digging economic moats for your xaas business | gainsight pulse 2016 keynote

©2015 Gainsight. All Rights Reserved.

Digging Economic Moats for Your XaaS Business

J.B. Wood, President and CEO, TSIA


Our mission is to increase revenue and profit performance of technology companies by optimizing service businesses.


Our Global Footprint

3

65+ Countries | 500 Memberships | 300 Tech Companies

80% areFortune 100 Tech Firms


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


"I skate to where the puck is going to be, not where it has been.” - Wayne Gretzky


2009 2011 2013

“We have a problem…”

“A new purchasingmodel is coming”

“Industrytransformation”

A Journey…“Profitable XaaS”

6

Coming This

Month!


Tech & Service 50 Index vs. Cloud 40 Index

TSIA TS50

TSIA Cloud 40

8


Revenue Multiplier (market cap/revenue)Average:Q4 2015 5.6

Lifelock

IntraLinks

Jive Software

RealPage

Athena Health

Google

LogMeIn

Veeva Systems

Ultimate Software

ServiceNow

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

1.41.71.71.81.8

2.12.6

5.15.55.55.65.7

6.17.5

7.98.18.2

8.610.4

14.1

9


However, The Mountains Are Eroding…

LiveP

erson

EGAIN

Numere

x

Carbon

ite

Bazaa

rvoice

Lifelo

ck

Chann

eladv

isor

Bottom

line T

echn

ologie

s

RingCen

tral

Corners

tone O

ndem

and

Veeva

Sys

tems

Textur

a

Athena

Hea

lth

Medida

ta

Fleetm

atics

Grou

p

Red H

at

Qualys

Ultimate

Soft

ware

Proofpo

int

Service

Now0

5

10

15

20

25

Current Last Year 10


GaaP Profitability Problem Not Going Away At Scale

11


The Slowdown Fish

PROFIT

LOSS

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+

Time

COST REVENUE

Profits

Losses

GrowthSlowdown

costs

revenue

12


The Slowdown Fish

PROFIT

LOSS


Time

COST REVENUE

Losses

GrowthSlowdown

New Investor Messaging

“Hyper-Growth”

“Growth+

Profits”

13


Why aren’t we already there?


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

15


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


Economic Moat XaaS 1.0 – All Same or Worse


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium

17


The Cost of Sales Problem


Sales and Marketing as a Percentage of Revenue

50%

40%

Workday LicensedSoftware

Rackspace Google

30%

20%

10%

0%

52%

60%

40% 38%29%

14% 13%Saas

CompaniesSalesforce

19


XaaS Revenue Waterfall

20

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%

$90mRetentionDollars

UpsellDollars

Cross Sell

Dollars

Customer Churn Dollars

DownsellDollars

Retention Rate = 90% Expansion Rate = 25%

Churn = 7% $3mDownsell = 3%

$7m

Upsell = 10%$10m

Xsell = 15%

$15m

YoY Growth Rate = 15%

Source: TSIA SRG Cloud Benchmark Study 20


Effectiveness

Efficiency

Data Quality

Stickiness

Quantity

Who

Land New Customer

LAND ADOPT

DescriptiveAnalytics

PredictiveAnalytics

OutcomeAnalytics

Consumption Analytics Platform

Cost-EffectiveSelling

Channels

Data-driven and CGT-driven

Lead Gen

X-SellSellers

RenewalSellers

UpsellSellers

Large UpsellSellers

EXPAND RENEW

OutcomeEngineering

Customer Success Team

Customer Service Teams

CustomerGrowthTeams

TSIA LAER Model – The Key to Reducing Cost of Sales

21


Economic Moats XaaS 2.0


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium

XaaS 2.0

Medium

22


The Revenue Diversification Problem


The Three Profiles of Xaas

Future ValueAggregator

Unit of Consumptionby Customers(users, pageviews, clicks, etc.)Confident in Pricing/Revenue Model

Revenues GrowingFaster Than Expenses

Profitability Horizon

Mid-TermWedge

Current ProfitMaximizer

24


FVA Profit Horizon

PROFIT

LOSS


Time

Future Value Aggregator

COST REVENUE

25



Rapid Growth(usually triple-digit)





Not yet

No

5+ years

Mid-TermWedge


26


MTW Profit Horizon

PROFIT

LOSS


Time

Mid-TermWedge

COST REVENUE

27




Mid-TermWedge


Growth(high double-digit+)




Yes

Yes, maybe barely

3 to 5 years

28


CPM Profit Horizon

PROFIT

LOSS


Time


COST REVENUE

29



30


Mid-TermWedge


Growth, could beslowing




Yes, usually multiple

Yes

Current to 3 years


Friction Extremes

31

Easy AcquisitionEasy Adoption

Maximize Margin

EASY PROFITABLE


The Friction Curve

32

FUTURE VALUEAGGREGATOR

MID-TERMWEDGE

CURRENT PROFIT

MAXIMIZER

Harder PurchaseDecision

Easier PurchaseDecision

Higher ProfitsPer Customer

Lower ProfitsPer Customer


Iron Triangle

Portfolio& Pricing

Customer Engagement ModelFinancial Keys

Key XaaS profits decisions live in these three areas


The 3x3 of XaaS

PortfolioAnd Pricing

CustomerEngagement

Model

FinancialKeys

FUTURE VALUE

AGGREGATOR

MID-TERMWEDGE

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 PurchaseDecision

Easier PurchaseDecision

Higher ProfitsPer Customer

Lower ProfitsPer Customer

34


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%

35

©2015 Gainsight. All Rights Reserved.LowAverageHigh

Gross Margin Profiles (TRIMMED RANGE)

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%SOFTWAREPRODUCT

GROSS MARGIN

SUBSCRIPTIONGROSS MARGIN

ANNUITY SERVICES

GROSS MARGIN

PROJECT SERVICES

GROSS MARGIN

TRANSACTION SERVICES

GROSS MARGIN

36


Bundle Growth Chart

ATTRIBUTE

Portfolio Components

Core Offer

Tech Support

Module A

Tech Support

Outcome Services

FVA STAGE NEAR-TERMWEDGE STAGE

CURRENTPROFIT 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 10TOTAL 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


FVA Revenue Streams

TOTALS

Revenue Streams






% 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


CompetitorA’s Price

CompetitorB’s Price

Core Subscription Prices and Margins Get Squeezed!

39


Expanding the Portfolio of Offers

ATTRIBUTE


Core Offer

Tech Support

Module A

Tech Support

Outcome Services


CURRENTPROFIT STAGE


Adjacent Modules

Attached Services


Adoption Services


Outcome Services

Basic Basic

Consulting

Tech Support

Basic



Core Offer

Module A

Implementation

Premium

Data Supplement

Core Offer

Module B

Implementation

Managed Services

Premium

Data Supplement

Advanced Analytics

Pay for Performance

40


MTW Revenue Streams

Revenue Streams






% 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%

41


Strategic Diversification

ATTRIBUTE


Core Offer

Tech Support

Module A

Tech Support

Outcome Services


CURRENTPROFIT STAGE


Adjacent Modules

Attached Services


Adoption Services


Outcome Services

Basic Basic

Consulting

Tech Support

Basic



Core Offer

Module A

Implementation

Premium

Data Supplement

Core Offer

Module B

Implementation

Managed Services

Premium

Data Supplement

Advanced Analytics

Pay for Performance

42


CPM Revenue Streams

TOTALS

Revenue Streams






% 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%

43


The Profitable Economic Moats of XaaS 2.0


Network Effect

Economies of Scale

Medium

Medium

Low


High

High

High


Unique Capabilities


XaaS 1.0

Medium

Low

Low

Low

Medium

Medium

XaaS 2.0

Medium

High

High

Medium

High

High

44


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!

www.tsia.comReserve Your Copy: http://info.tsia.com/xaasplaybook

Introducing TSIA’s New Book

http://info.tsia.com/xaasplaybook


Digging Economic Moats for Your XaaS Business

THANKS!

J.B. WoodPresident and CEO