A department lead evaluated a new software tool, but soon discovered that the actual challenge was not in choosing features from the menu, but through the sales and marketing of procurement (basically to buy anything); however, the company has to face security audits and usage fees that are not easily visible to the buyer or to the vendor (i.e., very little liability).
Purchasing software designed for operational costs used by the business normally shifts the total dynamics of how employees will function at work, including from a perspective of spending money and how we cost our business operations.
If you want to know exactly what B2B SaaS is, this guide provides information on how to interpret B2B cloud software financial structures for business operations, in addition to important contract language so that buyers can properly evaluate vendor offerings to avoid being "burned".
What Does B2B SaaS Mean For Business?
A buyer is not just buying a product but rather making a long-term investment with a vendor. With the signing of the cloud application contract, the buyer is now renting or outsourcing a portion of the buyer's business infrastructure (and paying for the privilege).
The vendor is now responsible for servicing the servers, ensuring the integrity of the software codes, providing regular software updates, and maintaining the necessary security measures.
The responsibility of the buyer is to provide user permissions on the internal network, provide workflow training to users, and perform other related tasks to ensure that the old data in the database is migrated into the new database and that users are trained on how to effectively use the new functionality.
This means that there are trade-offs for the buyer, both monetary and operationally speaking; however, it is important for the buyer to understand the trade-off of the cost and responsibilities.
To the extent that these services are no longer offered, or that a vendor cannot offer support services or software functionality, the buyer has effectively stopped receiving value for money spent on this service.
The days of buying a CD-ROM, loading it onto a "back-room server," and waiting for the product to arrive are gone! Today, software is a "service"; the buyer has an option to "rent" or "license" access to cloud software, and if the buyer stops paying, the light "shuts-off" on the business.
How B2B SaaS Benefits Your Operations
To understand B2B SaaS effectively, let's look at a basic definition of B2B SaaS:
At its core, B2B SaaS is software as a service from a corporation directly to other corporations (this is B2B), normally with monthly or yearly fees. The vendor hosts and maintains the applicable software that is provided (as needed) to the buyer.
The application has either been designed to be accessed via a web browser, mobile app, or through API connections. Companies need an application that allows staff to work collaboratively through complex organizational processes.
Such applications contain user access controls for hundreds of users; therefore, they must adhere to strict security protocols and integrate well with other applications you are currently using. The primary goal of using an application is to obtain value on an ongoing basis rather than for quick amusement or utility.
For this reason, there are certain common features that many people think of when thinking about using an application, but these features may not necessarily define the application's functionality.
To help you distinguish between what you must have in order to use an application and what you can potentially benefit from in terms of tactics, we will review those requirements as they pertain to working with software purchased from vendors.
The list below indicates whether or not a characteristic must exist for an organization to utilize a product in the B2B model. Additionally, it provides information regarding how each characteristic reflects the actual operational needs of organizations:
A product must be sold to organizations: Products sold to organizations are usually intended for B2B use. This is because customers of organizations usually have access to their internal systems, so they purchase applications from vendors.
A product must be hosted and delivered online: For all SaaS products, hosting and delivery over the internet is the core functionality.
Usually, a product will have a recurring access relationship: Most SaaS products charge customers on a subscription basis to access their application on an ongoing basis. However, some may also charge customers based on usage.
Multi-user access is common: Organizations typically use multiple user roles and authorization levels to facilitate efficient business processes. There is a need for different users to have different levels of access to the application's features.
Many enterprise software applications operate as isolated multi-tenant applications: There are many enterprise applications that are designed to provide users access to a single virtual environment. Multi-tenant, isolated enterprise software applications are used by many organizations to reduce complexity and provide greater reliability.
Vendors provide a free or freemium trial for each product: A free or freemium trial is not a characteristic of the application but rather a marketing tool for acquiring users.
API integrations are common: These integrations vary in depth of integration by product and price tier.
The Software Purchase Lifecycle
The software purchase lifecycle is not a single event. Vendor applications are built and managed on the vendor's infrastructure while businesses evaluate the application and its commercial agreement with the vendor.
After evaluations are completed, you need to assemble a group of stakeholders to evaluate and approve the purchase. A buying committee is usually comprised of six to ten people from finance, legal, and IT.
Once signed, the contract is only a beginning. The work of configuring and implementing an application is not completed at the time the contract is signed. Once the initial configuration is complete, administrators will connect the application to existing data.
In order for employees to "truly" use the product, employees must first adopt the product in their everyday job function. By doing this, it ensures that they'll use it for future productivity and effectiveness.
Employees will ultimately drive your renewal by your actual use and actual use results. If, for example, the software was a time-saver or revenue generator, you would potentially buy a larger contract, therefore increasing your annual recurring revenue (ARR) commitment by adding more seats to your license.
Conversely, if the adoption rate is significantly low, your finance team will identify the extent of that wasted expenditure in the next audit cycle. When reviewing any vendor, customers will continually evaluate costs, security performance, and data portability to verify that each vendor meets their obligation.
Cloud Computing vs. On-Premise Solutions
This model is why traditional on-premise solutions will cease to exist and be replaced by cloud computing.
It is important to note that there is a direct correlation between the move to cloud computing and the corresponding costs associated with on-premise applications. Traditionally, on-premise software required a significant up-front investment in licensing costs, as well as physical servers and a dedicated IT workforce to maintain the entire system.
A typical server can easily cost $50,000 or more, prior to anyone logging in. Additionally, the manual installation of updates was necessary for the installation process on traditional servers.
Cloud computing is a different story. With a cloud software model, the vendor assumes responsibility for risk, while you continue to operate as an expense instead of as a purchase, which means fewer capital outlays. Vendors frequently push out updates to the application multiple times each day without your knowing.
If a server goes down, it is the vendor's engineering team that will be covering the associated risk of downtime, not yours.
In summary, a cloud software model shifts your internal burden of maintenance and support to the governance of an ongoing workflow. You will spend less time fixing servers and more time engaging in an audit of unused licenses and shadow IT.
Many companies either do not have adequate structures in place to locate certain enterprise applications, thus resulting in a high probability that these applications were purchased from somewhere else or could create blind spots in their overall security posture. Therefore, the degree to which organizations purchase and utilize applications will have an impact on how many security blind spots are created.
Consumer vs. Business Cloud Products
To better understand the differences between consumer and business cloud products, it is important to note that while both types of products may look and feel the same (for example, a mobile phone app), they live and exist in completely different environments.
A consumer application typically requires the customer to pay between $5 and $15 per month for a single-user license model, while the user is the only person entitled to use the application. As such, if a user becomes disinterested with the application, they can cancel their subscription with a single click and have an immediate spike in churn rates.
In contrast, business software tends to have longer sales cycles (the length of time it takes until a company's deal has been closed), typically ranging from 2 to 6 months just to close a deal, with the end result typically having a drastically different contract value.
For example, while the tools that are designed to help small businesses grow may be worth a few thousand dollars a year, when figuring out exactly what B2B SaaS is, you will see that most mid-market and enterprise tools typically fall into the range of $20,000 to $250,000 annually.
Once an organization relies on an application, they will experience pain to switch to another vendor, resulting in an extremely low revenue churn rate and an incredibly high customer lifetime value.
Active Players in the Market
In order to better understand this category, you need to look at the active players currently competing within the market space.
Horizontal Products
These horizontal products provide some form of functionality across multiple industries within the same marketplace (horizontal).
As an example, Salesforce has become the de facto standard in customer relationship management (CRM), with the primary purpose of tracking a company's accounts, deal stages, and sales team's performance levels. In addition, while Salesforce requires a high level of internal administrative training, it acts as the "backbone" for many companies to generate revenue.
Additionally, Slack has replaced the function of email for the vast majority of internal communication between team members. Teams use Slack to communicate in shared workspaces, and IT has full control over the administration access to Slack and connecting alerts to workspaces via Slack.
Finally, HubSpot has combined the core business functions of marketing, sales, and service into one singular platform by taking the same principle as an organization's internal communications and applying it to external communication and sales. Technical monitoring is offered through Datadog, allowing engineering teams real-time visibility into their infrastructure logs.
Vertical Technical Products
The second type of product is vertical technical products, which provide deep solutions for specific industries rather than the mass market vertical.
Companies like Veeva create cloud applications tailored exclusively to the life sciences vertical, providing application functionality that addresses industry-specific workflows and regulatory compliance challenges that a single or general-use product cannot meet. Furthermore, they have cornered their niche market, which translates into very high gross margins and outstanding net revenue retention metrics.
Orderful tackles a technical element of the supply chain by delivering cloud EDI software, enabling businesses to connect directly to retailers and suppliers electronically via data exchanges.
Their implementation cycle typically takes days or weeks rather than the months or years that traditional systems take. This exemplifies how vertical cloud software applications can win by simply accelerating the delivery of painful technology solutions to the end customer.
Who You Pay For Access
Who you actually pay to get access to a service, or what you actually receive from that vendor's subscription, is critical to understand.
Assume that vendors have moved from a traditional subscription model with a single flat fee of a certain dollar amount per month for a set number of employees to a variable pricing structure. This bases your monthly fee on your usage or volume of service used in a given period based on the following principles: a per-transaction basis, a per-gigabyte basis, or a per-thousand-email basis.
A low entry point is beneficial to the customer, but costs can easily become out of control for a customer if the customer uses the software more extensively than anticipated.
Instead of pricing the software as just a base subscription, a majority of today's vendors have created a hybrid pricing model where there is a base subscription price, a price per user (also called "seats"), and an additional usage fee if the customer exceeds the maximum number of users or transactions allowed under the base subscription price.
Because of this hybrid pricing model, estimating the total cost of ownership can become very complicated for anyone evaluating what B2B SaaS is in terms of real expenses. Understanding the technical fundamentals of the service is something that should not be overlooked. A beautiful user interface is worthless if the underlying technology is poorly constructed and not well maintained.
Security and Access Control
When you place your company's data on another provider's servers, the biggest risk to your company is the potential for a data breach.
Strong business applications utilize advanced levels of multi-factor authentication and strict role-based access control to ensure the integrity of your company's data. The ability to control which employees have access to certain data by the level of the employee's position is critical to the security of your company's operations.
Therefore, you should NEVER sign an annual contract with a vendor who is not willing to give you a copy of their SOC 2 compliance report. You should also verify the vendor's data residency policy so you know where your company's data resides in the world.
Service Level Agreements and Integrations
Service Level Agreements (SLAs) outline how much downtime the vendor is liable for if their systems fail and how much the vendor will compensate the customer for the downtime. A service that cannot connect with your main database is worthless.
Many modern vendors have developed open APIs (Application Programming Interfaces) and Software Development Kits (SDKs) that allow for interoperability between disparate systems.
Before signing a contract with a vendor for any product, you must verify whether the vendor provides a native integration into your existing environment or if you will need to engage a developer to create a custom interface.
The danger of data lock-in should not be taken lightly. Therefore, you should determine what data you are allowed to export and in what format should you decide to cancel your subscription in three years. You must make sure you have an efficient and clear exit strategy in place before committing to the vendor with the first deal.
The Hard Evaluation Checklist
Most buyers get into trouble by not asking the correct questions during their sales calls. Most buyers look at the interface and not the operational reality behind the software.
As a buyer, you need to take away the marketing pitch and compel the vendor into providing answers to the tough technical and financial questions. Buyers must not enter into long-term contracts without obtaining documented proof of the vendor’s capability.
Due Diligence For Buyers
The following is an exact list you should use when evaluating software you are interested in using:
What will be the complete annual cost once you factor in implementation costs, probable usage overages, and support service fees?
Which integrations are native, which are built by third parties, and which will require custom coding to operate?
What particular types of data are available for export, in what format, and how quickly will we receive them if we exit?
Does the vendor maintain acceptable security credentials, and do they have a clearly documented contract outlining their responsibilities in the event of a breach?
What are the specific terms regarding support escalation procedures and incident-response procedures?
Will our monthly billing be impacted by the inactivity of users or the need to reduce our tier level?
Which of our internal processes will become fully reliant on this vendor continuing to operate?
What would be a realistic implementation timeline for an organization of our size?
Final Thoughts on Vendor Lock-In
Cloud computing is the most reasonable option for running modern organizations, but it won’t solve bad organizational management problems.
When an organization purchases B2B SaaS, the cost of maintaining an organization is transferred from expenses related to technology and hardware, to the cost of managing the vendor relationship and data connections, and billing each month.
By clearly defining what B2B SaaS is for your specific needs, you avoid blindly purchasing software where your organization will lose money through wasted licenses and fragmented data due to the absence of a comprehensive integration plan.
Treat each new software acquisition as a valuable partnership. Before you provide your company credit card information, demand assurance of clear pricing, a secure architecture, and an expectation of a prompt exit.
