Where’s the razor? The Limits of Up-front Fees

I’m sure you’ve heard about the genius of Gillette’s concept of giving away razors to sell razor blades. It still amazes me that when folks are pitching business ideas and they get to compare their idea to Gillette that they will pause and proudly announce that it is “…like giving away the razors to sell razor blades.” Really? I didn’t see that one coming 😉

Razor blades on Flickr by scottfeldstein

So where’s the razor / razor blade analogy with SaaS businesses? It’s upfront professional services necessary to launch a customer on an application versus the recurring usage fees. But, it’s not quite that simple. You can give away your implementation and training services to launch a new client, but I think that’s a poor idea (if your selling to enterprises). Getting a customer to pay for those services gets some skin in the game. No one wants to walk away from an implementation when you’ve sunk enough money into it that your boss will be asking about it or, worst, the board will be asking. Up-front cash is also extremely helpful in the early days when your cash flow is more of a trickle.

Fortunately, we’ve got more cash nowadays with our company so we can afford to dial in our up-front fees to suit various purposes. The first goal of up-front fees should be to make sure you’ve got fully qualified clients signed up. If a client won’t cut a check then they aren’t in. It’s much easier for the sales team to bring you signed paper if a client doesn’t start paying until they are launched and they don’t have to put out any cash up-front. However, don’t act surprised if you find a sizeable group of those clients staying in a nebulous stage where they are signed as customers but not making any motions to get launched. Imagine how many people would back out of car purchases if when they got home they could just pretend the car wasn’t there and it wouldn’t be (along with the resulting car payment). Thus, if you can get someone to sign a contract and hand over a check then you’ve got a fully qualified client on your hands. This attribute of up-front fees serves as a lower limit to the amount of up-front fees you should charge.

The second goal of up-front fees provides an upper limit to the fees and brings the ubiquitous razor into the mix. The main focus of a SaaS business should be to get recurring revenue up as quick as possible. Getting recurring revenue in the door is mainly a function of closing deals and launching those customers. I already talked about how the speed of launching customers can actually be improved by charging an up-front fee. Well, closing deals fast sometimes requires you to cut into the up-front fee. When I am given the choice between cutting an up-front fee or cutting the recurring fee then the up-front fee always goes down. This is one reason why I think an obsession over the profitability of professional services is counter-productive to a SaaS business. The poor folks on the professional services team can’t be held to profitability numbers if the CFO is constantly siding with the sales team to cut into the up-front fees that are used as the revenue measure for the professional services team. Yes, I know that you have to keep the professional services team from getting lazy and bloated, but keep in mind that up-front fees and recurring fees sum to total revenue and professional services, support services, software development, and hosting expenses sum to the total expenses. Your eye should be on quick launch cycle times and high recurring revenue.

There are razors all around. Hats off to King Camp Gillette!

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