Australian business software-as-a-service (Saas) customers complain of opaque pricing with hidden costs, implementation challenges, limits on capability and auto-renewals. Security also remains a key concern. Little wonder SaaS vendor are sweating on renewal rates.

With Australian companies tipped to spend $4 billion on SaaS products this year, according to figures from Gartner, business line managers who are increasingly driving decision making are learning what traditional IT buyers have always known; buyer beware.

Which-50 sought the views of technology buyers, consultants and analysts about the common pitfalls and red flags to be wary of when seeking out a new software-as-a-service solution.

Cloud-based SaaS represents more than just a change to the way software vendors bill for their products. Theoretically the ability to end your subscription if it fails to fulfill its promise, forces vendors to be much more customer-centric.

However, buyers who have entrusted business critical systems to SaaS providers may find if they are not getting value from a product, that extracting themselves from a contract can be much harder than anticipated.

First the good news. Most SaaS companies are trying to do the right things by their customers according to those we spoke to, often on the basis of anonymity. They tell us vendors are solving business problems quicker than ever before, offering better local support and starting to look beyond sales to customer success.

Happy customers are critical to their business model as SaaS vendors need their paying clients to stay for a certain amount of time, typically more than two years, before they become profitable.

However, many vendors are struggling with retention rates, according to industry insiders.

Shantanu Narayen, CEO, Adobe

Recent comments by Shantanu Narayen, the CEO of Adobe in an earnings call with analysts, brought the industry focus on customer churn into sharp relief.

Adobe is considered a  success story, having transformed itself from a seller of Photoshop licenses to a booming SaaS business for both creative and marketing executives.

“I still continue to believe that retention is the new growth,” Adobe’s President and CEO, Shantanu Narayen stating during his company’s most recent earnings call.

“The focus there really has been a lot on engagement and understanding how people can get the value out of our products.”

Over the past decade, SaaS vendors have used sophistication sales techniques that have contributed to their tremendous growth, says Simon O’Day, the Chairman and Co-Founder of The Lumery.

According to O’Day, whose company works with enterprise vendors in martech and adtech space, the landscape is shifting.

“We’re now leaving the ‘super sales era’, and recognising vendors have, in many ways, overlooked their customer’s real internal capability, data and process abilities – and how these factors reflect long-term success,” O’Day told Which-50.

Simon O'Day
Simon O’Day, Chairman and Co-Founder of The Lumery

“Of course some are now addressing this, but too many vendors are still driven by their shareholder and investment needs for monthly and annual recurring revenue growth and ‘magic SaaS growth’ across customer, sales and revenue. This is not a bad thing in itself, but could have unintended consequences long-term.”

O’Day says he has observed “customers have become numb to the vendor’s approach based on feeling they are being sold to continually,” and the industry needs a greater focus on making the customer successful.

In a new age of “post-big spending in vendor land by marketing heads,” he says, CMOs must engage their CIO when buying of marketing technology, and vendors sales pitches — once disconnected from the hard reality of existing data, people and process of customers — should focus on the ‘go live’ phase and beyond.

The mismatch

The problems which drive customer churn start early. A bad match between buyer and seller can turn into a lose-lose situation for both sides.

Grant Pattison independent consultant and senior technology leader whose pedigree includes stints with Deloitte and IAG, says the biggest pitfall companies can fall into with SaaS vendors is not matching the size of their company to the size of the SaaS vendor.

“If you take a random category like CRM for instance, Salesforce.com is a great solution for larger companies, but potentially unviable for small companies who might be better served by a company like Base CRM or Hubspot.”

That mismatch can have an impact on price, functionality and complexity.

David Butcher, Principal Consultant, Honed Digital

David Butcher, a principal consultant in digital strategy and growth at product development studio Honed Digital, said there is often a disconnect with customers “going out and paying for the Rolls Royce SaaS solution, when you might only have a Polo-sized problem.”

“Sometimes you’ll see a SaaS product demonstration or you’ll speak to someone from the business and they’ll be doing these really cool shiny things that you are excited about. But your first step needs to be coming back to your core business and your business fundamentals because you should obviously solve the biggest problems for your business first, rather than the most exciting.”

Butcher, who helps clients with SaaS vendor selection and negotiation, says both vendors and buyers need to do the work up from to avoid common problems which can arise after a solution is implemented.

He says it is important to understand the time, money and training required to run the product. Butcher has Also seen software which hasn’t lived up to the buyer’s expectations or it’s just not solving a big enough problem for them to justify the price and effort.

Shelfware

Poor selection can mean companies end up paying for things they don’t use. Shelfware (so named because of the amount of software that stayed wrapped in plastic sitting on shelves in the past) remains a problem for clients in the SaaS world. It comes in the form of under-utilised products or extra products which have been thrown in to add value to a deal.

In a recent Gartner survey, 40 per cent of respondents reported that 25 per cent or more of their SaaS subscriptions were under-utilised.

Simon O’Day said The Lumery tends to work with its clients “to sweat the existing assets and not replace vendors.”

“We won’t recommend a change unless it hits a snag in how it is used with the key elements of people, process, data – and the tech features for that specific customer,” O’Day said.

“The sad truth is that most of the time, the product is fine for what the sales person outlined as overall goals, but it doesn’t work for one or more of the key elements outlined above for the client. So either they have to adjust those key elements – people, process or data – or replace the software.”

O’Day identified two types of SaaS purchases which are likely to lead to buyer’s remorse: “where a stakeholder is in love with ‘vendor of the month’ and has made an emotional choice based on past experience or flippant post-conference love” or  “the vendor has not done a good enough job during the sales process to ensure the product is in the right fit and serves the right capability and need.”

“At The Lumery, we fix the second one a lot and save the vendors here. We try and educate the executive teams and stakeholders to not do the first one – but this is a lot harder.”

Opaque pricing and hidden costs

Jo Liversidge, a senior research director at Gartner, spends much of her time advising clients on their SaaS contract renewals. Pricing is a common topic of conversation, particularly because it isn’t always obvious what extras and add-ons are included with a core product.

Jo Liversidge, Senior Director Analyst, Gartner

For example, some vendors include one or more sandboxes (test and development environment) within the base fee, Liversidge explained, while others only include a production environment and all extra sandboxes are chargeable.

“SaaS customers who do not understand entitlements upfront, sign a contract and then realise this ‘extra’ is needed, may then end up paying the list price of that add-on as they have lost all leverage,” Liversidge told Which-50.

“These costs can be hefty – for example, the list price of a full copy sandbox from Salesforce is 30 per cent of the net subscription fees.”

Other added charges for additional storage, bandwidth or API requests can also contribute to the overall price of ownership.

“Even when SaaS providers are open with information about entitlements with each product, it is unusual for them to be open about these additional fees,” Liversidge said.

Stuart Turner, COO of social media agency BinaryM, told Which-50 he has also seen costs blow out when essential features aren’t included in the base subscription.

“When I was running SEO teams we used to use a lot of tech to manage and measure campaigns. The pricing models of these businesses started out simple — typically tiered subscription — but often grew to be complex and quite elastic,” he said.

“Complex cost structures can often based on equally complex tools, but I’ve often found that this complexity is badly communicated to the end customer and tends to be driven by an inward, functional focus on how to pay for the large cost base of a platform, not on how to price based on the value delivered to the end user.”

Negotiations

Pattison recommends contracting most SaaS vendors via usually 12 month contract with a built in 30 day cancellation notice period.

“This approach can often have a number of additional benefits including the ability to insert your own terms & conditions, particularly if things like data server locations and support service level agreements are important to your business, but it also builds in a regular review point for your chosen technology, while not being bound to a particularly provider for an extended period of time,” Pattison said.

One CIO of an Australian retailer who spoke to Which-50 for this story recommended buyers consider the performance of a product in their contracts.

“If you are passing a business critical capability to a third party provider, first and foremost you need to make sure they are reliable,” they said.

Contracts should include commercial liabilities if latency, downtime or errors have a detrimental impact on the business, as well as service level agreements for response times.

In a rapidly evolving industry like retail, the CIO also recommend reviewing contracts after on year, because “what might have been a good price and capability might not be in 12 months time.”

They are also expressed a preference for flexibility in contracts to only pay for what you use and not having fixed contracts. The CIO said most of the good solution providers don’t have an issue going month-to-month because they are confident in their service.

The biggest deal breaker? Auto renewal clauses. “It drives complacency,” the CIO said, adding that vendors say they can’t take it out, but they can.

Transparency & Security

During the sales process technology buyers want more information, particularly on security practices and product roadmaps, as well as access to current customers.

“It’s unfortunate the amount of times I need to ask if a solution I’m evaluating has multi-factor authentication and single-sign on capabilities, holds security certifications, such as ISO 27001 or PCI DSS and, where they store customer data and is it always encrypted?” said Grant Pattison.

“The answer to these fundamental questions should be readily available on each vendors website without needing to engage one of their sales team.”

Rebbecca Kerr, General Manager Technology, Roy Hill.

For Rebbecca Kerr, General Manager Technology, at mining company Roy Hill, security, data retention and product roadmap are top of mind when negotiating with SaaS vendors.

“[I want to know] can I get my data out if I want it during and after and, does the product have an active and functionally rich roadmap?”

She said SaaS vendors’ roadmaps traditionally tend to be very poor and there’s very little representation from customers/user groups.

“Implementation services also tend to poor, if it is not a great experience to implement then we are on the back foot,” she said.

Another CIO, who was not authorised to speak to media, said, “Privacy, customer data and security are also very high on the checklist. We’ve seen too many businesses compromised by partners, where SaaS has been the point of entry. As a business we need to make sure we know where data is held and security procedures are best practice.”

In the era of GDPR, Stuart Turner of BinaryM, also highlighted the key questions businesses need to ask their potential partners.

“How do they handle data? Where is it processed? What are your legal liabilities in case of a breach or error? Are they compliant with global privacy and data processing regulation?” he said.

“Any business that shies away from sharing this information I would be wary of.”

Reviews and Renewals

Buyers can also be stung with unexpected renewal costs if their vendors don’t have a standard price uplift cap, ie promising not to rise the renewal price higher than a certain percentage.

“Not having a contractually agreed cap limiting the increase means the SaaS customer has no certainty around what pricing will be following renewal time,” Gartner’s Liversidge said.

“For example, I spoke with a CIO at the US Symposium, whose SaaS provider (for a niche service), was increasing its per-unit pricing by 50 per cent at renewal, even though the customer was increasing its usage of the product. There was very little the CIO could do at that point, close to the renewal, with no short-term alternatives!”

Gartner recommends always negotiate an explicit renewal price cap allowing a fee increase of no more than 3 to 5 per cent.

Breaking up is hard to do

SaaS contract terms make it hard for clients to leave, says Liversidge. And it’s often due to lack of an exit strategy.

“Many SaaS contract are virtually silent on what happens on exit. This just adds to the degree of vendor lock-in,” Liversidge said.

“Clients need to think about their exit when negotiating the initial contract, for example ‘How and when can customer data be extracted? Is there a cost to do this? Will the provider assist in any way? Can an extension of a few months subscriptions be purchased to bridge any gap when moving to a new provider.’

“Unfortunately the majority of clients are not adequately planning exits at signature, compounding the degree of lock-in experienced.”

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