4/29/2021

Is Your Services Business Healthy?

Professional services play a valuable role in early SaaS companies: They can offer you an alternate revenue stream, improve customer retention, provide product feedback, and offer an avenue for testing product lines. But not all services are created equal.

In a previous post, I walked through why SaaS startups should embrace professional services. In this post, I’ll talk about how to execute services so they actually enhance your core platform. At Elsewhere, we call these “value-added services,” because they’re actually helping you build a better product in a cost-effective way.

At the end of the day, you need to make sure that your services offering aligns with your long-term vision for the product. Here’s how to build a healthy services business into a thriving SaaS business.

Focus on your core product roadmap

A solid services business is a business that’s profitable. But a healthy services business is a business that’s turning out profits and insights you can reinvest into your product.

This requires focusing on services that specifically contribute to enhancing your product—and scaling down any services that don’t. Ask yourself, “Where does this service fit into our product roadmap?”

For example, if you’re a security business and it would be a value-add to offer customers a particular integration with a separate threat intelligence product—and you have a customer that’s willing to pay for the integration to be built—that’s a win-win. You’re offering a service that’s already on your product roadmap, and the customer is fine with the integration being available to all customers. You’re getting paid to do something you were already planning on doing!

On the flip side, a lot of SaaS startups will get distracted by the needs of large and influential enterprise clients who see them as an outsourced development shop. If your product is built on top of Salesforce, for example, and your entire professional services business is focused on helping customers learn how to use Salesforce, developing custom code for customers beyond this is not really benefiting your roadmap. You may be generating profit, but you’re not focused on your product.

Think of this way: Start your business through services, and use those resources (quantitative and qualitative) to fund your software.

Track your metrics

Over time, services should become a smaller and smaller proportion of your revenue.

Before we invest, many of Elsewhere’s portfolio companies start out as pure services businesses. But by the time they reach $5M in revenue, we expect them to be at a maximum of a 50/50 split of services and product. And by $20M? Services should be 30% or less of overall revenue.

How do you scale down services as you scale up your business? Pay close attention to your metrics—from expenses to employee hours to overall revenue—when it comes to the services component of your business, and ask:

• Are these services profitable?
• How much are we investing in services vs. product when it comes to time, money, and talent?
• Are services growing as an overall portion of revenue? Are they growing faster than product?

You can also begin to focus more on SaaS metrics to shift people’s priorities and define new goals for each department, such as growth retention and net retention. It’s easy to become distracted by a thriving services business, but as a founder, your role is to ensure that they’re thriving in the right way. Stay on course by making choices that prioritize your product.

Create a sales strategy

Services are successful when you integrate them into your broader sales process, and sell them upfront. Customers get a sense for your product and your dedication to customer success, and you get a better understanding of what your customers need to succeed.

At the same time, you don’t want salespeople focused on selling services instead of selling the product. If your sales team receives the same commission for selling services and software, then they’ll likely sell services just as often they sell software. If you’re trying to grow your true SaaS business, you want to incentivize product sales. (And, of course, make sure you have a product that helps sell itself.)

Build your company goals into your sales structure: This might look like providing a lower commission for services sales, or higher commission for customers that purchase both.

One of our portfolio companies, Itential, used this strategy with great success. When we met the team, their revenue was split evenly across services and product. After Elsewhere invested, the Itential team split their services and software teams up, hired more experienced software executives, and expanded the software sales team. They’ve now tripled their revenue, and the product portion of that revenue has increased substantially. We actually just announced a Series B investment in Itential and are excited about their continued traction down this path.

It’s a top-down strategy

A company that starts as a services business will need to make a mindset shift to become a true SaaS company. And that comes from the top down. Services revenue doesn’t have to go away completely, but it should have its rightful place in the company strategy and business model.

Founders should communicate their goals to the rest of the organization, and incentivize all departments—not just sales—to align with the broader company goals. Everyone should know that services are not the end-goal, the product is the end-goal. As long as your team is building professional services along a solid product roadmap, you’re on the right path.