Those of us who have seen software transition from perpetual licenses to recurring revenue SaaS businesses know there’s been a fundamental shift in how revenue is earned over time. Recurring revenue businesses have to prove their value and win the customer’s trust every day. It’s no longer enough to rest on the laurels of a high-value contract term.
Still, some relics of the old world make their way into SaaS businesses, including the way service teams are incentivized. Certain legacy patterns of thinking need to make way for a more modern approach to value creation for the customer. In the old model, customization was key to unlocking services revenue.
Even today, service teams are incentivized to create custom work to drive revenue, too often at the expense of complexity with the objective of retaining the customer for the long-term.
Rather than maximizing services dollars per project, SaaS companies need to rethink the way they incentivize service teams and align them more closely with product teams. Let’s look at how this collaboration can maximize customer lifetime value (LTV) and result in more retention and expansion opportunities for recurring revenue businesses.
Engage for recurring impact
During customer onboarding, service teams typically consult with the customer on their jobs to be done, or most urgent problems to solve. As a result, you’ll usually see a service team create a scope of work (SOW) for customization as a gate around promised work versus future work to prevent scope creep. While this backstops potential downstream project risk, it ultimately misaligns incentives, putting the focus on short-term revenue capture (more and more customization) at the expense of long-term lifetime customer value.
SaaS companies need to rethink the way they incentivize service teams and align them more closely with product teams.
In this model, the customer becomes frustrated by the level of customization required to make a given product functional. Eventually, the software becomes too difficult to manage and the customer churns. In an alternate model, the service team’s goal is to leverage as much from product as possible and implement a defined scope at a predictable price, with a flexible time and materials budget for out-of-scope work.
In doing so, the services and product teams (preferably on the same team) are aligned on the company objective of improving overall net dollar retention. Or, as a recent Harvard Business Review article puts it, in subscription models, recurring revenue is the result of recurring impactand services are a key driver of this recurring impact throughout the customer life cycle.
A new model for commerce services
One of the biggest business challenges in commerce is replatforming. It’s a painful inflection point where the market (read: vendors) has conditioned merchants to believe that ripping and replacing a legacy system is the only option. That’s often where service teams come in and create a host of upfront custom work, leading to a vicious cycle where commerce platforms become cumbersome and virtually unusable all over again. It’s time to break the cycle!
I often advocate for breaking down the larger challenge of replatforming into smaller component parts. It’s the fastest path to delivering value and contributes to customer LTV. Instead of a wholesale replatform, teams can start small by choosing a single product line or problem to be solved, and pairing it with services activities that allow the customer to maximize their value with an existing product.
In this scenario, it’s important to pair services alongside the product team with each step. Let’s take a common problem to be solved with e-commerce catalog management as an example. During customer onboarding, a catalog modeling exercise delivered by the service team can help merchants understand their product set and variation/configuration options (e.g., sizes/colors,