Lots of companies get “stuck” (or gigged) with bad software because they do not know how to measure the quality of the vendor during the sales cycle. One of the best ways to measure a software company prior to buying the application (aside from the advice in the The Practical Guide to Buying Software for Service Contractors that talks about avoiding dead-end PC apps, non-SaaS products, etc.) is by measuring the software vendor’s GIG – Growth, Innovation, and Gross margin.
These are critical measures of a quality software company, and if your vendor does not meet certain criteria, you will be in a bad situation over the relationship. The reason that they are critical is because performing well on these measures provides a software company with access to capital. Capital is critical in order to drive research and development activities that lead to competitive innovations that help you drive your business forward. Without capital (either in the form of high gross profit or investments based upon high gross profit), the software vendor will inevitably “gig” you over and over again for services charges associated with getting it right for your situation – not a sustainable business model for the vendor or for you. So what should these metrics look like?
Growth – A software company that is not growing at least 20 – 30% a year is dying. They might not die quickly (depending upon the gross margin), but they are certainly not moving forward. Faster growing competitors will ruthlessly devour their customers and slow growth will become no growth and will eventually become death. Ask your prospective vendor how many customers they are adding per week/month/year and the average annual subscription value of those customers. Ask them for how much customer churn they are experiencing – i.e. how many customers quit the platform. Validate this information the best you can, although it might be difficult. Ask for the names of the new customers and the names of the customers that quit. Check them out and make your own assessment.
Innovation – A software company that is not delivering new features every month is dying. Modern SaaS companies deliver new capability monthly (unless they are very large, and then it is often quarterly – certainly not “every couple of years”). Ask the prospective vendor for a list of new features delivered in the last six months and validate that list with customer references. Ask the references how fast the vendor moves, and their level of satisfaction with the rate and quality of new innovations. New innovations drive growth, which, when coupled with gross margin, drives access to capital, which drives growth and so on.
Gross Margin – A software company that is not delivering gross margin of at least 60% is not a software company. It is a service company, and it is dying (unless of course their goal is to be a service company, but that means the application is dying). Service companies are very different than software companies. They don’t innovate. They charge you for services. And you pay a $1 for every $1 of improvement or change in the application. With a great software company, you pay less than a penny for every $100 in innovations delivered because your subscription payments get pooled with thousands of other customer subscription payments to drive research and development which drives innovation which drives growth. Subscription margin typically runs 80 – 98% gross margin. It is the fuel for a software company. Services are simply the smallest required investment on the part of the customer to get onto the application (training, setup, etc). The blended gross margin across subscription and services needs to be above 60%, otherwise the company is dying. And you are throwing your money away when you make them your vendor.
If you have ever been “gigged” by a software vendor, you know it is not pleasant. Avoid it in the future by measuring the Growth, Innovation, and Gross margin before you buy. A big GIG is the best way to avoid getting gigged.
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