What is XaaS anyway? Your key to recurring revenue streams

If you are the CEO of a company selling products or services to other businesses, you undoubtedly are constantly on the lookout for new sources of growth. It’s frustrating when your company is unable to realize its maximum potential.

Sometimes, a lack of growth is due to an inability to fully understand the customer or marketplace for your products or services. In other cases, it may be that changes to your marketing strategy or execution plan are needed.

But sometimes, a more sweeping change – involving a critical adjustment to the core business model of your product or service – is the best course of action. An increasing number of companies are realizing that transitioning to or launching a Something-as-a-Service business model is the answer to driving higher growth, more profitability, and more stable and reliable revenue streams.

What is XaaS?

To put it simply, a Something-as-a-Service (XaaS) business model is one where customers ‘subscribe’ to an offering for which they receive the value over time (as opposed to paying a one-time fee and receiving most of the value up front).

Such business models have been used in the classic services sector for many years, but a more recent innovation is that companies that had previously sold their offering as a one-time ‘product sale’ are now converting to subscription business models.

Advantages of XaaS

Markets (including both sellers and buyers) are increasingly adopting XaaS models, given some very clear benefits.

Advantages for buyers:

• Lower up-front costs – customers pay over time as the value is received;
• Less risk – ability to turn off the service when it’s no longer needed (subject to contract constraints);
• Higher quality – XaaS providers are highly motivated to retain the ongoing business of their customers.

Advantages for sellers:

• Subscription services provide more predictable, recurring revenue streams (and what business doesn’t want that?);
• Higher margins in the long run – compared to a non-subscription model, where the offering has to be re-sold/re-purchased every month, quarter, or year;
• Greater chance to upsell or cross-sell to customers – and customers are ‘stickier.’

Sounds good? Increasingly, investors think so, too. In fact, while investments in XaaS companies originally took hold in the venture capital (VC) space, increasingly it is more conservative private equity (PE) firms that are driving significant new investment into XaaS model businesses – and for good reason.

Is it time to transition?

So, how do you know it’s time to consider a transition to a XaaS business model for your business?

Here are some signs to look for:

1. Revenue growth is not achieving your expectations, given the opportunity in the market;
2. The cost of marketing and sales is too high, relative to the revenue that you are generating;
3. You need to effectively ‘re-sell’ your offering to the same customers, repeatedly, each month, quarter, or year;
4. Your business only has a limited ability to cross-sell and up-sell other products or services to its existing customers;
5. As your offering expands and improves, it is becoming increasingly complex for your customers to own, operate, or otherwise benefit from it;
6. Your customers are demanding real outcomes and value, and are becoming increasingly disinterested in paying for either your product’s features or your time;
7. Competitors (or substitutes) are beginning to implement subscription models, and are growing faster or gaining market share;
8. Some of these new competitors have the potential to ‘disrupt’ your business entirely and cause significant – or even terminal – damage in the long run.

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