Cloud Business and Cost Models
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Cloud computing is less a technological revolution than it is a business revolution. In this session we'll look at trends that are driving cloud computing and the opportunities these bring to ISV organizations to compete in the marketplace. We’ll see how cloud computing can change an ISV's business model in potentially radical new ways and discuss concrete ways your business can grow in the modern world of software.
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Cloud Business and Cost Models
- 3. Source: National Institute of Standards and Technology
- 4. A nice incremental cost improvement for most scenarios… A peerless solution for a few
- 5. Private (On-Premise) Storage Servers Networking O/S Databases Virtualization Data Applications Integration Youmanage Dedicated (Managed Hosting) Storage Servers Networking O/S Databases Virtualization Data Applications Integration Managedbyvendor Youmanage Infrastructure (as a Service) Managedbyvendor Youmanage Storage Servers Networking O/S Databases Virtualization Applications Integration Data Platform (as a service) Managedbyvendor Storage Servers Networking O/S Databases Virtualization Applications Integration Data ISV’s Unique Value
- 6. Remaining competitive Staying focused Reducing costs Managing datacenters Security, privacy & continuity Embracing globalization Improving free cash flow Boosting capital value Top of Mind Issues for ISVs
- 7. Financial Metrics Churn Rate Cash flow and cost of sale Customer Lifetime Value Committed Monthly Revenue Sales & Marketing Licensing Customer Acquisition and Cost of Sale Try before Buy – Click, Try, Buy Sales Cycle Referral Programs Distribution & Support Delivery rhythm Channel Dynamics Service Level Agreements Support Billing
- 8. Large upfront fees replaced by smaller ongoing payments collected and recognized over time Cost of sale has to be managed very carefully Ongoing cost associated with application delivery Upfront investments in R & D, sales, marketing and support with no immediate payback Capital markets that assume exponential customer adds and reduced acquisition cost at the margin
- 9. New Financial Drivers Source: Bessemer Venture Partners: 10 Rules Of Cloud Computing And SaaS CMRR C-PIPE CAC Cash Flow Churn Rate CLTV
- 10. Source: David Skok, Matrix Partners Assumptions • 5-year model • $10k bookings in month 1 • $2k monthly growth 5-year impact • At 2.5% churn, $(64,000) • At 5% churn, $(90,000)
- 11. Source: David Skok, Matrix Partners Assumptions • 5-year model • $10k bookings in month 1 • $2k monthly growth • Expansion revenue of 2.5% to current customer base
- 12. Increase stickiness Track and react to customer engagement Contact your customers Put top sales talent on cancellations Consider longer-term contracts Track and react to churn
- 14. Traditional Sales Process: Sales Led, Sales Driven Steps in Sales Process How is this Done? Steps in Sales Process How is this Done? Cloud Sales Process: Customer Led, Support Driven
- 17. Business Value For ISVs
- 19. Pay as You Go Enterprise Agreement Open Licensing Resell Azure and maintain direct customer relationships
- 21. Using Azure IaaS to support easy trial of existing ‘click-wrap’ software Dynamics CRM as a unified customer and app instrumentation platform Azure as a low cost data distribution & storage platform Augmenting existing apps with cloud based instrumentation and analytics
Hinweis der Redaktion
- Key Point: This presentation is intended for Business Decision Makers(BDMs) within an independent software vendor(ISV) organization. The goals of this guide are to: Provide an understanding of the momentum around cloud computing and what makes it attractive for ISVs Describe the Microsoft Azure its features & some successful ISV case studies And finally, to discuss the pricing of the Microsoft Azure , illustrated by some cost examples of ISVs applications with their monthly costs on Microsoft Azure Each of the 3 sections provides details on one of these goals.
- Key point: Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources. National Institute of Standards and Technology definition: Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction Cloud computing is composed of five essential characteristics. Essential Characteristics: On-demand self-service. A consumer can unilaterally provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service’s provider. Broad network access. Capabilities are available over the network and accessed through standard mechanisms that promote use by heterogeneous thin or thick client s (e.g., mobile phones, laptops, and PDAs). Resource pooling. The provider’s computing resources are pooled to serve multiple consumers using a multi-tenant model, with different physical and virtual resources dynamically assigned and reassigned according to consumer demand. There is a sense of location independence in that the customer generally has no control or knowledge over the exact location of the provided resources but may be able to specify location at a higher level of abstraction (e.g., country, state, or datacenter). Examples of resources include storage, processing, memory, network bandwidth, and virtual machines. Rapid elasticity. Capabilities can be rapidly and elastically provisioned, in some cases automatically, to quickly scale out and rapidly released to quickly scale in. To the consumer, the capabilities available for provisioning often appear to be unlimited and can be purchased in any quantity at any time. Measured Service. Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service (e.g., storage, processing, bandwidth, and active user accounts). Resource usage can be monitored, controlled, and reported providing transparency for both the provider and consumer of the utilized service. Source: http://csrc.nist.gov/groups/SNS/cloud-computing/cloud-def-v15.doc
- Key Point: While all applications can realize benefits from moving to the cloud, applications with certain workload patterns are particularly well suited to the cloud. They include: On and off: parallel processing applications, when large amounts of capacity are needed for a very short time frame for example an online state exam taken by thousands of students in one day Growing fast: start-up applications which may start with a few customers but may grow quickly to add many customers Spiky Unpredictable bursts: consumer applications like online games, social networks Predictable bursts: seasonal applications like shopping websites during the holiday season
- Key point: As your organization evaluates the multiple environments available to create a cloud based offering, it is important to understand that only Platform as a Service takes away all of the extraneous management tasks that are not directly related to your value add. However with Microsoft Azure you have the option to do Infrastructure as a Service as well. Across different types of hosted and cloud offerings the resources your organization manages are different: On-Premise: If you develop, test and help customers deploy your offering on-premise, all the components of the stack starting from the base hardware to middleware and right up to the application are managed by you. The place where your organization adds value however is at the very top where the application and the data sits. Managed hosting: If you have already moved part of the way to a hosted environment that manages some of the components of the hardware and may manage middleware partly as well, you still spend a lot of energy on managing the remaining parts of the stack where you don’t add value. You also have to predict usage, rent servers and hope you predicted right. There is no inbuilt process for scaling. IaaS: In an IaaS offering some of this headache of managing non-value added components of the stack goes away however you still manage the databases and security and integration services….so this is better than the 2 prior alternatives but still not ideal. PaaS: This is the offering where your organization is able to use its energies and talent most effectively – in creating more innovative applications, in reaching new markets, and in overcoming your businesses challenges versus managing infrastructure or middleware. The only components of the stack that you manage and focus on are those where you add value and therefore those that are tied to your revenue-stream directly.
- Key Point: There are many challenges that ISVs face today – here are some of the key ones and how the cloud helps: Remaining competitive: Cloud computing allows ISV to rapidly create and deploy new solutions. With no upfront hardware investments – innovations can occur at the speed of thought. Staying Focused: With the cloud, the ISV need not spend time and resources managing and provisioning servers, hardware and load- balancing. They can concentrate on providing the most innovative and comprehensive solutions to their customer base. Reducing Costs: Upfront hardware costs that mean CAPEX expenditures are tough in this economic environment both for the ISV and their end customer. Cloud computing allows for a utilization based OPEX model. Managing Datacenter: Planning for peak demand would make data centers too expensive for average loads. Planning for average demand means that applications don’t scale well and fail when there is high demand With cloud computing the ISV can ensure that demand and capacity are always in sync without idling expensive hardware. Maintaining Security, Privacy and Continuity: The goals of secure applications and increased access are always in conflict within the on-premises world. It is not so with the cloud paradigm. Embracing Globalization: Globalization is both, a hurdle when it comes to distributed teams and an opportunity when it comes to reaching new markets. Cloud computing helps with both – in connecting dispersed teams and reaching new markets. So what’s the right cloud for you?
- Key Points: To create a cloud based SaaS offering, apart from technical considerations, many components of your business need to be thought through differently including Financial Metrics, Sales and Marketing and Operations How Cloud Services Are Different Financial Metrics: Cloud will require you to understand and track a whole new set of financial metrics. Details provided on the next slide. Marketing and Sales are also different for the cloud, there are new licensing models, different sales cycles and marketing tactics that are needed to be successful. With delivery over the internet and instant upgrades, promised SLAs and 24/7 support the cloud business needs an entirely different model from the existing on premise one.
- Managing your cash flow is critical. Find out quickly if you’re getting into trouble.
- Key Point: One component of your business that you need to rethink is the Financial Metrics. Arguably, metrics are more important for a SaaS business than for a traditional packaged-software business. The metrics that you see here are the new financial drivers and levers that are key to monitoring and managing the health of your cloud services business. The good news is that a SaaS model, in theory, gives you a strong recurring revenue base that grows over time. The bad news is that it doesn’t happen overnight. To read more about these refer to the BVP – 10 Laws of Cloud SaaS included in the Analyst Reports. Source: http://www.bvp.com/saas/default.aspx CMRR is the Committed or Contracted Monthly Recurring Revenue and obviously the driver of business revenue. Regardless of your pricing model, CMRR is the combined value of signed contracts on a monthly basis. The goals are to have a healthy flow of new and existing committed contracts as well as the monthly dollar amount of each contract being as high as possible. For example, if a customer upgrades from a basic level into a premium level package, the CMRR will increase regardless of whether any new contracts have been added. Churn is a critical element of CMRR as it indicates the value of the monthly recurring revenue that is expected to be lost from customers that have announced they will stop the service. It’s also a metric that should be monitored closely in its own right as high customer churn can be disastrous. It varies greatly from solution to solution but fundamentally if your cloud offering is not quickly providing real business value to a customer, and not continuously providing that value, then that customer will likely cancel their account at their first opportunity which may be the next payment date or renewal date. The concept of providing ongoing value to your customers in order to keep churn rates low is discussed in more detail in webinar 5. Again, according to Bessemer, the top most successful companies selling software as a service have a renewal rate of more than 90%. The reason this isn’t higher is that you really can’t avoid situations such as acquisitions and failed businesses that create a situation where a client discontinues the use of the solution. C-pipe is your forward looking indicator for CMRR and CAC and another very important metric to determine the expected future health of the business. A 4th key metric is cash flow. This arguably has always been a key metric for software companies. For cloud services specifically, however, it’s critical for staying afloat when payments are made in small ongoing incremental amounts over the lifetime of the contract, and for helping to cover the initial outlay required to get the cloud services business up and running. Many companies often use discounts for pre-payment to improve their cash flow position. These 2 metrics, Customer Acquisition Costs (CAC) and Lifetime Value of the Customer (LTV) are focused on long term financial health. For nearly all companies selling software as a service, customer acquisition costs are frequently the single largest expense on the income statement. As such, it’s important to measure and track how quickly you are able to recoup those costs on a per customer basis. According to Bessemer, the “non-official” standard in the market is that the sales and marketing costs should be recouped within a year, with the following year covering the cost of administration, product development etc. With respect to LTV, the idea that companies should consider the lifetime value of their customers has become one of the core premises of sophisticated marketing over the past decade. It’s particularly important to cloud services where the overall success of the company is based not only on acquiring new customers but also on sustaining and growing the customer relationship over time. The goal is to have a continued stream of profitable payments that will increase in value over time as the customer upgrades their account and takes on additional products and services.
- As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a large number. That loss of revenue requires more and more bookings coming from new customers just to replace the churn. As a result growth slows substantially. To illustrate this point, I built a very simple model and graphed the output below. The model starts with MRR (Monthly Recurring Revenue) at zero, and bookings from new customers at $10k in the first month, increasing by $2k every month after that (represented by the dotted blue line in the graph below).
- Negative churn occurs when your expansions, up-sells and cross-sells to your current customer base exceed the revenue that you are losing because of churn. In this example, we have negative churn of 2.5% through upsells to the current customer base. You can see the dramatic result. Check out the monthly recurring revenue – you can see that with the 2.5% negative churn, the business is nearly three times bigger than one with 2.5% churn. Negative churn (or offsetting churn to the point near zero) is a tremendous driver of business growth. To get there, you need to do one or more of three things: Expand revenue from your existing product portfolio Upsell customers to a more valuable feature set Cross-sell customers additional products from your portfolio
- Key point: Managing churn is anything but a passive activity. You need to figure out what makes your products sticky – and how you can make them stickier. The more indispensable they are, the less churn you’ll experience. Track customer engagement – and react to it. Follow up with customers and enable them. Give them ways to make more and better use of the products they’ve bought. Help them get going when they first sign up. Put top sales talent on cancellations, to save potentially lost business. But don’t be Comcast. Consider lengthening the standard contract to increase commitment to the product. And always, always – understand your churn rate. Understand what’s causing churn, and manage it actively.
- Key Point: Let’s turn now to talk about what the demand generation funnel looks like for cloud services. Because cloud services customers keep PAYING for a product if, and only if, they are actively using it and getting value from it, the role of demand generation in cloud services shifts the traditional focus on getting leads into the top of the funnel, and extends it throughout the customer lifecycle. Demand generation in the context of cloud services is focused on achieving 3 critical and measurable marketing goals: To acquire customers – here demand generation activities are focused on generating awareness or capturing existing interest and ultimately turning that interest into orders. If your demand generation activities are successful, they will result in an increase in your Contracted Monthly Recurring Revenue (or CMRR). Also, optimizing your marketing spend will ensure that you are keeping your Customer Acquisition Costs (or CAC) down. To activate usage – here demand generation and cultivation activities are focused on increasing both CMRR and reducing Churn. Helping customers to quickly realize value, often even before they have made a buying decision, will shorten the sales cycle. Getting them educated so that they start using your solution in depth will help to ensure that they keep on paying. To cultivate fans – here the demand generation activities are focused on increasing customer Lifetime Value (that is, LTV) and reducing Churn. Your efforts should ensure that your customers are extensively using your cloud solution and realizing additional value from any complementary products and services. More than this. They should also turn them into loyal advocates and provide them with tools and forums that enable their comments to reach and influence other customers and prospects. The metrics I’m referring to here, CMRR, CAC, Churn and LTV are discussed in more detail in module 2 of this workshop series. They are fundamental to the financial health and success of Cloud providers so if you haven’t watched this webinar, I encourage you to do so.
- Key Point: The sales process for SaaS is also very different from the traditional sales cycle for on-premise products Digital Marketing and a clean web presence become more important for a product online. Also, many buyers like to taste the goods before committing to paying so trials are important. In many cases, if the audience is fragmented like SMBs or consumers, the traditional sales force is not even a requirement as the internet and a tele-sales team become the primary sales channel. Also, reviews, forums, community and blogs are big drivers of awareness and perception.
- Key Point: This presentation is intended for Business Decision Makers(BDMs) within an independent software vendor(ISV) organization. The goals of this guide are to: Provide an understanding of the momentum around cloud computing and what makes it attractive for ISVs Describe the Microsoft Azure its features & some successful ISV case studies And finally, to discuss the pricing of the Microsoft Azure , illustrated by some cost examples of ISVs applications with their monthly costs on Microsoft Azure Each of the 3 sections provides details on one of these goals.
- Key Point: Microsoft Azure can help ISVs throughout the application development lifecycle of developing, selling, deploying and managing applications. The case studies below amply illustrate some of the benefits. Thinking back to the challenges and top of mind issues outlined at the beginning of this deck, Microsoft Azure can help address each of them: Remaining competitive; Staying focused; Reducing costs; Managing data centers; Maintaining security, privacy, continuity; Embracing globalization When developing applications It can help you innovate quickly via an open, comprehensive on which to develop new applications or migrate existing ones or even create hybrid applications. http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?CaseStudyID=4000010792 (Vela Studios, Germany - used Java and PHP to develop mobile apps) http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?casestudyid=400000000081 (Gigaspaces, US - provides tools to ease Java app development on Azure) When selling applications It can help you grow revenue by Monetizing existing IP, or reaching new customers and new geographies Extending your on-premise applications via a hybrid model Generating leads through an application marketplace And by providing a rich partner support eco-system that includes sales, marketing and technical resources http://www.microsoft.com/casestudies/Windows-Azure/Talentsoft/Human-Resources-Solution-Vendor-Uses-Cloud-to-Capture-New-Markets-Cut-Costs/4000011149 (Talentsoft UK- Human Resources Solution Vendor Uses Cloud to Capture New Markets, Cut Costs) http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?CaseStudyID=4000010842 ( Spikes Cavell UK - Government Spending Analytics Provider Uses Cloud to Scale Solution, Expand Overseas) When deploying & managing applications Once your applications are in market, Azure helps you deploy and manage applications with greater efficiency You can scale reliably and cost effectively with fully managed hardware and software, reducing costs for you and your customers You no longer have to manage multiple versions of on premise software, nor plan and manage infrastructure capacity, performance, and availability. You’re free to return to the beginning of the cycle and develop and sell more applications. http://www.microsoft.com/casestudies/Windows-Azure/Soluto/TechCrunch-Disrupt-Winner-Chooses-Windows-Azure-Scales-to-3-Million-Downloads/710000000248 - (Soluto Israel - TechCrunch Disrupt Winner Chooses Microsoft Azure, Scales to 3 Million Downloads) http://www.microsoft.com/casestudies/Windows-Azure/SIVECO-Romania/Ministry-Creates-National-Cloud-Service-to-Ensure-Top-Performance-of-Exams-Website/435000000081 (SIVECO Romania - Ministry Creates National Cloud Service to Ensure Top Performance of Exams Website)
- Key Points: There are 2 ways in which Microsoft works with ISVs using Microsoft Azure The ISV is the direct interface with the customer The customer buys application and Microsoft Azure from the ISV, then the ISV pays Microsoft The ISV builds the app for the customer, but Microsoft owns the billing relationship with the customer
- Key Point: There are several ways to buy Microsoft Azure. Microsoft provides flexibility via a variety of purchasing options, allowing customers to control costs and choose how services are priced. Pay as You Go: allows you to pay-as-you-go for consumption, based on a variety of usage meters. There are no minimums or commitments, and you can cancel anytime. That’s Microsoft’s most popular and flexible payment plan. Enterprise Agreement: To further optimize costs for large-scale cloud service offering, volume discounts are available for coordinated purchasing through EA. Any Enterprise Agreement customer can add Azure to their EA by making an upfront monetary commitment to Azure. That commitment is consumed throughout the year by using any combination of the wide variety of cloud services Azure offers from its global datacenters. If a customer’s usage exceeds their commitment, they will be billed in-arrears for that usage, either quarterly or annually depending on whether that additional use is more than 50% beyond their original commitment Open Licensing: (New as of August 1, 2014) When you resell Azure in Open Licensing, you purchase tokens from your preferred Distributor and apply the credit to the customer’s Azure Portal in increments of $100. The credits can be used for any consumption-based service available in Azure. To add more credit, you simply purchase new tokens and add them to the account. This gives you the opportunity to manage your customer’s portal, setup services, and monitor consumption, all while maintaining a direct relationship.
- Key point: There are multiple methods for monetizing cloud offerings….and they are not all mutually exclusive. Many cloud providers successfully combine several methods to arrive at a hybrid pricing model. Details for each pricing model are included below Free models: Providing a basic level of service for free and then offering premium upgrades. There is much to be said in favor of incorporating this method into your pricing model since it significantly reduces any barriers customers may have in trying out your software. Once they have started to derive business value from it, they will quickly outgrow the limited number of features available to them and want to upgrade. Your challenge here of course is to package your features and functions in such a way as to increase the number of customers who are upgrading. Ad Based Revenue is a valid pricing method, though a tough one to successfully implement. Having said this, Google and Facebook have both generated significant revenues from advertising while providing their services free of charge for users. Other companies can also make this model work for them. Related Services charged – in this model the application is free but you may have to pay for some related service or virtual goods. Most commonly this is leveraged in free games where you can do micro transactions and in consumer websites Per Unit Per Meter - this has applicability only in certain situations. It is good, for example for file sharing or backup applications. When it is applicable, it is often used in combination with other methods such as per user pricing. The growth goal in this scenario is to increase storage per customer. Per transaction pricing is also a common pricing method, but not applicable to every application where it may be hard to carve out discrete transaction units. The growth goal here, of course, is to increase the number of transactions per customer. Per User pricing is one of the most common pricing mechanisms. This may include number of seats or named users. Once again packaging your offering in such a way as to make premium upgrades available will help to ensure that you are providing a low end, easy point of entry for your customers and then quickly encouraging them to upgrade in order to have access to an expanded set of functions and features and/or additional users, thereby increasing your average revenue per customer. Payment types A monthly subscription is one of the most common payment mechanisms though lack of robust billing systems means that this is often billed annually in commercial sales. Consumer sales however require the billing systems to be in place even before the service is offered. Revenue Share many services which are sold via a reseller require the ISV to take a cut of the revenues and share the rest. The share is most often higher for whoever owns the brand and customer relationship. Perpetual License Fee this is seen most often in companies that offer on-premise software and have not yet fully transitioned to the cloud business model.