Can Consultancies Develop Successful SaaS Offerings?

Key Takeaways

• SaaS vs. Consulting: SaaS requires substantial upfront investment and differs from consulting in investment, sales, pricing, marketing, talent, and scalability.
• Success Factors: Firms succeed by identifying client problems, researching competitors, building strong business cases, developing MVPs, hiring specialized talent, and treating SaaS projects as separate entities with distinct strategies.
• Pricing Strategies: Price based on value, offer tiered models, use subscription-based pricing, ensure transparency, benchmark against competitors, and provide flexible billing options.
• Measuring Success: Track Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), churn rate, Net Promoter Score (NPS), and Monthly Active Users (MAU).
• Valuation Impact: Buyers assess growth in key metrics, market potential, competitive position, and intellectual property using various valuation methods.

Why SaaS Development is So Risky for People Firms

My traditional advice on consulting firms developing SaaS offerings is “don’t do it”. Whilst there are a lot of theoretical reasons for this, the primary reason is that I’ve seen it fail too many times.

The biggest reason it fails is that SaaS or software companies are very different to consulting companies and require different approaches to investment, sales, pricing, marketing, people and….well, pretty much everything.

The differences are outlined in the table below, but the main one is that SaaS usually requires a HUGE upfront investment to get to a product that clients (“customers”) are prepared to spend 30 minutes testing, let alone funding on an ongoing basis.

Table 1: The Differences Between SaaS and Consulting Companies

How Consulting Firms Develop Successful SaaS Offerings

Yet….. I still see some clients succeed. In the last two years alone, Digitopia transitioned successfully from a digital maturity consultancy to a digital maturity platform, offering firms the opportunity to track their digital maturity against a set of benchmarks.

Mesh Experience, successfully built a data-led software offering; Reinvigoration has built its OpX Platform – an integrated set of tools for operational transformation.

So what did these firms get right?

• They were led by a clear, high value problem which clients articulated a solution for.
• They did their research. What were the competitors out there, and who were the potential competitors likely to launch something similar in the next 3 years?
• They built a clear business case which showed no-brainer routes to market and sales channels.
• They (sometimes) got paid to develop a part of the product by a client.
• They built a MVP prototype and used this to get client feedback.
• They hired a fractional CTO (or at least a SaaS Product Manager) who had launched similar products.
• They (often) used investment to derisk the rest of the company, accelerate the timelines to launch and gain introductions to their target market or partner with other companies.
• They treated the software side project as if it was a different P&L and even business so they could be clear on the costs and resources used by the project.
• They ran a separate marketing, sales and support strategy for their product, headed by a SaaS marketing specialist.
• They did not under-estimate the costs of not only developing the product, but also updates, maintenance, marketing and support.
• They realised that the resourcing for the project wasn’t ‘getting some on-the-bench’ consultants to work on it, and invested in great people and off-shore teams.
• UX and client success was crucial. Regardless of what the software does, if the client doesn’t ‘get it’ in 15 minutes, and ‘get results’ in 15 days, it’s not going to sell well.

Not all successful firms ticked all these boxes, but most of them ticked most of them.

How to Price Your SaaS Offering?

Once you have a decent product, how do you go about pricing it?

Initially at least, there’s going to be an element of ‘suck it and see’, and you will want to give discounted or even free licences to your first few clients in order to get their feedback.

It is likely that you will increase your pricing year on year as you add more ‘logos’ to your order book, increase the features and iron out the bugs.

Pricing your SaaS offering in the management space is a critical decision that can significantly impact your product’s success and the value of your company.

Consulting firms typically sell at around 7.5x EBITDA whereas software firms sell at around 17xEBITDA (alternative methods of valuation are available!).

Here are some best practices to consider:

1. Price on Value

• Your client doesn’t care whether it took you three years or three days to develop the software. They are interested in the value it brings. Align your pricing with the perceived value that your SaaS product provides to customers.
• Consider the specific benefits, cost savings, and efficiency gains that your product offers, and price accordingly. Think about what they would need to do to get the same outcomes or try and monetise the benefits they get.
• Research your client need / problem in detail (before you build the thing, but also afterwards during trials). Conduct market research to understand how much your target customers are willing to pay for the value you provide. Offer discounts for early clients who give you feedback, testimonials and referrals.

2. Tiered Pricing Models

• Offer multiple pricing tiers that cater to different customer segments and their specific needs. This may not be an option with your MVP offering, but eventually you may see opportunities for different numbers of features or seats.
• For example, some firms include a basic tier with core features, a professional tier with advanced features, and an enterprise tier with custom solutions and dedicated support.

3. Subscription-Based Pricing Drives Company Value

• Charge customers on a recurring basis, usually monthly or annually, for access to your SaaS product. ARR, MMR and CAC are all new terms for your traditional consulting leader (see the next section)
• Subscription-based pricing provides predictable, recurring revenue and encourages long-term customer relationships.
• Consider offering discounts for annual subscriptions to incentivize longer commitments and reduce churn.

4. Per-User or Per-Feature Pricing

• For management SaaS products, pricing based on the number of users or specific features accessed can be effective if it’s likely bigger firms would need more ‘seats’.
• Per-feature pricing allows customers to pay only for the specific features they need, providing flexibility and cost control.

5. Transparent Pricing

• Many consulting SaaS products come wrapped in a, well…. consulting service. Be transparent about your pricing structure, including any additional fees, such as onboarding, training, or support costs.
• Clearly communicate what is included in each pricing tier and the value customers can expect to receive. As in consulting, clients buy benefits, not features.

6. Competitive Benchmarking

• Research the pricing strategies of your competitors in the management SaaS space to ensure that your pricing is competitive.
• Analyse how your product’s features, value proposition, and target market compare to those of your competitors to justify your pricing decisions.
• Keep in mind that being the cheapest option is not always the best strategy, as it may undermine the perceived value of your product.

7. Flexible Billing Options

• Allow customers to choose between monthly and annual billing and consider offering usage-based or pay-as-you-go options for specific features or services. Charge more for monthly subscriptions.

The optimal pricing strategy will depend on various factors, including your target market, product features, and overall business goals. It’s essential to continuously test, learn, and refine your pricing approach to find the right balance.

Measuring Success

Finally, you should note that the SaaS side of your business won’t report on project margin, utilisation, leverage, or bench-time. Software and SaaS companies rely on KPIs that are very different to the consulting world.

In addition to gross and net margin, these are the metrics that buyers will look for as well!

1. Monthly Recurring Revenue (MRR):

MRR represents the predictable and recurring revenue generated from subscription-based customers each month. It is calculated by multiplying the number of paying customers by the average revenue per user (ARPU) and reflects the growth and stability of the business.

2. Annual Recurring Revenue (ARR):

ARR is the annualized equivalent of MRR, representing the recurring revenue that a SaaS company expects to generate over a 12-month period. It is useful for long-term planning, forecasting, and assessing the overall health of the business.

3. Customer Acquisition Cost (CAC):

CAC represents the total cost of acquiring a new customer, including marketing, sales, and onboarding expenses. Monitoring CAC helps SaaS companies optimize their customer acquisition strategies and ensure cost-effective customer acquisition.

4. Customer Lifetime Value (CLV or LTV):

CLV helps SaaS companies assess the long-term value of their customer base and make informed decisions about customer acquisition and retention strategies.

5. Churn Rate:

Churn rate represents the percentage of customers who cancel their subscriptions or fail to renew over a specific period. Monitoring churn rate is crucial for SaaS companies as high churn can negatively impact growth and profitability.

6. Net Promoter Score (NPS):

NPS is a metric that measures customer loyalty and satisfaction by asking customers how likely they are to recommend the product or service to others.

It provides insights into customer sentiment and can help SaaS companies identify areas for improvement in their product and customer experience.

7. Monthly Active Users (MAU):

MAU represents the number of unique users who actively engage with the SaaS product within a 30-day period. Tracking MAU helps SaaS companies understand user behaviour, identify trends, and make data-driven decisions to enhance the product and user experience.

How This Contributes to Your Firm Valuation?

When determining the value of your SaaS offering, buyers will look at the growth in these metrics and how they drive profitability.

In addition, as well as the usual operational metrics, they will examine:

• Total Addressable Market (TAM): The size and growth potential of the market the company operates in.
• Competitive Landscape: The company’s position in the market relative to its competitors and its unique value proposition.
• Intellectual Property: The company’s proprietary technology, patents, and other intellectual property assets that can provide a competitive advantage.

Buyers often use a combination of valuation methods, such as discounted cash flow (DCF) analysis, comparable company analysis, and precedent transactions, to arrive at a fair valuation for the software company.

The specific weight given to each KPI and factor may vary depending on the buyer’s investment strategy, risk appetite, and the company’s stage of growth.