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Published August 11, 2020

How much of a SaaS companies’ revenue should come from services?

How much of a SaaS companies’ revenue should come from services?

There is a fundamental issue in the SaaS market; If a SaaS company makes more money from services that from their software, then they are not motivated to make their software better, because it would actually reduce their revenue.

Why would anyone invest in making a product that will make them less money?

This has been an economic conundrum for a very long time.

People who made horse drawn buggies and technologies associated with horses, made a case against the car.

Companies who made vinyl records made the case against compact cassettes, and then against Compact discs, and then against streaming music services.

And in all cases the case they were making was in support of their existing business model, not in support of the user requirement.

When the SaaS business model was first launched, it was to be able to sell solutions directly to business departments (such as sales) as opposed to having to have an internal IT department build or configure the solution. When companies such as first entered the market, they were offering a solution that was at least 50% of what the business needed. This was in a time when the business was only able to get maybe 30% of what they needed from their internal services teams, and the time to market and the cost was far higher (with internal teams) than they could justify. The result was using SaaS was seen as a low risk purchase, but over time required a significant additional investment in services to add the additional functions and configurations that were not in place “out of the box”.

Over time these services actually exceeded the budget for the SaaS product itself, and this created pressure within the SaaS companies (and their partner ecosystems) to maintain and grow this revenue stream. This pressure made it hard for the SaaS platform to solve these problems in software, as doing so would reduce service revenue and increase development costs. This is why SaaS products which seem to offer so much promise at their inception seem to slow down their innovation as their sales skyrocket.

SaaS has become the ultimate “bait and switch”, with the initial sale often being predicated on a free trial (or a very low starting price), that quickly becomes the standard within a business, and as they scale the use of the platform, complexity and additional requirements require large investments in services and additional licenses.

The ultimate SaaS company shouldn’t make any money from services, so what is an acceptable level of services that a SaaS company can make without corrupting their business model?

Quite simply a SaaS business must make more from their SaaS software than from services to ensure that they are motivated to continue to innovate in the platform at the expense of services. They should see services as an embarrassment, and they should be motivated to do whatever it takes to eliminate the need for services from their implementations.

Look for SaaS companies who make significantly more from their software than they do from their services (and in this include the services offered by their partners), only then do you know that the vendor has the same interests as you.