SaaS 102 #41 How One RaaS Company Achieved a 1 Billion USD Valuation in 3 Years
For many SaaS companies, 2022 was a year full of challenges. Because of the downturn in the overall market environment, many companies started to control their budget more tightly. As a result, the time it took to sign customers kept getting longer and longer.
But from my point of view, changes in the external environment have only made customers behave more carefully. Customer demand for SaaS products still exists, and may even be increasing.
As long as we can bring customers the business results they want, customers will be willing to pay.
This idea is also related to the business model I will write about in this article:
RaaS, or Results as a Service.
With a RaaS model, we don’t charge the customer according to the product we provide them. Instead, we charge according to the actual business results we create for the customer.
A RaaS company that rose against the trend, despite increasing compliance and cost pressures
Vendr is a company which helps businesses purchase and manage SaaS products. Vendr was founded in 2019, and became profitable in the same year. By the end of 2020, they had already raised 6 million dollars between two seed-stage funding rounds. In 2021, they raised 60 million US dollars in a Series A round. In 2022, they raised 150 million US dollars in a Series B round that brought their valuation to 1 billion US dollars.
Why is it that during a downturn across the entire industry, while most SaaS companies were struggling to grow and gain funding, this company was able to defy market trends and achieve growth?
From my point of view there are two main reasons why Vendr was able to achieve growth in a less than ideal business environment:
First, the Vendr business model fits with the compliance and cost control requirements customers have in the current environment.
Second, because pricing is set according to results, the customer’s strategy risk is reduced. This enables Vendr to sign customers faster.
Overall, 2021 was a watershed year. Before 2021, many companies talked about growth. But after 2021, more and more companies started to focus on how to survive.
With revenue being increasingly hard to come by, controlling costs while ensuring compliance has become something many companies need to do if they want to stay in business.
And what Vendr does is:
They help companies purchase suitable SaaS products for cheaper prices. Vendr charge their customers a fee of between 1–5% of the amount they spend on software.
A company with 500 employees might spend between 2 million and 3.5 million US dollars per year on software. Calculated according to the median fee charged by Vendr, a company that spends that amount would bring Vendr 50,000–87,500 US dollars in annual revenue.
Why are companies willing to pay Vendr to help them purchase and manage SaaS products?
Customers are willing to pay because Vendr guarantees that they will save them more than they cost. If they don’t, Vendr will give their customers their money back.
The screenshot above shows the Vendr pricing page. For different pricing plans, different savings guarantees are offered.
This is actually one of the distinguishing features of RaaS:
With a RaaS business model, we charge according to the actual additional value created for the customer. If we haven’t created enough value, then we don’t charge.
According to the Vendr official website, customers gain an average eightfold ROI by using their product. This means if a group of customers pay an average of 100,000 US dollars to use Vendr, then Vendr can save them an average of 800,000 US dollars in SaaS costs.
Vendr’s business model fits the requirements many companies currently have for software compliance and cost reduction. They also offer a customers savings guarantee, and make it easy for customers to see the ROI on the money they have spent on Vendr services. When all this is taken into account, Vendr’s rise in the face of current trends can be understood.
What kind of business is a RaaS model suitable for?
From my point of view, the RaaS model has very clear benefits for both companies and customers:
1. For companies, RaaS can significantly increase your market competitiveness, and put you light years ahead of your competitors. (Your competitors will still be talking about product features when they try to gain customers, but you’ll be talking about final business results. By increasing your competitiveness, you can reduce your customer acquisition cost (CAC).)
2. And for customers, the RaaS model can reduce strategy costs and risks. Customers aren’t afraid of spending money. But they are afraid of spending money and not getting the results they are looking for.
Yet the RaaS pricing model isn’t suitable for all kinds of businesses. Companies that want to use the RaaS pricing model need to have the following characteristics:
First, their product needs to have a core metric which is strongly linked to customer success, and which is easy to measure and calculate.
For example, for an eCommerce customer that wanted to carry out marketing to gain customers, that metric might be gross merchandise value (GMV). For a customer that wanted to reduce software costs, the most important key metric might be software expenses.
Only by finding that core metric can we calculate how much value the product can create for the customer, and how much, according to that created value, we should charge the customer.
Second, their product capability must be strong enough, and they must be able to create real business results for their customers.
Many SaaS companies promise a lot to their customers during the sales period. They will try to convince customers how much they can benefit by using their products.
But once the customer has made the purchase, can we really help the customer get the best use out of our product? Even if the customer does get the best use out of our product, will that use then create business value that meets, or even surpasses, the customer’s expectations? This really depends on the SaaS company’s product capabilities.
If the renewal rates for your products are high, then that demonstrates that customers can gain real value from using your products. So if you already have high renewal rates, then you can consider using a RaaS model.
But if renewal rates for your products are low, then your priority is to first increase your product capability.
Third, their company values should set helping customers succeed, and not maximizing profits, as their most important goal.
The advantage of the RaaS model is that the more business improves for your customers, the more your company’s income will increase. This is why your pricing model should be strongly correlated with your customers’ business. For more details on this, please refer to another SaaS 102 article: “How to Set Pricing Models That Help You and Customers Succeed.”
But on the other hand, what happens when a SaaS company’s customers see a downturn in their business? A SaaS company using a traditional subscription-based pricing model might be able to maintain its revenue for a few months, or even a few years (depending on contract durations.)
But for companies using the RaaS model, revenue will be immediately affected if customers don’t achieve their business goals.
This is a real test of a company’s culture and values. The RaaS model forces every person within a company to think about how they can help customers to succeed.
AfterShip’s experience with trying the RaaS model
At present, AfterShip is also trying the RaaS model with some products, for example AfterShip Personalization (product name abbreviated to “Personalization” for the rest of this article).
Personalization uses an AI algorithm to provide product recommendations to consumers on eCommerce websites. This increases average revenue per user (ARPU), and brings the merchant additional GMV.
As the Personalization pricing page shows:
1. Personalization provides a three-month free trial. This helps potential customers to get started quickly, and experience the product’s value for themselves.
2. For customers who have purchased paid plans, we charge a set subscription fee. That fee is approximately 2.5% of the estimated additional GMV we can create for our customers.
3. We provide an ROI guarantee. If the additional GMV the customer gets by using Personalization is less than the amount they have paid us in fees, then we can provide a refund.
I recommend all e-commerce brands who want to get more GMV to click on this link and try our products.
Some people may ask the following question:
Why don’t we just charge commission only, and not charge any subscription fees?
There are three main reasons for this:
1. We hope customers can make an initial investment into our product in the form of subscription fees. When customers invest resources, they then have motivation to get the best possible use out of the product.
2. We hope to use the subscription fee as a barrier to entry to filter out those customers who are not the product’s target customers. At the least, target customers for this product need to have a certain amount of orders each month.
3. Revenue from subscription fees is easier to predict. It is also better for the financial model of SaaS companies.
But no matter what kind of pricing model we use, as long as we are charging according to the actual business results we are creating for our customers and not charging according to the products we are providing, then that is RaaS.
Summary
RaaS stands for “Results as a Service.”
For companies, RaaS can increase market competitiveness and reduce CAC. For customers, it can reduce strategy risk. RaaS really can be a win-win solution for both customers and companies.
Yet the RaaS model isn’t suitable for all companies. Companies which use RaaS should have the following characteristics:
- Their product needs to have a core metric which is strongly linked to customer success, and which is easy to measure and calculate.
- Their product capability must be strong enough, and they must be able to create real business results for their customers.
- Their company values should set helping customers succeed, and not maximizing profits, as their most important goal.
There might be people who think that RaaS is just the existing SaaS model with a refund guarantee added.
But what I really want to express is:
For all of us in the business of providing services, we should only charge when we are really creating value for our customers, and our customers have received the results. That’s how we can really help our customers succeed.
The RaaS model forces each team within a company to take responsibility for the customer’s final business result. It doesn’t allow a situation where the R&D team only cares about creating the product features, and the sales and marketing teams are only focused on making sales.
If we can really effectively implement the RaaS model, then our relationship with our customers can become a cooperative partnership built on mutual success, rather than just a customer-supplier relationship.
I'm Teddy, Co-Founder & CEO of AfterShip, SaaS 102 is a series of articles where I share my experience in SaaS startups.
We are looking for great SaaS sales talent and welcome you to join us at careers.aftership.com.
(Article translated by Joseph O'Neill)