Making it Too Easy to Buy
In software land, we've all been witness to commercial success that we sensed to be not quite right — that seemed too easy — where some corner must have been cut, some shortcut taken. We can't always put our finger on it, but reliably, our nose tends to be correct on this; somewhere, we know there is fire. When my own radar starts pinging in this direction, a Fleetwood Mac lyric pops into my head that seems regularly to stick. There is Stevie Nicks, spinning around and reflecting on the mistakes of her life, confessing through a microphone, "Relationships that start out in the dark don't do well in the light." Truth. Sing it.
Prospects tend to confess less than they know — who doesn't? Whenever you don't hear someone confess, do you believe they are actually ready to change? First time, shame on you; second time, shame on me. A real willingness to change is measured by depth of behavior. This applies to collectives as much as it does individuals.
It is not unreasonable to believe that a willingness to hand over money is evidence by a prospect of a willingness to change. It is a willingness to change; what I am here to tell you, though, is that it should not be perceived as a willingness to change until death do us part.
In the world of enterprise software, MOIC's definition of a relationship that "started out in the dark" is evidenced by a few things:
- Short-term contracts
- Long-term contracts with 30-day outs
- Weak Statements of Work through which the prospect can burn you to the ground (if they so chose)
- Otherwise, any sales cycle through which the full confession is not behaviorally confessed by the prospect
So many times vendors believe that even though they may evidence some of these blemishes, they reveal nothing more than a superficial concern for the economic longevity. THIS IS WRONG. What the blemishes above are revealing to you is that in the face of headwinds, the customer has a put an option on their expense (your revenue). Let's put it this way: do you think SAP or ORACLE has any of these blemishes? THE ANSWER IS NO. Imagine the investor / board meeting where you are trying to hide the methods you didn't undertake that resulted in the down cycle evaporation of your subscription base. So how much is this costing me?
The graphic above is based on a valuation model assuming 30% of customer contracts have a 30-day out clause and that there is one down cycle in the energy sector during a five -year period. The column on the left is a baseline depiction of the value of a basket of SaaS contracts that don't have a 30-day out clause. The column on the right contemplates the effect if half of the 30% (out clause contracts) avail themselves of such clause during the down cycle. It shows a drop in calculated value of 30%. If you don't believe this it is because you haven't been doing this long enough. And it is only 30% because we haven't factored in the notion that termination doesn't have to wait for an energy industry downcycle. This is a big number.
Not to worry; you can control this outcome. The customer is not imposing this dynamic on you, you are inviting it. Do you want to know how? Do want your own hedge, your own multiple expansion? It is very much worth solving this problem. Email us at Maximize@MOICPartners.com to set up an initial call.
