A thriving subscription or consumption model depends on the ability of the vendor to retain and expand customers. Broadly stated, expansion revenue manifests in two forms: upsell revenue (selling more or getting the customer to consume more of the existing solution) and cross-sell revenue (selling a new solution or to a different set of buyers). AGI’s Cloud Sales Index data indicates that for every dollar of an initial as-a-service booking, best-in-class companies are deriving $8-$10 additional dollars of revenue over the subsequent four years. Put another way, companies get 88-91 percent of the total five-year contract value on a deal after the initial booking event (excluding one-time charges such as professional services or migration fees). This new reality creates an increasing dependency on making substantial investments in post-sales capabilities, skills and resources to capture potential revenue.
In the past with the on-premise perpetual license model, legacy tech companies focused on the booking event, which is where nearly all the revenue associated with a deal exists. “Born-in-cloud” startups understandably focused on driving acquisition in order to demonstrate the growth potential and viability of their technology. Not surprisingly, neither legacy nor “born-in-cloud” companies adequately invested in the post-sales support resources needed to drive effective subscription/consumption revenue growth. That historical reality is changing rapidly and dramatically. Consider that the mature tech companies in our Cloud Survey Index are moving from about 5 percent of their total sales expense on post-sales resources today to 40 percent within two years. Such rapid migration creates opportunities for both great success–if the transition is smooth and successful–or significant disruption and revenue erosion if the new coverage model is conceived or executed poorly.
How should companies transitioning to an as-a-service model think about building out a viable, growth-oriented post-sales engine? Here are the areas AGI recommends companies consider:
1. Understand and Document Your Customer Use Cases
2. Build and Align Post-Sales Roles to Viable Expansion Scenarios
3. Identify, Align and Build the Enablers to Support New Post-Sales Roles
The economics of the as-a-service business model mandate a more explicit, resource-intensive focus on post-sales activities. Vendors that cannot effectively retain and expand their existing customers will be increasingly unable to drive enough revenue to realize sufficient returns on customer acquisition investments. More importantly, as-a-service companies must continue to drive value to customers after the initial sale in order to keep competitors out and revenues expanding. These realities point to the need for significant recalibration of existing sales models: the good news is, AGI can help.
Read part 2 of this blog series.
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