndemand
Marketo
VeevaSystems
LogMeIn
Textura
Demandware
AthenaHealth
Google
Medidata
SalesForce
FleetmaticsGroup
SpsCommerce
RedHat
Cvent
Qualys
NetSuite
UltimateSoftware
Splunk
Proofpoint
GuidewireSoftware
ServiceNow
Workday
Current Last Year
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The Slowdown Fish
PROFIT
LOSS
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+
Time
COST REVENUE
Profits
Losses
Growth
Slowdown
costs
revenue
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The Slowdown Fish
PROFIT
LOSS
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+
Time
COST REVENUE
Losses
Growth
Slowdown
New Investor Messaging
“Hyper-Growth”
“Growth
+
Profits”
13
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Economic Moats – What Drives Sustained Tech Profitability?
6. Virality/Low Cost of Sales
4. Network Effect
3. Economies of Scale
Economic Moat
5. Diverse Revenue Streams
2. Unique Capabilities
1. High Switching Costs
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Economic Moat - Traditional Tech Alignment
Virality/Low Cost of Sales
Network Effect
Economies of Scale
Medium
Medium
Low
Economic Moat Traditional Tech
High
High
High
Diverse Revenue Streams
Unique Capabilities
High Switching Costs
16
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Economic Moat XaaS 1.0 – All Same or Worse
Virality/Low Cost of Sales
Network Effect
Economies of Scale
Medium
Medium
Low
Economic Moat Traditional Tech
High
High
High
Diverse Revenue Streams
Unique Capabilities
High Switching Costs
XaaS 1.0
Medium
Low
Low
Low
Medium
Medium
17
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Sales and Marketing as a Percentage of Revenue
50%
40%
Workday Licensed
Software
Rackspace Google
30%
20%
10%
0%
52%
60%
40% 38%
29%
14% 13%
Saas
Companies
Salesforce
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XaaS Revenue Waterfall
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115%
$115m
100%
$100m
End of Year
Revenue:
Total $’s
End of Year
Starting ARR:
Total $’s Available
to Renew at
Beginning of Year
90%
$90m
Retention
Dollars
Upsell
Dollars
Cross
Sell
Dollars
Customer
Churn
Dollars
Downsell
Dollars
Retention Rate = 90% Expansion Rate = 25%
Churn = 7% $3m
Downsell = 3%
$7m
Upsell = 10%
$10m
Xsell = 15%
$15m
YoY Growth Rate = 15%
Source: TSIA SRG Cloud Benchmark Study 20
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Effectiveness
Efficiency
Data Quality
Stickiness
Quantity
Who
Land New
Customer
LAND ADOPT
Descriptive
Analytics
Predictive
Analytics
Outcome
Analytics
Consumption
Analytics
Platform
Cost-Effective
Selling
Channels
Data-driven
and CGT-driven
Lead Gen
X-Sell
Sellers
Renewal
Sellers
Upsell
Sellers
Large Upsell
Sellers
EXPAND RENEW
Outcome
Engineering
Customer
Success Team
Customer
Service Teams
Customer
Growth
Teams
TSIA LAER Model – The Key to Reducing Cost of Sales
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Economic Moats XaaS 2.0
Virality/Low Cost of Sales
Network Effect
Economies of Scale
Medium
Medium
Low
Economic Moat Traditional Tech
High
High
High
Diverse Revenue Streams
Unique Capabilities
High Switching Costs
XaaS 1.0
Medium
Low
Low
Low
Medium
Medium
XaaS 2.0
Medium
22
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The Three Profiles of Xaas
Future Value
Aggregator
Unit of Consumption
by Customers
(users, pageviews,
clicks, etc.)
Confident in Pricing/
Revenue Model
Revenues Growing
Faster Than Expenses
Profitability Horizon
Mid-Term
Wedge
Current Profit
Maximizer
24
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FVA Profit Horizon
PROFIT
LOSS
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+
Time
Future Value
Aggregator
COST REVENUE
25
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The Three Profiles of Xaas
Rapid Growth
(usually triple-digit)
Future Value
Aggregator
Unit of Consumption
by Customers
(users, pageviews,
clicks, etc.)
Confident in Pricing/
Revenue Model
Revenues Growing
Faster Than Expenses
Profitability Horizon
Not yet
No
5+ years
Mid-Term
Wedge
Current Profit
Maximizer
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MTW Profit Horizon
PROFIT
LOSS
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+
Time
Mid-Term
Wedge
COST REVENUE
27
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The Three Profiles of Xaas
Future Value
Aggregator
Mid-Term
Wedge
Current Profit
Maximizer
Growth
(high double-digit+)
Unit of Consumption
by Customers
(users, pageviews,
clicks, etc.)
Confident in Pricing/
Revenue Model
Revenues Growing
Faster Than Expenses
Profitability Horizon
Yes
Yes, maybe barely
3 to 5 years
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CPM Profit Horizon
PROFIT
LOSS
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+
Time
Current Profit
Maximizer
COST REVENUE
29
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The Three Profiles of Xaas
30
Future Value
Aggregator
Mid-Term
Wedge
Current Profit
Maximizer
Growth, could be
slowing
Unit of Consumption
by Customers
(users, pageviews,
clicks, etc.)
Confident in Pricing/
Revenue Model
Revenues Growing
Faster Than Expenses
Profitability Horizon
Yes, usually multiple
Yes
Current to 3 years
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Friction Extremes
31
Easy Acquisition
Easy Adoption
Maximize Margin
EASY PROFITABLE
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The Friction Curve
32
FUTURE VALUE
AGGREGATOR
MID-TERM
WEDGE
CURRENT
PROFIT
MAXIMIZER
Harder Purchase
Decision
Easier Purchase
Decision
Higher Profits
Per Customer
Lower Profits
Per Customer
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Iron Triangle
Portfolio
& Pricing
Customer
Engagement Model
Financial Keys
Key XaaS profits decisions live in these three areas
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The 3x3 of XaaS
Portfolio
And Pricing
Customer
Engagement
Model
Financial
Keys
FUTURE
VALUE
AGGREGATOR
MID-TERM
WEDGE
CURRENT
PROFIT
MAXIMIZER
• Revenue mix
• Margin and profit targets
• Sales and marketing
• Key performance metrics
• New customer landing strategy
• Adoption framework
• Customer expansion model
• Renewal responsibility
• Technology offer definition
• Value-added service offer definition
• Offer(s) pricing model
Harder Purchase
Decision
Easier Purchase
Decision
Higher Profits
Per Customer
Lower Profits
Per Customer
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XaaS Revenue Streams
TOTALS
Revenue
Streams
Technology
Subscription
Premium
Annuity
Account
Services
Professional
Services
Transaction
Revenues
Aggregate
Business Model
% of Company
Revenue
COGS%
GM%
S&M%
R&D%
G&A%
OI%
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LowAverageHigh
Gross Margin Profiles (TRIMMED RANGE)
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
SOFTWARE
PRODUCT
GROSS MARGIN
SUBSCRIPTION
GROSS MARGIN
ANNUITY
SERVICES
GROSS MARGIN
PROJECT
SERVICES
GROSS MARGIN
TRANSACTION
SERVICES
GROSS MARGIN
36
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Bundle Growth Chart
ATTRIBUTE
Portfolio Components
Core Offer
Tech Support
Module A
Tech Support
Outcome Services
FVA STAGE
NEAR-TERM
WEDGE STAGE
CURRENT
PROFIT STAGE
Core Tech Subscription
Adjacent Modules
Attached Services
Operational Services
Adoption Services
Information Services
Outcome Services
Basic Basic
Consulting
Tech Support
Basic
DiverseCompleteSimple
1 5 10
TOTAL NUMBER OF
OFFER BUNDLES
Core Offer
Module A
Implementation
Premium
Data Supplement
Core Offer
Module B
Implementation
Managed Services
Premium
Data Supplement
Advanced Analytics
Pay for Performance
37
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FVA Revenue Streams
TOTALS
Revenue
Streams
Technology
Subscription
Premium
Annuity
Account
Services
Professional
Services
Transaction
Revenues
Aggregate
Business Model
% of Company
Revenue
90% 10% 100%
COGS% 40% 40% 40%
GM% 60% 60% 60%
S&M% 60% 15% 56%
R&D% 20% 20% 20%
G&A% 15% 15% 15%
OI% -35% 10% -30.5%
38
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Competitor
A’s Price
Competitor
B’s Price
Core Subscription Prices and Margins Get Squeezed!
39
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Expanding the Portfolio of Offers
ATTRIBUTE
Portfolio Components
Core Offer
Tech Support
Module A
Tech Support
Outcome Services
FVA STAGE
NEAR-TERM
WEDGE STAGE
CURRENT
PROFIT STAGE
Core Tech Subscription
Adjacent Modules
Attached Services
Operational Services
Adoption Services
Information Services
Outcome Services
Basic Basic
Consulting
Tech Support
Basic
DiverseCompleteSimple
1 5 10
TOTAL NUMBER OF
OFFER BUNDLES
Core Offer
Module A
Implementation
Premium
Data Supplement
Core Offer
Module B
Implementation
Managed Services
Premium
Data Supplement
Advanced Analytics
Pay for Performance
40
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MTW Revenue Streams
Revenue
Streams
Technology
Subscription
Premium
Annuity
Account
Services
Professional
Services
Transaction
Revenues
Aggregate
Business Model
% of Company
Revenue
70% 20% 10% 100%
COGS% 35% 35% 65% 38%
GM% 65% 65% 35% 62%
S&M% 45% 12% 8% 35%
R&D% 18% 10% 5% 15%
G&A% 12% 12% 12% 12%
OI% -10% 31% 10% 0%
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Strategic Diversification
ATTRIBUTE
Portfolio Components
Core Offer
Tech Support
Module A
Tech Support
Outcome Services
FVA STAGE
NEAR-TERM
WEDGE STAGE
CURRENT
PROFIT STAGE
Core Tech Subscription
Adjacent Modules
Attached Services
Operational Services
Adoption Services
Information Services
Outcome Services
Basic Basic
Consulting
Tech Support
Basic
DiverseCompleteSimple
1 5 10
TOTAL NUMBER OF
OFFER BUNDLES
Core Offer
Module A
Implementation
Premium
Data Supplement
Core Offer
Module B
Implementation
Managed Services
Premium
Data Supplement
Advanced Analytics
Pay for Performance
42
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CPM Revenue Streams
TOTALS
Revenue
Streams
Technology
Subscription
Premium
Annuity
Account
Services
Professional
Services
Transaction
Revenues
Aggregate
Business Model
% of Company
Revenue
55% 20% 15% 10% 100%
COGS% 25% 25% 60% 10% 29%
GM% 75% 75% 40% 90% 71%
S&M% 42% 10% 5% 5% 26%
R&D% 20% 10% 5% 8% 15%
G&A% 10% 10% 10% 10% 10%
OI% 3% 45% 20% 67% 20%
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The Profitable Economic Moats of XaaS 2.0
Virality/Low Cost of Sales
Network Effect
Economies of Scale
Medium
Medium
Low
Economic Moat Traditional Tech
High
High
High
Diverse Revenue Streams
Unique Capabilities
High Switching Costs
XaaS 1.0
Medium
Low
Low
Low
Medium
Medium
XaaS 2.0
Medium
High
High
Medium
High
High
44
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Customer Success Will Play A Central Role in Profitable XaaS 2.0
• Drive down sales costs
• Optimize waterfall economic performance
• Diversify revenue streams
A Lot More Than Just Adoption and NPS!
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Digging Economic Moats for Your
XaaS Business
THANKS!
J.B. Wood
President and CEO
Editor's Notes Mission: Tech companies are all looking for growth in revenue and profits. We help them achieve this by optimizing their service businesses. We understand the strategic, financial and operational levers that lead to improved financial results and are laser focused on how to optimize around them.
Global Footprint: We work with hundreds of technology firms, both large and small, around the world. We have over 300 member companies and 500 active membership subscriptions. 80% of our members are from Fortune 500 firms.
Research-Intensive Model: Our model is highly data-driven. Through our engagements with members that include deep dive audits, benchmark analyses, analyst inquiries, and special studies, we collect and analyze hundreds of thousands of data points that we synthesize into our research and recommendations. We know what works and play that back to our members to help accelerate results on the metrics that matter.