The "Planet Fitness" Era of SaaS is Over
There’s a dirty secret in Silicon Valley - we make money when you don’t show up.
A word from our sponsor Mercury
In the world of startups, being the first can be exhilarating. Being the first finance leader to join a startup, however, can be daunting.
Mercury shares the five steps to establishing a strong financial foundation in your first 90 days. The article covers navigating existing processes, aligning with the CEO on key priorities, crafting a financial strategy at scale, and building relationships across the company to make better decisions.
Read the article to learn the art of simplifying complex financial operations, so you and the company can perform at your highest level.
There’s a dirty secret in Silicon Valley - we make money when you don’t show up.
I spoke with John McCauley, CFO of Calendly, who, after scaling companies in the Enterprise SaaS world, now leads one of the most recognizable PLG powerhouses. He observed the differences between the two worlds:
“I think the not-so-dirty little secret of SaaS at enterprise companies is we make money in the same way that the gym does. We make a lot of money off people that don't show up.
You don't get that luxury in PLG. They're constantly auditing their users and making sure that people are actually using it. And so I find it to be the purest form of software where you're only getting paid if you create value.
Where at Enterprise, that can be dubious at times, but at PLG, you’ve got to show up every day for work and prove that value to your customers.”
-John McCauley, CFO of Calendly (Available on Apple | Spotify | YouTube)
Yup. He said the quiet thing out loud.
And this realization isn’t lost on CFOs in charge of purchasing decisions.
Product Led Growth, for better or worse, trained CFOs to push for the following when evaluating a buying decision:
Get me to value fast, and preferably before I buy
Make it easy for me to buy more (or less)
Show me clear value, on a regular basis
These asks play out in de-risked buying decisions, clear ROI, and shorter contracts. It’s a brave new world.
Get me to value fast, and preferably before I buy
Product Led Growth is predicated on showing you value before asking for your business. The “aha” moment occurs before a transaction; it’s the catalyst that spurs you to pay.
Sales Led Growth forces the customer to take a leap of faith upfront…Sometimes a massive, “bet your career” type leap of faith.
On the far end of that spectrum is GuideWire, a publicly traded vertical SaaS company that serves the insurance industry. Their sales cycles can take years, and buyers are often betting their reputations and careers on the success of an implementation:
“CIOs often bet their career on this program to modernize this core suite of applications to support their business.”
-Jeff Cooper, CFO of Guidewire (Available on Apple | Spotify | YouTube)
With that leap of faith, it's hard to imagine not providing some sort of professional services to ensure they get to that “aha” moment as fast as possible post-purchase.
And it’s not like companies enjoy providing these add on services - it’s an expensive and time consuming model for everyone, as professional services are not a high contribution margin or durable revenue stream for the vendor.
This is pushing companies to build onboarding into their products so there is at least some value at the outset, even if it takes a while to get fully configured. An example I see in the stodgy Finance & Back Office world is Aleph. I’ve previously purchased FP&A tools that took literally four months (and hundreds of hours of expensive consultants) to just run a simple quarterly P&L. Aleph can get someone up and running with a view of their budget in under 30 minutes. See - even finance can get with the times!
John McCauley ties it all together with some more examples from other places he’s worked at:
“Take a ServiceNow contract, for example. You’ve been sold a lot. Now the company has to go deliver that.
You can get value on Calendly today if you sign up for it. You sign up for ServiceNow or Seismic, you’re talking three to six months before you actually get value.
PLG companies kind of invert the go-to-market that SLG does.
SLG sells you value and then it proves to you the value after you've sold it.”
-John McCauley, CFO of Calendly (Available on Apple | Spotify | YouTube)
Once you’ve seen the light (eherm, the “value”), it’s hard to go back to waiting for value to show up.
Make it easy for me to buy more (or less)
The wrinkle in PLG is that customers can leave as fast as they came. In good times, expansion RIPPPPs. In bad times, it’s easier to turn down the volume.
CFOs are now looking for more flexibility when it comes to toggling spend. This doesn’t always mean churning entirely, but it may mean downgrading from a higher priced plan to a lower priced plan if the full value proposition is not coming to fruition. I recently did this with a project management tool we use.
CFOs are also keeping an eye out for orphaned licenses. I’d say that the biggest beneficiary of the post ZIRP era is the relationship between CFOs and IT. In fact, many IT orgs have moved under the CFO to streamline budgeting, procurement, risk management, and cost realization.
I’ve never spoken to IT as much. We slack constantly about license counts and which people are chewing up licenses, but not logging in.
We’ve also moved to a “Just In Time” purchasing approach to many tools. For example, we purchase JAMF for remote device management on a rolling basis as new joiners enter the company, rather than attempting to buy ahead and commit to a large swath of licenses.
Two years ago, I would have attempted to buy ahead for the entire year’s forecasted headcount, locking in a better price per head in exchange for a larger commitment. I’m now much more reticent to do that, especially if headcount plans are in flux and each hire is under additional scrutiny. If I make changes to my hiring plans, I’d rather pay for optionality and hold off on expanding license counts. As such, I’ll be more apt to work with tools who allow me to purchase like this.
Show me clear value, on a regular basis
In 2024, walk the halls of any tech company and you’ll hear CFOs muttering:
“Are we using this? Who’s using that? Is that thing plugged in?”
PLG companies constantly interview for their jobs. They have to prove their value over and over. The onus of driving value is so much higher at PLG companies. And it’s rubbing off throughout the tech stack, regardless of contract structure.
While it’s impossible to get out of an iron-clad three year ERP contract, it’s coached CFOs to philosophically test if they can see value in tools on a regular basis.
“And look, that's showing up more and more today. I think the software buyer in 2024 is much more aware of what I just said than they were, or at least they care much more. I mean, look, we went into a pandemic, people bought software like crazy. They said, “We’ve got to go remote, buy whatever software you need,” in 2020, 22, year 21. And then 2023 came around and everybody had to rationalize all that software that they bought as the world went back to normal. And I think people are asking questions that they used to maybe turn a blind eye to, and that's why you saw net dollar retention rates and growth rates kind of plummet across software in 2023. So we are in a different environment and you’ve got to prove value.”
-John McCauley, CFO of Calendly (Available on Apple | Spotify | YouTube)
Contracts are getting shorter as expectations are getting higher. In Product Led Growth, the evaluation period is everyday.
Business in it’s purest form
All the questions CFOs are asking are a wrench in the models of incumbent software companies who, for so long, have gotten fat on gym members who don’t show up.
But it’s a net positive for the industry long term. Slingin’ shelf wear and aggressive ramping license deals trick business operators into a false sense of security, leading to more downside volatility in macro downturns.
When we sell things that people need, over a period of time that realistically makes sense, in a quantity that’s useful, and put our best foot forward with value from the jump, it leads to healthier, more durable buyers AND sellers.
Regardless of how you sell, proving value every day and showing up every day is the purest form of business.
The Rubrik IPO
Rubrik IPO’d! Let me and
be your guide.We digested their S1 and talk about how Rubrik may expand their revenue and TAM.
FP&A Tools Showcase
There are like a bajillion FP&A tools on the market today. Seriously - you practically need a spreadsheet (or an FP&A tool, lol) to track them all.
Even as someone on the “inside”, I have a hard time keeping up. I frequently pick up the Mostly Metrics Bat Phone and call my buddy Paul Barnhurst, the FP&A Guy.
Lucky for Finance pros like you and me, he’s running a FREE virtual showcase for FP&A tools.
Discover 🔝 FP&A solutions from leading providers like Aleph, Datarails, Drivetrain, Farseer, Mosaic, Modeloptic, and Runway
Gain insights 💡 from 35-minute sessions on company overviews, product demonstrations, customer success stories, and Q&A segments
It’s May 30th from 8:30 AM to 5:00 PM EST.
Attend, or your Net Income won’t roll with Retained Earnings.
Totally disagree with the Planet Fitness concept in SaaS as a long-sighted business model (ever). Fundamentally, when you have users paying for product they don't use, that means the value prop doesn't work for them. To coin a phrase, this represents "value prop debt" (sort of like tech debt). Meaning the user is receiving less than they are paying, it should be inverted. Value prop debt is not sustainable and ultimately leads to disloyal customers that begrudge your product. That's why metrics like DAU may sense because it shows a product that is relevant and needed perpetually.
Love that graphic of Finance and IT - Time To Value is the metric to watch