I’ve worked with several startups that fell into the following pattern:
Selling a SaaS application at a healthy price (e.g., $100K to $200K ARR)
With low, fixed-cost implementation packages (e.g., $25K)
But a product that actually takes maybe $50K to $75K to successfully deploy
Resulting in an unprofitable professional services business (and wrecking the market for partner services)
High adoption failure
And, depending on the initial contract duration, high customer churn 
For example, one company had a CAC of 4.0, churn of 25%, and services margins of negative 66% when I started working with them . Ouch.
Before proceeding, let me say that if you have a low-touch, high-velocity, easy-adoption business model — and the product to go with it — then you don’t need to read this post . If you don’t, and any of the above problems sound familiar, then let’s figure out what’s going on here and fix it.
The problem is the company is not charging the appropriate price for the services needed. Perhaps this is because of a zero-sum fallacy between ARR and services. Or perhaps they feel that customers “just won’t pay” that much for implementation services. Or perhaps their product takes more work to deploy than the competition and they feel forced to match price on services .
This under-pricing usually triggers a number of other problems:
In order to work within the self-created, low-cost implementation services model, the company “hires cheap” when it comes to implementation consultants, preferring junior staff and/or staff in offshore locations.
The company’s “implementation consultants” are overloaded, working on too many projects in parallel, and are largely focused more on “getting onto the next one” than getting customers successfully implemented.
Once a certain number of hours are clocked on any given project, the consultants go from “in a hurry” to “in a big hurry” to finish up and move on.
Customers are left high-and-dry with failed or partial implementations that, if left unfinished, will likely lead to churn.
Customer success, whose job is to prevent churn, is left holding the bag and is pulled away from its primary mission of adoption, renewal, and expansion into the implementation-completion business, potentially changing its hiring profile from more sales-oriented to more product-oriented and/or complementing CSMs with customer success architects (CSAs) or technical account managers (TAMs) to try and fill the implementation void.
I sometimes consider fixing this corporate chiropractor work, because one maladjustment results in the whole organization being twisted out of shape . The good news is that, as with chiropractors, one adjustment can pop the whole system back into alignment.
Now, before we move onto fixing this, there’s one more problem we haven’t discussed yet — and give yourself ten pats on the back if you figured out before I got here:
Who ever said the customer defined success as getting the software implemented?
Oh shit. We were so tied up trying to deliver a $25K services package that costs $40K to deliver that we forgot about the customer. What customer equates implementation with success? None. Zero. Nobody.
“Hey, it’s all set up now, you can login, gotta go!” is not the credo of a success-oriented consultant.
But what do we call our consultants again? Implementation consultants.
What do implementation consultants think they do? Well, implementations.
When an implementation consultant reads their own business card, what does it tell them they their job is? Implementations.
Are implementations what customers want? No.
So why do we have implementation consultants again? I have no idea.
What do customers what? Overall they want success, but what’s a good proxy? How about attaining their first business objective? If you sell:
A recruiting app, running your first recruiting campaign
A financial planning app, it’s making your first plan
A demandgen marketing app, it’s running your first demandgen campaign
A customer service app, it’s your first day running the call center
A deflection app, it’s deflecting your first cases
A sales enablement app, it’s training your first reps
An IT support app, it’s handing your first tickets
So, what’s the fix here? While not all of this will be possible or recommended in all situations, here’s the long list:
Re-frame services as in the success business, not the implementation business
Eliminate the job title implementation consultant in favor of consultant
Get services to make plans that end not with implementation, but with the achievement of an agreed-to first business objective.
Hire more experienced consultants who can better make customers successful and don’t be afraid to charge more for them. (They’re worth it.)
Agree to an ARR price before negotiating the services price; refuse to trade one off against the other.
Involve your services team in the sale well before the contract is signed so they propose the right prix fixe package (e.g., small, medium, large) or create an appropriately-sized bespoke statement of work.
Modify your product so it is not at a competitive disadvantage on required implementation work.
# # #
 With one-year contracts, a failed implementation that takes 6-9 months to fail typically results in churn, whereas with three-year contracts, you will often get another swing at the problem.
 These horrific unit economics result in an LTV/CAC of 1.0 and make the company totally uninvestable. The CAC would be even higher if hard-ass investor added the services losses back into the CAC on the theory they were subsidizing sales.
 Product-led growth business models are great, but when companies that are not designed for them try to emulate pieces of the business model, they can get into trouble. Implementation is an area that quickly goes awry when companies not built for PLG attempt bottom-up, try-and-buy, viral go-to market strategies.
 In which case, an obvious solution is to reduce the deployment workload requirements of the product.
 Put differently, the sales bone is connected to the services bone, and the services bone is connected to the customer success bone.
Any solutions practices or offerings should be built by our partners
The services team should be introduced as late as possible in the sales cycle; ideally after contract signing, in order to eliminate the chance a post-sales consultant will show up, tell the customer “the truth,” and ruin a deal
It is impossible and/or not meaningful to create and run a separate services P&L
The need for services is a reflection of failure on the part of the product (even in an enterprise setting)
Zero-sum delusion typically presents with the following metrics:
Services being less than 10% of total company revenues
Services margins running in the negative 20% to negative 60% range
High churn on one-year deals (often 25% or higher) due to failed implementations
Competitors winning bigger deals both on the ARR and services side (and associated internal confusion about that)
Loss reports indicating that prospects believed the competition “understood our problem better” and acted “more like a partner than a vendor”
Zero-sum delusion is a serious issue for an early-stage SaaS business. It is often acquired through excess contact with purely financial venture capitalists. Happily, with critical thinking and by challenging assumptions, it can be overcome.
OK, let’s switch to my normal narrative mode and discuss what’s going on here. First, some SaaS companies deliberately run with a low set-up product, little to no services, and a customer success team that takes care of implementation issues. Usually these companies sell inexpensive software (e.g., ARR < $25K), use a low-touch sales model, and focus on the small and medium business market . If delivering such an offering is your company’s strategy then you should disregard this post.
However, if your strategy is not to be a low-touch business model disruptor, if you do deals closer to $250K than $25K, if your services attach rate  is closer to 10% than 40%, if you consider yourself a somewhat classic enterprise SaaS vendor — basically, if you solve big, hard problems for enterprises and expect to get paid for it — then you should read this post.
Let’s start with a story. Back in the day at Business Objects, we did a great business grinding out a large number of relatively small (but nevertheless enterprise) deals in the $100K to $200K range. I remember we were working a deal at a major retailer — call them SeasEdge — against MicroStrategy, a self-funded competitor bootstrapped from a consulting business.
SeasEdge was doing a business intelligence (BI) evaluation and were looking to use BI to improve operational efficiency across a wide range of retail use cases, from supply chain to catalog design. We had a pretty formulaic sales cycle, from discovery to demo to proposal. We had financials that Wall Street loved (e.g., high gross margins, a small services business, good sales efficiency) so that meant we ran with a high salesrep-to-SE (sales engineer) ratio and a relatively small, largely tactical professional services team. I remember hearing our sales team’s worries that we were under-servicing the account — the salesrep had a lot of other active opportunities and the SE, who was supporting more than two salesreps, was badly overloaded. Worse yet, MicroStrategy was swarming on the account, bringing not only a salesrep and an SE but about 5 senior consultants to every meeting. Although they were a fraction of our size, they looked bigger than we did in this account.
SeasEdge taught me the important lesson that the deal you lose is not necessarily the deal your competitor wins. We lost a $200K query-and-reporting (Q&R) deal. MicroStrategy won a $4M retail transformation deal. We were in the business of banging out $200K Q&R deals so that’s what we saw when we looked at SeasEdge. MicroStrategy, born from a consultancy, looked at SeasEdge and saw a massive software and services, retail transformation opportunity instead.
I understand this is an extreme example and I’m not suggesting your company get in the business of multi-million dollar services deals . But don’t miss the key lessons either:
Make sure you’re selling what the customer is buying. We were selling Q&R tools. They were buying retail transformation.
People may have more money than you think. Particularly, when there’s a major business challenge. We saw only 5% of the eventual budget.
A strong professional services organization can help you win deals by allowing you to better understand, more heavily staff, appear more as a partner in, and better solve customer problems in sales opportunities. Internalize: a rainmaker professional services leader is pure gold in sales cycles.
While partners are awesome, they are not you. Once in a while, the customer wants “one throat to choke” and if you can’t be that throat then they will likely buy from someone who can.
I call this problem zero-sum delusion because I think the root cause is a fallacy that a zero-sum trade-off exists between ARR and professional services. The fallacy is that if a customer has only $250K to spend, we should get as much of that $250K as possible in ARR, because ARR recurs and professional services doesn’t . The reality is that most customers, particularly when you’re selling to the information technology (IT) organization, are professional buyers — this isn’t their first rodeo, they know that enterprise software requires professional services, and they budget separately for it. Moreover, they know that a three-year $250K ARR deal represents a lot of money for their company and they darn well want the project associated with that investment to be successful — and they are willing to pay to ensure that success.
If you combine the zero-sum fallacy with purely financial investors applying pressure to maximize blended gross margins  and the fantasy that you can somehow run a low-touch services model when that isn’t actually your company and product strategy, you end up with a full-blown case of zero-sum delusion.
Curing the Zero-Sum Delusion
If your organization has this problem, here are some steps you can take to fix it.
Convince yourself it’s not zero sum. Interview customers. Look at competitors. Look at you budget in your own company. Talk to consultants who help customers buy and implement software. When you do, you will realize that customers know that enterprise software requires services and they budget accordingly. You’ll also understand that customers will happily pay to increase the odds of project success; buying quality services is, in effect, an insurance policy on the customer’s job .
Change your negotiation approach. If you think it’s zero sum, you’ll create a self-fulfilling prophecy in negotiation. Don’t frame the problem as zero sum. Negotiate ARR first, then treat that as fixed. Add the required services on top, negotiating services not as a zero-sum budget trade-off against ARR, but as a function of the amount of work they want done. I’ve won deals precisely because we proposed twice the services as our competition because the customer saw we actually wanted to solve their problem, and not just low-ball them on services to sell subscription.
Change sales’ mental math. If you pay salesreps 12% on ARR and 2% on services, if your reps have zero-sum delusion they will see a $250K ARR, $100K services deal as $5K to $10K in lost commission . Per the prior point we want them to see this as a $30K ARR commission opportunity with some services commissions on top — and the higher the services commissions the higher the chance for downstream upsell. Moreover, once they really get it, they see a 50% chance of winning a 250/25 deal, but a 80% chance of winning a 250/100 deal. An increase in expected value by over $10K.
Put a partner-level, rainmaker leader in charge of your services organization and each region of it. The lawyer who makes partner isn’t the one with the best legal knowledge; it’s the one with the biggest book of business. Adopt that mentality and run your services business like, well, a services business.
Create a services P&L and let your VP of Services fully manage it. They will know to get more bookings when the forecast is light. They will increase hiring into a heavy forecast and cut weak performers into a light forecast. They know how to do this. Let them.
Set your professional services gross margin target at 5-10%. As an independent business it can easily run in the 30-40% range. As a SaaS adjunct you want services to have time to help sales, time to help broken customers (helping renewals), time to enable partners, and the ability to be agile. All that costs you some margin. The mission should be to maximize ARR while not losing money.
Constrain services to no more than 20% of revenue. This limits the blended gross margin impact, is usually fine with the board, keeps you well away from the line where people say “it’s really a services firm,” usually leaves plenty of room for a services partner ecosystem, and most importantly, creates artificial scarcity that will force you to be mindful about where to put your services team versus where to put a partner’s.
Force sales to engage with services earlier in the sales cycle. This is hard and requires trust. It also requires that the services folks are ready for it. So wait until the rainmakers in charge have trained, retrained, or cleared people and then begin. It doesn’t take but a few screw-ups to break the whole process so make sure services understand that they are not on the sales prevention team, but on the solving customer problems team. When this is working, the customer buys because both the VP of Sales, and more importantly, the VP of Services looked them in the eye and said, “we will make you successful” .
Outplace any consultant who thinks their mission is “tell the truth” and not help sales. Nobody’s saying that people should lie, but there is a breed of curmudgeon who loves to “half empty” everything and does so in the name of “telling the truth.” In reality, they’re telling the truth in the most negative way possible and, if they want to do that, and if they think that helps their credibility, they should go work at independent services firm . You can help them do that.
Under no circumstances create a separate services sales team — i.e., hire separate salespeople just to sell services . The margins don’t support it and it’s unnecessary. If you have strong overall and regional leadership, if those leaders are rainmakers as they should be, then there is absolutely zero reason to hire separate staff to sell services.
# # #
 Yes, they can eventually be enterprise disruptors by bringing this low-touch, cheap-and-cheerful approach to the enterprise (e.g., Zendesk), but that’s not the purpose of this post.
 Services attach rate is the ratio of professional services to ARR in a new booking. For example, if you sell $50K of services as part of a $500K ARR deal, then your attach rate is 10%.
 We had neither that staffing levels nor the right kind of consultants to even propose, let alone take on, such an engagement. The better strategy for us would have been to run behind a Big 4 systems integrator bidding who included our software in their proposal.
 Sales compensation plans typically reinforce this as well. Remediating that is hard and beyond the scope of this post, but at least be aware of the problem.
 At the potential expense of maximizing ARR — which should be the point.
 If you think from the customer’s perspective. Their job is to make sure projects succeed. Bad things sometimes happen when they don’t.
 On the theory that the perfect deal, compensation wide, is 100% ARR. Math wise, 0.12*250+0.02*100 = $32K whereas 0.12*350+0.02*0 = $42K. More realistically, if they could have held services to $50K, you’d get 0.12*300+0.02*50 = $37K. Note that this way of thinking is zero-sum and ignores the chance you can expand services while holding ARR constant.
 And, no offense, they believed the latter more than the former. And they know the latter is the person on the hook to make it happen.
 Oh, but they want the stock-options upside of working at a vendor! If that’s true, then they need to get on board and help maximize ARR while, yes, still telling the truth but in a positive way.
 Wanting to do so is actually a symptom of advanced zero-sum delusion.
Career Development: What It Really Means to be a Manager, Director, or VP. The number two post of 2018 was actually written in 2015! That says a lot about this very special post which appears to have simply nailed it in capturing the hard-to-describe but incredibly important differences between operating at the manager, director, or VP level. I must admit I love this post, too, because it was literally twenty years in the making. I’d been asked so many times “what does it really mean to operate at the director level” that it was cathartic when I finally found the words to express the answer.
The SaaS Rule of 40. No surprise here. Love it or not, understanding the rule of 40 is critical when running a SaaS business. Plenty of companies don’t obey the rule of 40 — it’s a very high bar. And it’s not appropriate in all circumstances. But something like 80% of public company SaaS market capitalization is captured by the companies that adhere to it. It’s the PEG ratio of modern SaaS.
The Role of Professional Services in a SaaS Company. I was surprised and happy to see that this post made the top five. In short, the mission of services in a SaaS company is “to maximize ARR while not losing money.” SaaS companies don’t need the 25-35% services margins of their on-premises counterparts. They need happy, renewing customers. Far better to forgo modest profits on services in favor of subsidizing ARR both in new customer acquisition and in existing customer success to drive renewals. Services are critical in a SaaS company, but you shouldn’t measure them by services margins.
The Customer Acquisition Cost Ratio: Another Subtle SaaS Metric. The number five post of 2018 actually dates back to 2013! The post covers all the basics of measuring your cost to acquire a customer or a $1 of ARR. In 2019 I intend to update my fundamentals posts on CAC and churn, but until then, this post stands strong in providing a comprehensive view of the CAC ratio and how to calculate it. Most SaaS companies lose money on customer acquisition (i.e., “sell dollars for 80 cents”) which in turn begs two critical questions: how much do they lose and how quickly do they get it back? I’m happy to see a “fun with fundamentals” type post still running in the top five.
 See disclaimer that I’m not a financial analyst and I don’t make buy/sell recommendations.
I like to make them based on real-life situations, e.g., when someone running a department seems confused about the real purpose of their team.
For example, some police-oriented HR departments seem to think their mission is protect employees from management. Think: “Freeze, you can’t send an email like that; put your hands in the air and step away from the keyboard!”
I think otherwise. If the HR team conceptualizes itself as “helping managers manage,” it will be more positively focused, help deliver better results, and be a better business partner — all while protecting employees from bad managers (after all, mistreating employees is bad management).
Over the past year, I’ve developed one of these pithy mission statements for professional services, also known as consulting, the (typically billable) experts employed by a software company who work with customers on implementations after the sale:
Professional services exists to maximize ARR while not losing money.
Maximizing ARR surprises some people. Why say that in the context of professional services? Sales brings in new ARR. Customer Success (or Customers for Life) is reponsible for the maintenance and expansion of existing ARR. Where does professional services fit in? Shouldn’t they exist to drive successful implementations or to achieve services revenue targets? Yes, but that’s actually secondary to the primary mission.
The point of a SaaS business is to maxmize enterprise value and that value is a function of ARR. If you could maximize ARR without a professional services team then you wouldn’t have one at all (and some SaaS firms don’t). But if you’re going to have a professional services team, then they — like everybody else — should be there to maximize ARR. How does professional services help maximize ARR? They:
Help drive new ARR by supporting sales — for example, working with sales to draft a statement of work and by building confidence that the company can solve the customer’s problem. If you remember that customers buy “holes, not bits” you’ll know that a SaaS subscription, by itself, doesn’t solve any business problem. The importance of the consultants who do the solution mapping is paramount.
Help preserve/expand existing ARR by supporting the Customer Success (aka, the Customers for Life) team, either by repairing blown implementations or by doing new or expanded implementations at existing customers. This could entail anything from a “save” to a simple expansion, but either way, professional services is there maximizing ARR.
Help do both by enabling the partner ecosystem. Professional services is key to enabling partners who can both provide quality implementation services for customers and who can extend the vendor’s reach through go-to-market partnering.
Or, as our SVP of Services at Host Analytics says, “our role is to make happy customers.”
I prefer to say “maximize ARR without losing money” but we’re very much on the same page. Let’s finish with the “not losing money” part. In my opinion,
A typical on-premises software vendor drove 25% to 30% gross margins on professional services. Those were the days one big one-shot license fees and huge multi-million dollar implementations. In those days, customers weren’t necessarily too happy but the services team had a strong “make money” aspect to its mission.
A typical SaaS vendors have negative 20% to negative 10% gross margins on services (and sometimes a lot more negative than that). That’s because some vendors subsidize their ARR with free or heavily discounted services because ARR recurs whereas services revenue does not.
I believe that professional services has real value (e.g., our team at Host Analytics is amazing) and that if you’re driving 0% to 5% gross margins with such a team that you are already supporting the ARR pool with discounted services (you could be running 25% to 30% margins). Whether you make 0% or 10% doesn’t much matter — because it won’t to someone valuing your company — but I think it’s a mistake to shoot for the 30% margins of yore as well as a mistake to tolerate -50% margins and completely de-value your services.
I’m Dave Kellogg, advisor, director, consultant, angel investor, and blogger focused on enterprise software startups. I am an executive-in-residence (EIR) at Balderton Capital and principal of my own eponymous consulting business.
I bring an uncommon perspective to startup challenges having 10 years’ experience at each of the CEO, CMO, and independent director levels across 10+ companies ranging in size from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of cloud EPM vendor Host Analytics, where we quintupled ARR while halving customer acquisition costs in a competitive market, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of NoSQL database provider MarkLogic, which we grew from zero to $80M over 6 years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues. I started my career in technical and product marketing positions at Ingres and Versant.
I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Bluecore, Cyral, FloQast, GainSight, MongoDB, Recorded Future, and Tableau.
I previously sat on the boards of Granular (agtech, acquired by DuPont), Aster Data (big data, acquired by Teradata), and Nuxeo (content services, acquired by Hyland), and Profisee (MDM, exited to Pamlico).
I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).