The Rule of 35: A New Metric for SaaS Profitability with Thomas Lah

This week on the Expert Voices podcast, Randy Wootton, CEO of Maxio, speaks with Thomas Lah, co-founder of the Technology Services Industry Association (TSIA). Randy and Thomas take an in-depth exploration of the journey from traditional software models to SaaS, the dynamics of profitability within the industry, and the development of key success metrics. Thomas shares valuable experiences from his tenure at Silicon Graphics to his groundbreaking approach in founding an association focused on data and insights for the technology services industry. Randy and Thomas navigate through the transformational shift from on-premises software models to cloud-native SaaS businesses, revealing trends, challenges, and strategies for acclimating to new market realities. 

Quotes"If your RAC (revenue acquisition cost) number is higher than your competitors, you have a problem. You have a serious problem because you are not as efficient at generating revenue growth. And that's going to catch up with you. How much time and treasure you're going to have to spend to get market share.” -Thomas Lah [22:20]<br/>
“SaaS companies can be replaced. As a CEO or CFO, you have to think about your unique value in a way that doesn't lock the customer in. You have to continue to give value. It's a value conversation versus a price increase conversation.” -Randy Wootton [38:58]<br/>



Expert Takeaways The Rule of 35, proposed by TSIA, serves as a new benchmark for operational efficiency, complementing the well-known Rule of 40 in guiding SaaS companies towards profitability.Monetizing service motions, migrating commercials, and leveraging data for growth are crucial levers for improving SaaS profitability.The RAC (Revenue Acquisition Cost) to CAC (Customer Acquisition Cost) metric provides a clearer picture of growth efficiency compared to CAC alone.There has been an increase in focus on financial austerity among SaaS companies, with significant layoffs marking a move toward more sustainable growth strategies.<br/>


Timestamps[03:25] Transformation from on-prem to cloud-native software [07:13] Migration from on-prem to managed service offers [10:19] Challenges of achieving profitability in the SaaS business model [13:07] Tech companies have eliminated almost a million jobs [14:18] Importance of being profitable and the rule of 40 [22:10] Salesforce, ServiceNow, and Zscaler's rack numbers compared to competitors [24:37] CFOs need to shift from Excel to database models for data analysis [29:15] CFOs need to shift from compliance to strategic partnership [31:44] The "porpoise principle" of becoming profitable before making growth investments [40:01] Changing the operating model is the hard work for profitability [40:57] "Digital Hesitation" and "As a Service Playbook" are recommended books




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