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SaaS TCO : The Mirror Image of Total Cost of Service

Much has been written about how software-as-a-service can lower a customer’s total cost of ownership (TCO) by eliminating the high up-front investment and ongoing maintenance costs of in-house software and hardware infrastructure.  Most SaaS vendors deliver on this promise with a bargain basement subscription price, putting their faith in the miracle of multi-tenant architecture, and working to build enough volume to make the theory a reality.  Meanwhile, they bleed cash.

Multi-tenant architecture simply is not enough.  In fact, it can distract you from the real economic challenge of achieving economies-of-scale and driving out costs across the entire value chain.  You’ve lowered TCO for your customer, now it’s time to think about lowering Total Cost of Service (TCS) for your business.  TCS is the total cost of delivering your service to a customer, and if you expect to run a profitable, cash-positive business it can only happen if your lifetime customer value exceeds TCS.

Life Time Customer Value  > Total Cost of Service

Total cost of service is the the mirror image of total cost of ownership. If you think of the value that your customer realizes from your product as resulting from the sum of all the work that you do (TCS) and all the work that your customer does (TCO) from raw idea through product delivery to realized benefit, then it becomes clear that creating a disruptive technology is really about taking costs out of the value chain, regardless of which side of the fence they sit on, because you pass your cost savings on to your customer in the form of lower prices.

software value chain
The Mirror Image of Total Cost of Ownership : Total Cost of Service

In my recent series on SaaS Sales Tips, I suggest that the margin delivered by the sales operation, or the difference between revenue and fully loaded sales costs, is actually more important to the SaaS vendor than revenue alone.  This tip is a special case of the more general objective of lowering TCS. SaaS vendors should look to drive costs out of the value chain and out of their operations across every function, not just through multi-tenant architecture.

SaaS total cost of owership - total cost of service
SaaS vendors should lower TCS by driving costs out across the value chain

Every business activity should be examined for the potential to apply the following cost-eliminating techniques:

  • Standardization
  • Mass Customization
  • Process Automation (internal and external leveraging the Internet)
  • Customer Self-service

Standardization and mass customization are essential to a true multi-tenant SaaS product, but these concepts can be applied to achieve economies-of-scale across the entire value chain.  For example, mass customization can be applied to customer acquisition through website personalization and automated nurturing programs that serve up content to prospects based on their history with your company, i.e., if the prospect spent 5 minutes on the widget page, then send that prospect an invite to watch a video on your widget capabilities.  Or, apply Internet-based automation to your external support processes by offering a portal, knowledgebase, forums and online chat.

Customer self-service has the double benefit of automating tasks to drive out costs, but also shifting the cost back to the customer.  This may sound like bad business, but the truth is that sometimes your customers would simply rather do things themselves, particularly if it means saving money.  When was the last time you paid for full service at the gas station?  I’m probably dating myself, because I honestly can’t remember the last time I pulled into a gas station that  even offered full service. It used to be the standard, but it was eliminated by disruptive technologies for pumping and payment that eliminated and shifted costs within the value chain.

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