Those of us who have seen software transition from perpetual licenses to recurring revenue from SaaS companies know that there has been a fundamental shift in how revenue is earned over time. Recurring revenue businesses They have to prove their value and earn customer trust every day. It is no longer enough to rest on the laurels of a high-value contract.
Still, some old-world relics are making their way into SaaS businesses, including the way service teams are incentivized. Certain legacy patterns of thinking must give way to a more modern approach to creating customer value. In the previous model, personalization was key to unlocking service revenue.
Even today, service teams are incentivized to create custom work to generate revenue, all too often at the expense of complexity with the goal of long-term customer retention.
Instead of maximizing service dollars per project, companies SaaS providers need to rethink how they incentivize service teams and align them more closely with product teams. Let's see how this collaboration can maximize customer lifetime value (LTV) and result in result in more retention and expansion opportunities for businesses of recurring income.
Engage for recurring impact
During customer onboarding, service teams often consult with the customer about what work they need to do or the most urgent issues they need to resolve. As a result, you will typically see a service team create a scope of work (SOW) for customization as a gateway between promised work and future work to avoid range increase. While this supports potential downstream project risk, it ultimately misaligns incentives and focuses on short-term revenue capture (more and more customization) at the expense of long-term customer value.
In this model, the customer is frustrated by the level of customization required to make a given product functional. Eventually, the software becomes too difficult to manage and the customer abandons. In an alternative model, the service team's goal is to get the most out of the product and implement a defined scope at a predictable price, with a flexible time and materials budget for out-of-scope work.
By doing so, the service and product teams (preferably on the same team) align with the company's goal of improve retention net of dollars in general. Or, like the recent Harvard Business Review article states, in subscription models, recurring revenue is the result of recurring impact and services are a key to this impact throughout the customer lifecycle.
A new model for commerce services
One of the biggest business challenges in trading is platform switching. It's a painful turning point where the market (i.e. vendors) has conditioned merchants to believe that the only option is to rip out and replace a legacy system. Often, that's where service teams come in and create a lot of upfront custom work, leading to a vicious cycle where trading platforms become cumbersome and virtually unusable again. It's time to break that cycle!
I often advocate breaking down the biggest challenge of replatforming into smaller components. It is the fastest way to deliver value and contributes to customer LTV. Instead of a new wholesale platform, teams can start small by choosing a single product line or problem to solve, and combining it with service activities, for example APIs, that allow the customer to maximize their value with an existing product.
In this scenario, it is important to pair the services together with the product team at every step. Let's take a common problem to be solved with e-commerce catalog management. During customer onboarding, a catalog modeling exercise conducted by the service team can help merchants understand their product set and variation/configuration options (e.g., sizes/colors, packages/combinations, individual items, etc.).
What are the problems that cannot be solved today? In the traditional catalog model, the tight coupling of product, price, and category limits merchants' ability to be flexible with their inventory. As a result, many rely heavily on promotions or discounts to resolve pricing restrictions. Options like dynamic bundling or price variations from B2B to B2C channels often involve custom development work outside the platform, which is difficult to maintain.
A catalog modeling exercise based on the question «problems to solve» should lead to fruitful collaboration between the product and service team. For example, a service team might work on data migration issues and product integrations. That way, the merchant can leverage their existing commerce platform with new catalog capabilities, without having to navigate through an entire new platform. Future component replacements represent opportunities for new service projects, serving customer LTV.
key takeaways
While we've used commerce as a model to show how product and service teams can break down a larger problem to solve into smaller components, this strategy can be applied to any recurring revenue business. Some of the key points include:
- Reduce hourly revenue targets for services; incentivizing LTV instead: $500,000 in service revenue today doesn't add up to multiples in the future, or worse yet, could add complexity for the client in the form of custom work that isn't necessarily necessary for success. Think of creative ways to break services into chunks over a longer period of time. Align and incentivize product and service teams to collaborate on solving common problems with existing products. In the long run, this collaboration may look like co-developing a product roadmap. In the short term, it's more like guiding the customer on what is best to prioritize based on their implementation needs.
- Embrace a cultural change: Instead of a traditional relationship, it is necessary to limit confrontation between the product and service team, encouraging collaboration between these two groups. The goal is to understand and effectively package existing products, rather than addressing gaps with custom work. This change will reduce complexity for the customer and create more opportunities to cross-sell and upsell, increasing customer LTV.
- Invite the customer to help define the product: In the model described above, traditional services evolve into a “service services” role. The goal is to always think about what the client wants and guide them along the best long-term path. A best practice is to invite the customer into the product development process through micro-engagements with a customer advisory board (CAB). Instead of a traditional enterprise CAB that might meet once or twice a year to discuss big ideas, a micro-engagement involves more frequent, actionable meetings to develop products based on real customer needs.
Above all, recurring revenue companies need to earn customer trust every day. You never know when the client might make big changes, like the departure of a champion or SI partner. As a result, it is important to have multi-threaded accounts with multiple stakeholders, along with service/product collaboration that critically thinks about customer implementation as a team, every day. Prioritize openness and transparency with customers to build trust and build team relationships by aligning incentives instead of competing when you should be on the same team.
