Should Services for Software Purchases be FREE or PAID?

Customers buy technology to improve their company’s ability to drive revenue streams and/or save costs, thus improving profitability and growth potential. So why wouldn’t they invest in the appropriate services required to ensure the technology is utilized properly to achieve their business innovations?

The answer is that the customers do invest in services.

Customers actually plan and budget for services to support their technology investments. CFOs want technology investments to work and drive lower costs, faster innovation and revenue growth. CIOs design a technology architecture that is intended to meet these goals and need help ensuring the new software is fully adopted and operationalized.

If we look at which top software companies are charging for services, we will find that many of them have a service program or package that is sold with every software purchase. As a matter of fact, many require sales executives to add the appropriate services program/package to every deal. These software companies have figured out the secret to growing and scaling their business profitably; Charge for services.

Just to give you an idea of which software companies are selling services with every software deal, here is a list of some of the top SaaS software companies and the attach rates of Services to License from Bryan Stolle, Founding Partner at Wildcat VC.

“Clearly, professional services have been and still are a key part of the SaaS playbook for the highly successful companies in the table.”-Bryan Stolle, Founding Partner Wildcat VC.

As a CCO for five software companies, I have tracked customer data to analyze the amount of services required to get to a value state. What the data trends showed is the companies that spent the appropriate amount on a services program had over 95% retention rates and over 40% expansion growth rates. The data also showed what the breaking point was in the amount of services required to confidently predict the customer renewals. For example, in the early days at Workfront, we found that the customers who purchased service programs that offered at least two weeks or more of consulting services with our education and annual support programs, which included additional consulting hours to support post launch, had the highest retention and growth rates.

So why is there still such a strong debate in the software industry on whether to sell services or give it away for free to get the deal?

The answer is that there are some situations in which it is appropriate and a better business model to include product and services subscriptions as one price and others where it is not the right model. Generally, an enterprise software solution will always require a services program due to the business transformations required in order for the customer to operationalize the new technology. It really depends on how complex of a problem the software is solving. The more complex the problem, the more services required to help customers realized the value.

However, many SaaS solutions may only require a minimal amount of services to get to value. Other free or minimum cost service options are when you find success in offering a value realization workshop in the sales cycle to help you to close the larger deals or you have a robust online self-help center or automated onboarding process in which the data proves the customers can realize value with limited human intervention.

The Gap Services covers

The best way to think about it is to be real about how intuitive the product is for a customer to quickly setup, configure, roll out and adopt without human intervention. The amount of intervention required for a customer to learn, configure and adopt the solution will dictate the types and amount of services required to meet the gaps between product capability and customer expected outcomes.

There are several aspects to consider when defining the right level and type of service(s) a SaaS company should offer to ensure consistent delivery of high value customer outcomes. The following graphic depicts the gaps that services can fill between the product capabilities and the customer’s expected value outcomes:

For Enterprise Software companies, this is a nice article that I think is worth the read by Deloitte that is a fantastic summary on how to think about designing the right services model for each stage of a software company’s growth. It will provide some insights and options for Enterprise Software companies to consider when working on defining the right services program to drive growth and retention.

Types of Services that are considered Added Value

There are several license to services models that will support your GTM Strategy and tactical plays that are defined for each target market. The secret is to understand what types of services should be included with the basic sale of the software and what are considered added value and should be paid services options.

Some Examples of services that can be considered added value are:

• best practice implementation methodology that drives results faster

• strategic planning and business transformation consulting services

• best practices and custom configuration consulting services

• high levels of service

  • Support (Service Level Agreements) SLAs

  • Custom Education courses, virtual or onsite

  • Education certification programs

  • Dedicated Support person, consultant, strategic account manager

  • Post Implementation consulting coaching

  • Custom solutions

Services Revenue

Building a profitably services organization will contribute to improving operational margins. Even though services revenue doesn’t affect valuation, it is the secret sauce for most SaaS companies to manage churn and drive expansions, especially when using a land and expand strategy.

This article by Callum Thompson from Precursive is a solid way to think about services as a strategic part of any SaaS company strategy.

I would love to hear your thoughts and feedback on this topic. Please feel free to provide your insights.

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