Five steps for transforming your software company into a healthy SaaS business

Don’t overlook these five essentials for making a successful transition to a healthy SaaS business.

When you move some or all your software offering from an on-premises deployment model to offering it as a service in the SaaS model, you change more than just how you deliver technology. You transform your entire software business. Multiple departments and processes will feel the impact. Build a solid foundation for SaaS business success by understanding, preparing for and executing the transition.

The rationale for this is that the business transformation is profoundly affected by the adoption of a recurring revenue model and the ongoing operational costs required to maintain or buy the SaaS hosting platform. Both considerations eventually have a significant impact on the operations and success of the SaaS business.

Goals of a healthy SaaS business

A healthy SaaS business should enjoy an expanding revenue stream based capturing new customers, as does any business. But more important than ever, the healthy SaaS business requires strong renewal rates and customer expansion by maintaining a strong recurring revenue stream. Getting here requires a new approach to thinking that is nothing short of a transformation. For a traditional software provider, this transformation doesn’t have to occur overnight, since the existing revenue stream can buoy financial results. But over time, the business will need to adjust to ensure a strong SaaS business. Below are 5 steps to help guide this transformation.

1. Understand the Financial Implications and Business Metrics

With SaaS, the business performance metrics used to gauge financial performance will be different than metrics used for a business built upon selling on-premises software (with either a perpetual or a subscription license model). These are the questions to ask as you move toward this transition:

What are the costs involved in moving to SaaS?
How will it impact revenue streams?
What metrics are necessary to evaluate your SaaS success and business growth?

No longer will the financial focus be solely on a model with high-up front sales costs and a high up-front and revenue recognition model. You must consider bookings that add recurring revenue; how to minimise churn to ensure high customer retention (renewal rates) and recurring revenue streams; growth in deferred revenue (contractually committed, but not yet recognised); and cash flow vs. revenue recognition as sales and marketing costs that are typically incurred ahead of a sale that recognises revenue in a recurring fashion. – Read more

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