Professional services for SaaS companies
Professional services are a component of many B2B SaaS businesses, especially in the enterprise space, where most vendors make around 20% of their revenue from services. Usually, these services take the form of onboarding services provided to help a customer to get set up with your product after they’ve first become a paying customer.
For many enterprise SaaS products, a layer of professional services is essential because enterprise customers tend to have diverse needs from each other. Professional services enable deeper customisation on a per-customer basis while keeping the core product focused on the target market rather than the needs of specific customers. Another benefit of providing in-house professional services is that they can provide a significant revenue stream during the early days of finding product-market fit. Many bootstrapped companies use this revenue to keep the lights on as they build recurring revenue momentum.
Unfortunately, there are also many downsides to relying on professional services as a SaaS company. For example, by building a product that depends on configuration by a professional, you can seriously hinder the growth momentum of your company. This is because professional services teams can be tough to scale. So while the model works great when you only have a few customers coming in each month, companies often hit a breaking point where they cannot scale their professional services team as quickly as their SaaS product wants to grow. This results in sales teams having to slow down or professional services teams becoming overcommitted.
Another risk is the risk of distraction. Professional services are not core to the mission of any SaaS company, so when they become a bottleneck and, therefore, an area that constantly requires attention from management, they can seriously distract the business from the things that will drive recurring revenue growth. Similarly, by relying too heavily on professional services, SaaS companies often turn into professional services companies who rely much more heavily on professional services revenue than recurring revenue (when this happens, valuations given during initial fundraising can become increasingly unrealistic). Dependence on professional services revenue can kill SaaS companies because it creates a catch-22 where the company needs to invest in product development to make their product more self-service (and, therefore, easier to grow as it is less dependent on professional services). Still, as professional services work is urgent and keeps the lights on, it always gets prioritised over product development work.
As a SaaS business, challenge yourself to see if you can deliver a great product without professional services. Self-service products tend to have the best economics and the most unhindered growth, especially products compatible with a product-led growth model. Companies that start with a dependence on professional services often struggle to imagine a self-service future for their product, but this is achievable more often than not.
If this is not possible, explore outsourcing the professional services component of your product to third-party professional services companies with whom you can partner. For some products, this is easier than others. For example, products built within an existing ecosystem (e.g., marketing products or add-ons platforms like Salesforce and Shopify) might have an existing network of professional services agencies that they can tap into and refer business to instead.
If all else fails, embrace internal professional services, especially if you service the enterprise market. If you don’t service the enterprise market and cannot provide your product without a layer of professional services, you should consider going upmarket and targeting enterprise in the future. If you find yourself in this situation, there are a few things I recommend considering carefully.
First, make sure you have outstanding leadership in your professional services team to avoid unnecessary bottlenecks in the customer journey. Try to hire ahead of your needs so that your sales team does not need to slow down while you recruit new professional services staff. Professional services teams tend to have poorer retention rates than engineering teams, so try to keep these teams happy and well-resourced to limit the negative impacts of potential staff churn.
Second, keep your pool of resources for professional services separate from your product, engineering, and support resources, and commit to spending at least 30% of your Annual Recurring Revenue on product development. This will stop you from falling into the trap of neglecting the development of your product (and your journey towards becoming more self-service) because of short-term urgencies in the professional services team. If this feels unrealistic for your company, I’d recommend increasing your prices for either/both your professional services and your SaaS product.
Lastly, report on professional services costs and revenue separately to your SaaS reporting. Never include professional services revenue or expenses in your calculations for ARR, ARPU, CAC Payback, SaaS COGS, LTV:CAC, or any other SaaS metrics. To succeed as a SaaS business, you need an honest view of the health of your SaaS business. As nice as professional services revenue can be, it does not factor into the health of your core SaaS business.
29 March, 2022
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