The Role of the Channel in SaaS Customer Retention

A very savvy SaaS CEO told me recently that he was concerned about the fact that 80% of his customers had never met anyone at his company face to face. The resulting lack of customer intimacy, as he termed it, was seen as a major contributing factor to the risk of churn. I think he’s right about the connection to risk, and the customer retention rates of most, if not all, SaaS vendors are also vulnerable. Features and functionality are not long-term competitive advantages; they are too easily and quickly duplicated. SaaS is about selling a relationship over time, and the greater the involvement with the customer, the more that customer relationship is likely to continue. Therefore, if a vendor is not interested in extending the depth of the relationship by offering additional services in-house, then they should partner with those who are interested and capable of filling in the gaps.

Subscription Licensing Doesn’t Guarantee Customer Retention

The accelerating transition of increasing numbers of software manufacturers to the SaaS model means that competition is intensifying, and that certain types of business operational functionality are turning into commodities. What will truly differentiate Company A’s sales force automation service from that offered by Company B? Especially when a customer of “A” can literally press a button on B’s web site to cause the automatic migration of not only all of their data formerly located on A’s service, but also all of their customizations?

The basic business strategy of the SaaS model mandates that sales be web-based as much as possible and large sales staffing is avoided. But while the web might be the most efficient and cost-effective approach to gaining new customers, success in SaaS requires keeping and extending those customer income streams for the maximum duration. If the impersonal nature of the web and the emphasis on sales efficiency run counter to the formation of the necessary customer intimacy, SaaS companies that want to prosper will have to consider other options. Here is where the careful design and deployment of channel partners can play a very beneficial role in optimizing the customer retention rate for both.

Eight Paths to Money

There are 8 basic methodologies for revenue generation in the SaaS model, and they offer several options for mutually profitable partnerships. The first and most popular, Subscription Licensing, will typically be reserved for the manufacturer, although there may be a commission plan for a partner. The second method, Enhanced Usage Billing based on metered access, project/transactions, bandwidth, etc., likewise tends to be held by the vendor. The third method, Implementations and Integrations, is often where a partner comes into the picture, but the short-term project and up-front nature of this type of interaction has a limited contribution to the larger issue of customer retention. The fourth method, Professional Services and Customization, and the fifth, Training, are ideal opportunities for a partner play, and both can have a very dramatic effect on customer retention. The sixth method, Support, and the seventh, Metadata sales, are both more appropriately handled by the manufacturer. The eighth, however, which is Outsourcing, is another good opportunity for partnering and encouraging retention.

Traditionally, the channel partner has been perceived as being local to the customer and therefore closer to them. The closeness can also be based on greater specialization in a particular vertical market. With the growing popularity of video-conferencing, and the web base of the application and data, the importance of physical location in being close to the customer is no longer as vital as the emotional connection. If a given manufacturer chose to do so, there is no real barrier to the vendor tapping all of the 8 revenue methods themselves. The vital point is not who provides what service to increase the depth and therefore the longevity of the customer relationship, but that it be done.

[Update: February 2010] Some of the questions in The SaaS & Support Project research dealt with the role of the Channel in SaaS vendor strategies, and the responses were interesting to say the least.  If you haven’t become involved yourself with the project, I recommend it highly.  The cost for a 12-month individual membership is only $95 USD, and the benefits include not only a copy of the Report for 2009, you’ll also get a copy of the Report for 2010 when it is published later in the year.  To become a member, click here.