Get that Money: Growing XaaS Profitability in 2023

With inflation, high interest rates, and depressed company valuations, current economic reality is forcing companies to sharpen their focus on #profitability in 2023.

But it's not all bad news: this holiday season, we're offering the gift of profitability guidance.

In today’s issue, find three data-backed recommendations for driving revenue and increasing profitability for a technology company transitioning to or operating in an XaaS model.

1. Avoid the “ARR Trap.”

There is an incessant drive for technology companies to grow annual recurring revenues (ARR)—and for good reason. #RecurringRevenue streams are more predictable and more resilient than transactional revenue streams, and investors will reward fast-growing ARR.

But companies often mask the nature of their economic engine by lumping all revenue streams into one ARR bucket, leading them into the ARR trap.

This is an understandable thing to do, but these companies are setting a trap for themselves. If a company initially props up ARR revenues by including maintenance contracts, they’re going to have to bite the bullet of shelfware loss when customers migrate to new XaaS offers.?

If they’re inflating ARR with revenue that is really still coming from on-premise customers using legacy software, when those customers migrate to XaaS, that inflated ARR is going to drop significantly, as #XaaS offers are lower margin than on-premise offers.

“As tempting as it is, do not lump all disparate recurring revenue streams into one magical bucket called ARR.” [ Thomas Lah ]

If your company is doing this, don’t feel too bad—you’re certainly not the only one. But if you want to keep your company’s business model transformation neutral to overall profitability, you must report four distinct revenue streams.?

Read the full report to learn about these four revenue streams and get more TSIA recommendations for avoiding the trap.

2. Don’t stop at the sale.

Because the sales motion doesn’t stop with the sale.

“The nature of revenue is shifting. We’re moving away at a dead sprint from transactional to contractual.” [Steve Frost]

What you do throughout the customer lifecycle has a massive impact on your growth and profitability. You must optimize your approach to driving revenue for the entire LAER (Land, Adopt, Expand, Renew) lifecycle.

In this webinar, Steve Frost , TSIA’s managing director of revenue research, explains this more, referencing TSIA research on how to grow revenue and increase profits, including:

• Why the customer lifecycle approach to revenue is so critical for XaaS growth.
• Shifting responsibilities within Sales and #CustomerSuccess teams.
• The number one predictor for renewals, and how it relates to the lifecycle.

He also touches on TSIA’s exciting new research on the role of the Chief Revenue Officer (CRO), which focuses on optimizing revenue growth. (CROs may find this interesting).

“Doing nothing may very well be the riskiest move you can take right now. If you’re relying on your customers to make big capital purchases when inflation and interest rates are skyrocketing, that’s not a very solid bet.” [Steve Frost]

3. You can’t cut your way to success.

“There are new expectations for what defines a highly valuable SaaS business.” [Thomas Lah]

In 2023, #SaaS companies will have to focus on improving free cash flow and overall profitability.

For over a decade, TSIA has been studying the difference between profitable and unprofitable SaaS business models.

In this blog, Thomas Lah , TSIA’s executive VP and executive director, explains the three main factors that are inhibiting the ability for a majority of SaaS companies to become profitable:

• Blunt economic engines
• Subsidized costs
• High revenue acquisition costs (RAC)

Though the intuition of management teams will be to cut costs to improve probability, Thomas also explains why this is not the right move:

• Growth is heavily dependent on direct sales motions, so cutting Sales is risky.
• The highest margin revenue for any SaaS provider comes from existing customers, so cutting Customer Success budgets isn’t a good idea.
• It will be VERY tempting to reduce funding for support, but don’t. Prioritize existing customers and renewals.

So, are SaaS companies doomed to unprofitability? No—but the road ahead isn’t easy.

TSIA has an informed perspective on how SaaS companies can escape this profitability conundrum. For prescriptive insights and expert advisory, join the TSIA community—become a member today.

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