I my past several posts I have been discussing Intellectual Property, and this idea that you can create Repeatable I.P., that could possibly be offered on a Recurring basis. According to Microsoft, this is the Holy Grail for Partners going forward, and all Partners will soon be valued based on their recurring revenue from unique I.P.
Whether you agree with this or not is unimportant for this post. I am going to assume that you are interested in getting on the recurring revenue gravy train, with some kind of I.P. that you want to develop, package and offer on a subscription basis. If this is not even remotely on your roadmap, you can safely skip this post. For the three of you that continue reading, I will attempt to address the biggest challenge with Recurring I.P…. Churn.
What is Churn?
In the Software as a Service model, Churn is the ratio of new subscribers to cancelling subscribers. Obviously to be successful with a SaaS product, you have to keep this ratio low. You had also better be tracking it closely, as it can turn on a dime and rise really fast. From a valuation standpoint, for a SaaS company or product, Churn is one of the most critical measures. You can tell a lot from this one ratio when viewed over time. For example you can easily spot the effects of innovation you have introduced, or new competition. Obviously, overall growth is impacted by these factors as well, and these two metrics (Growth and Churn) are scrutinized very closely together. Growth is another issue, in this post I will talk about Churn factors.
Charles said your I.P. Sucks
Let’s face it, there is a lot of crappy I.P. out there that was developed either by morons or opportunists. Morons create solutions to problems that don’t exist, opportunists create crappy solutions to problems that do exist. Ironically, either of these approaches may yield some quick financial returns, but eventually the Darwinian nature of Churn will overcome them both. So where does crappy I.P. originate? Urgency is one source; an opportunity is spotted and a super quick, poorly thought out, solution is thrown out there in advance of legitimate solutions. Another source of crappy I.P. is copycats hoping to hijack customers from a legitimate solution that is gaining traction. In both of these cases what really made the I.P. crappy was the lack of a complete understanding of the problem to be solved (we have some RapidStart CRM copycats that suffer from this).
You want how much? for that?
With a subscription model, your valued is judged every month when that credit card or bank statement comes in. Each month your customer looks at that line item for you solution and makes a mental decision that it is worth the cost… or not. What may have seemed cheap at the outset, over time and actual use, could be perceived as expensive for what they are actually getting out of it. It may well be the customer’s own fault that they are not getting the value out of it, but that does not help you at this point. If your solution is priced high, this analysis will be even more unforgiving. If it is really cheap, it could last quite a while, even if it is useless, because the motivation to go through the cancellation steps is not very high for a $5 solution. This is an actual strategy for a lot of crappy I.P.; sign em up with marketing and then hope to stay under the radar for as long as possible. For worthy I.P., fairly priced, it is your job to make sure the customer is getting the value out of it. Many solutions suffer from an aggressive sales motion, with little or no follow-up to ensure the customer is getting any real value, the result is Churn.
Innovate or Die
Much of I.P. are cash cows. Something that solved a problem at one time, and still does solve the problem for the most part, but has not been innovated on. When we were a customer-facing CRM Partner, many customer conversations were around replacing L.O.B. systems that had not innovated. While many customers had reached the point where they truly hated the solution they were using, they were also not in a position to invest in customizing CRM to replace its functionality. Even where someone has created some great I.P. for CRM to solve their issues, there was often still a need for migration and re-training. Outdated solutions, that are heavily utilized and depended on are difficult to unseat, even when the customer can agree that it is the best thing they could do. But enough customers will bite the bullet and make the change, and the Churn of that incumbent solution will rise over time. Odds are that they are not bringing on many new customers to their dated solution, so Churn is all that can happen. If you see your Churn increasing, you have to ask yourself if your cash-cow riding ass deserves it.
Those Dirty Rat Bastards
Related to innovation is competition. If you are not innovating, someone else is. If you see Churn increasing, you need to be looking at where those customers are going, and why. Today, I believe that the number of Salesforce.com customers switching to Dynamics CRM, is higher than the other way around. I guess you could say Salesforce.com has a trade deficit with Microsoft right now. Microsoft is innovating faster right now and at a lower cost. It is early days and Salesforce.com has a huge market share advantage right now, but they are watching this closely and starting to take some steps. Eventually, when this trade deficit gets big enough, and the Churn rate increases enough, Salesforce.com will have no choice but to lower their prices, which they are loath to do. This impacts small I.P. as well, while most copycat solutions are crap, someone who sees the problem from a better angle than you, could indeed create a better version of your mousetrap. Or a very similar version at a lower cost.
Seriously, another Platform Update!
One thing about most of the types of I.P. I have been talking about is that it will run on, or enhance, something else that you do not control. A pending platform update will have you staring at the ceiling at 3AM for a week. If your I.P. was iffy, and it doesn’t work the minute your customer gets in the updated platform, they may well cancel. Also, as I mentioned before, if your I.P. was feature based, an update might well solve the problem you were solving. While I don’t think that Microsoft is targeting your I.P., but for those features they could and should solve for, they are indifferent to you. Even for significant I.P., Microsoft’s position is “Hey you built it on our platform, that’s your problem”. You should think of a platform update like a steamroller with a blind driver. To the degree that you can, you will want to know the path of that steamroller in advance, and get your stuff out of the way, but expect to follow that with some round the clock patching after it actually rumbles through. Time is your enemy here.
I don’t have a particularly good ending for this post so I will just stop writing… here.
[info type=”info”]Non-Confidential Information Notice. This post was written by Steve Mordue who is a member of multiple Partner Advisory Councils and is therefore subject to an Enhanced Microsoft Non-Disclosure Agreement regarding information conveyed to PAC Members. All opinions expressed are solely those of Steve Mordue, and no information provided herein is subject to the NDA. Basically, Steve knows a lot more than he let’s on; He’d tell ya, but then he’d have to kill ya.[/info]