Should Your SaaS Business Push Professional Services or Stay Focused on Recurring Revenue?

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Recurring revenue: what’s not to love about it?

If your subscription SaaS business manages its churn well, it can expect a stable, reliable, and predictable flow of it every month.

And of course, that may not be your business’s only stream of revenue either. Many SaaS businesses also offer professional services to their customers. While revenue from this kind of offering certainly has its benefits, it obviously isn’t as stable, reliable, or predictable.

Professional services are usually completed as ad hoc, shorter-term transactions. So once you’ve met your customer’s needs, the contract ends—as does the stream of service revenue from that customer.

Demand for professional services can also fluctuate unpredictably.

Is it worthwhile for your SaaS business to leverage professional services as another revenue stream? And if so, how should you go about it?

Here are some things to consider.

Is there demand for professional services from your subscription customers?

Professional services come in a few different flavors, and each relates to helping customers at some point in their journey with your SaaS business.

For example:

  • Implementation: get your product set up and running smoothly
  • Product training: learn how to maximize the value of your product
  • Product support: troubleshoot problems encountered while using your product

Whether or not your customers need professional services depends on the SaaS product you offer.

…there are SaaS platforms that have a more event-based consumption behavior, where the product is self-explanatory or more plug-and-play,” shares Andrew Barton, former Vice President of Client Success at project management platform Wrike.

"In such cases, users are often enabled by intuition, in-product guidance, e-learning materials, and perhaps a short call with a customer success manager [such that they don’t need professional services].”

But perhaps your SaaS product isn’t “plug-and-play”—and you’ve found customers tend to need more handholding as they integrate your software into their workflows.

If so, your customers may appreciate being able to engage professional services for a smoother transition.

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Should your SaaS provide professional services in-house or outsource them?

Cloud computing business Veeva carries out most of its professional services in-house with the help of a dedicated team, as disclosed in its 2020 annual report.

On the other hand, file hosting business Dropbox offers no in-house professional services at all. Instead, customers needing professional services can engage an external partner from their region.

If your SaaS business will be providing professional services, which approach should it be taking?

The in-house route enables you to have greater control over the quality of the services provided to customers. However, this comes at the expense of having to hire more staff to service your customers—especially if demand for professional services is high.

You’ll need to consider whether the potential return from offering professional services in-house will justify the extra expense and internal distraction.

Alternatively, outsourcing professional service work enables your team to focus on offering its core product—namely, your software. But when you outsource such work, your business will have less control over how it’s performed and this could affect the quality of service provided.

Consider the pros and cons of each approach before deciding which your business should adopt, and whether you can mitigate the potential risks.

In the case of Dropbox, the business certifies its partners to ensure they can offer quality service. It also incentivizes partners to seek higher-tiered certification in return for greater support and rebates.

Should your SaaS business try to grow its service revenue?

If your SaaS business already offers professional services, should it then be trying to grow the revenue earned from them?

Here’s a peek at what a few established SaaS businesses have been doing in this respect.

  Service Revenue as a % Of Total Revenue
  2018 2019 2020
Veeva 19.0% 19.5% 18.8%
Salesforce 7.3% 6.5%> 6.2%
Avalara 6.6% 7.1% 6.9%
HubSpot 5.0% 4.2% 3.4%

The service revenue for these four SaaS businesses as a percentage of their total revenue is relatively flat from 2018 to 2020—even being on a decreasing trend for HubSpot. This suggests they aren’t trying to earn a greater portion of their revenue from professional services.

In fact, Veeva stated in its 2020 annual report it expects the proportion of total revenue derived from professional services to decrease over time.

Professional services are meant to complement your software offering, not overshadow it. In this light, the growth of service revenue should be treated as a means to an end rather than an end in itself.

Focus on offering professional services to the extent that they support the growth of your recurring revenue. And if this happens to lead to a boost in your service revenue, then that’s a bonus.

How do venture capitalists view service revenue?

This question is most relevant if you’ve been, or will be, seeking venture capital (VC) funding for your SaaS business. Because once you’ve received funding, your VCs will have a say in how your business is run.

This includes whether they welcome or frown upon your business earning service revenue—and your business’s decision to offer professional services in general.

Byron Deeter, partner of VC fund Bessemer Venture Partners, stated in no uncertain terms, his position on this issue.

“I’ll be very blunt: professional services revenue is bad for cloud businesses in most cases."

It’s low gross margin revenue that slows down your implementations and can only scale in proportion to your services headcount.”

But not all venture capitalists think the same way. Bryan Stolle, founding partner of VC fund Wildcat Venture Partners, acknowledges VCs commonly view professional services in a negative light.

However, he called this a “pervasive and pernicious SaaS business model myth.”

He then goes on to defend professional services as being valuable in helping SaaS businesses improve customer success and retention, as well as product-market fit.

Given the mixed views of VCs on this issue, it would be wise not to assume every VC fund is supportive of or against SaaS businesses leveraging professional services as a revenue stream.

Instead, when pitching to VC funds, find out their stance—especially if you are, or are considering, offering professional services. This will help prevent conflicts from arising should they decide to invest in your business.

Pushing professional services as a strategy for growing recurring revenue

You’re running a software as a service business, not a professional service business. But sometimes your customers may need help using your software to an extent that assistance from customer success is inadequate.

Enter professional services. These more extensive, value-added services help customers successfully implement your product and maximize their use of it within their businesses.

As a result, your customers continue to see the value in your product and pay for it over the long term—which is great news for your recurring revenue.

If you’ve decided to offer professional services, think about whether you’ll be providing them in-house or via third parties, as this decision will have potential cost and quality implications.

And once you’ve started offering professional services, keep a close eye on your service revenue figures.

While you may not want to chase growth of this revenue stream for growth’s sake, these numbers can help inform your future professional service-related decisions, such as whether you should be outsourcing the work or raising your rates to ensure continued profitability.

Tags: SaaS SaaS Strategy Recurring Revenue

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