Ten-Baggers Are Made By Customers, Not Hype: XaaS Key #1

In my introduction to XaaS, I mentioned that companies like Adobe and Microsoft all realized huge stock price gains after transforming their revenue models to XaaS. Revenues for XaaS companies have greatly outperformed all other companies over the past 10 years, as shown by the Zuora “Subscription Economy Index”.

Bright, Shiny Things

The temptation is therefore strong to call yourself an XaaS play, even before having a real idea of what that means, or how to do it.  

Now more than ever, the temptation to rush to a bright shiny thing to drive attention from investors will be extreme. The global economic slowdown triggered by COVID means companies are slowing down their capex, and seeking to move more spending to opex. According to PWC, 81% of companies are deferring capex, while only 18% are deferring critical IT opex.  

But just adding “as a service” to your offer doesn’t suddenly drive your stock price up – or keep it up. In general, over 75% of all digital transformation efforts fail, also according to PWC.

Playing hype cycles doesn’t create real value; in fact, it can cause your business significant damage, from frustrated and disappointed customers, channel partners, employees, and ultimately investors. Things will get painful. Fast.  

Doing XaaS right means having the right motivation for making the change from transactions to relationships.

It’s All About The Customer

There is a misconception that customers don’t want to have a recurring relationship for some products or services. It’s not the relationship structure they object to – as I discussed in “XaaS: 6 Keys to Success", the recurring relationship delivers three key benefits for customers:

• Cheaper, easier procurement;
• Affordability and access;
• Automatic upgrades.

Adobe launched Creative Cloud in 2011 – although there wasn’t anything really “Cloud” about Creative Cloud, with the exception of some online storage. The software was still downloaded locally onto your device, through a subscription management app.  

Was Adobe just riding a hype cycle? Maybe – in 2010, Gartner already had Cloud Computing at the apex of its famous Hype Cycle curve. So if Adobe was riding the cycle, it needed to jump on, quick.

But underlying Creative Cloud was a solid understanding of what customers valued, in particular a much easier procurement process, automated upgrades to the latest version (and thus compatibility across all users), and a lower entry price. Adobe certainly had the motivation to deliver returns to shareholders, but it fully understood that it could only do that by delighting customers throughout their experience with the company. And customers welcomed changes from Adobe as a trusted partner. 

Over-Hyped? Over And Out!

What customers reject are bad offers, typically betraying a strategy based on hype, not real value. These companies went for hype over customer value - and lost big:

• Squeezed By Hype. Addressing the growing health-food market, a startup developed an innovative hybrid offer of a connected kitchen appliance together with proprietary food packs. Sensors tracked usage data, enabling automatic refill ordering and suggestion sales. Riding the hype cycle of platform plays and hardware + services XaaS bundles, the company raised $100mln from renowned global VCs. But just one year after launching the product, the company closed. The mistake? The appliance itself was priced at $700, way beyond the purchasing power of most consumers – and investors discovered the complicated appliance didn’t work any better than one’s own two hands.  
• Me-Too Vaporware. Facing pressure from e-commerce giants Amazon and Alibaba, a leading supply-chain giant launched a digital strategy to much fanfare in 2014. Including exciting new terms such as artificial intelligence, big data, and virtual reality, precious few specifics underpinned the strategy – especially any new services beyond what Alibaba and Amazon already offered. Revenues and margins decayed, destroying 95% of the company’s market cap and leading to the company going private.  
• Door Number 1, or Door Number B. A leading productivity software company has recently become extremely successful with SaaS, driving rapid stock price appreciation. But the SaaS offering was actually launched 10 years ago, and for its first 5 years in market gained very few subscribers. Seeking to hedge against rapid internal and external change, the company offered and promoted both its perpetual-license and SaaS products at the same time, confusing customers and betraying the company’s own lack of confidence in its offer. Ultimately the CEO recognized the lack of commitment, and resulting customer confusion, hurt the company, and stepped down. 

It’s Ok To Try

“The enemy of the better is the best”, as any perfectionist will tell you. It’s ok to try different things with XaaS, even imperfect things, as long as they improve the experience for your customers.

Adobe didn’t have everything fully figured out with Creative Cloud from the very first day. Indeed, far from it, as I will discuss in later articles. But with a deep understanding of how it could deliver exceptional value for customers, Adobe had the confidence to completely transition to Creative Cloud in 2013, and both customers and investors have responded positively. It remains one of the most successful XaaS transformations in history. 

I’ve worked on successful business model transformations in three of the world’s leading technology companies, covering all geographies. Are you looking for a strategic “secret weapon” to advise you on your business model transformation, without excessive hype or exorbitant information technology bills? I’d be delighted to discuss how I can put my experience to use on your business model transformation.  Contact me. I am here to help.