Philippe Botteri has put together an interesting analysis of his 13-member index of public SaaS companies (see here for the full spreadsheet). Essentially he has applied the same sales productivity metrics we use to evaluate private SaaS companies to public companies and charted their evolution over time.
The resulting graph provides a stark picture of the recession's impact on these companies: an 85% decline in the productivity ratio (incremental gross profit / sales & marketing cost), which is now running at 0.10 vs a target of 1.00. These companies are struggling to add new customer revenue and are surviving primarily on their existing recurring revenue base.
The rate and scale of the productivity decline are telling, but the absolute ratios should be taken with a grain of salt.
First, this way of calculating sales productivity does not take into account the actual lifetime value of a customer, which can differ greatly depending on the churn rate. Very sticky SaaS apps can have churn rates as low as 10%. This means that the average customer has a life of 9-10 years. But many SaaS apps have churn rates approaching 30% or higher (especially in the current environment), implying a life of 3-4 years. Obviously you can afford spend a lot more on sales to capture a 10-year customer than a 3-year customer, so for some vendors the target ratio should be lower than 1.00, for others it should be higher.
Second, it would be a mistake to conclude that SaaS vendors should reduce sales headcount by a lot in the short-term to bring the ratio back into line. The extremely low productivity reflects the fact that the bulk of the sales force that propelled growth in the good days is still there, costing the company money, while actual new sales have slowed dramatically. The great benefit of the recurring revenue model is that such an overhang can be supported for a while, until markets recover (at least for most vendors). In the traditional licence sales model cuts would have to come a lot sooner.
Third, perhaps the biggest challenge for SaaS companies (hidden in this data) is the continuous, permanent change in the way software products are distributed, which is reflected in lower average sale prices. The components of the SaaS application and infrastructure stack are being commoditised from the bottom up. Witness what Zoho is doing to Salesforce, or what Google Analytics did to the web analytics applications industry, or what services like SugarSync are doing to the backup and recovery solutions market.
Last week Microsoft announced a 33% reduction in prices for some of its SaaS products, to better compete with Google Apps and others.
SaaS vendors may feel that their sales productivity will return to normal once the economic recovery is underway. That would be a mistake. What they will find is that their sales model has become permanently too expensive for the revenues generated. What seemed like an efficient direct sales force should now be telesales; what was a great telesales machine should now be a self-service e-commerce site; and perhaps what was an effective online e-commerce channel should now be a full-blown freemium lead generation programme.
Selling SaaS already has a lot less in common with selling enterprise software than it does with selling B2C web services. Increasingly business applications are not sold to companies at all, but to business users, also known as consumers. SaaS companies -- especially the ones we can now comfortably call 'legacy' eg Salesforce.com -- will need to master that consumer distribution model in order to survive.