Let’s begin with some tough talk for every support leader: If your support department is not a profit center, it is an expense. Expenses will always be viewed by a business as something to manage, control, and limit, and those limits can have real implications when support leaders look for the right level of resources to provide quality support.
Transitioning to a paid, profit-making support model can be tricky, but with a little thought and some simple calculations, you can directly prove your value to the business and enjoy increased influence and impact. Here’s how to do it.
Understanding costs, profits, and margins
Imagine a child’s lemonade stand. In this example, the product is lemonade. Lemonade cannot exist without the core ingredients: lemons, sugar, and water. The cost of those essential ingredients is called “cost of goods sold” or COGS.
The difference between the money brought in by selling the lemonade (revenue) and the direct cost of the ingredients (COGS) is called gross profit.
Gross profit = revenue - cost of goods sold
Usually, businesses represent gross profit as a percentage: For every dollar of sales, how much profit is made? That percentage figure is known as gross margin.
Gross margin (%) = (gross profit / revenue) x 100
Gross margin is a vital metric, because it indicates whether the product is priced properly. A costly product that will only make a little profit is probably not worth the risk. Gross margin also makes it much easier to compare a company’s performance against its peers’. By cutting away all the other expenses (which are referred to as operating expenses or “opex”), you get at the most fundamental parts of the business — the parts that are vital and non-negotiable.
Operating expenses vs. COGS
Back at the lemonade stand, the kid running the stand decides to pay their friend to run the stand for an hour. Would that “salary” be considered COGS? No, because that friend’s work is not related to production of the product — regardless of who is doing the selling, the product still exists.
What if instead of selling lemonade the kid decides to have a “homework help” stand and pays their friend to be the tutor? In this scenario, the friend’s payment is now considered a cost of goods sold. The tutoring is the “goods” and without the tutor, there is no product.
That same logic applies to software services too. In SaaS, the product is the software subscription, not the software itself.
COGS in Software as a Service
Generally speaking, the engineers who write the code for SaaS products are not considered COGS. But the engineers who keep the cloud servers running are. The account executives and customer success managers who are selling and upselling are not. But here's the key for support leaders: Software support is without a doubt considered COGS.
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This is a blessing and a curse. Because COGS is part of the gross margin calculation, customer support expenses impact not only overall profit margin but gross margin, too. By comparison, if you have too many sales people, it has no impact on gross margin at all.
It also means that if you do not charge for support, then your gross profit and gross margin, as a department, will always be negative. This is not a great place to be if your company is looking to increase its overall gross margin — if, perhaps, an IPO is imminent or a new round of funding is on the cards.
After all, there are two ways to increase gross margin: more revenue or fewer expenses. Chopping the support team in half could easily add half a percentage point or more to the margin.
Improving gross margin by charging for support
Rather than reducing the number of support staff, you could charge customers what it costs to provide support services. In many cases, simply passing on the costs to the customer will increase their prices by less than 3% and will allow your support org to break even.
In a (proprietary) industry analysis of a cohort of SaaS business, the average gross margin for support organizations was much better than break even, at 38%. But that’s still a lot less than the typical gross margin goal of a SaaS company. In other words, we’re not shooting for the stars here. Any support organization that has a positive gross margin is going to be a nice surprise for the CFO.
It's clear that we can better position support within our businesses by being gross margin positive, but surely it will upset customers to charge them for support? It turns out that maintaining positive customer sentiment during a transition to paid support comes down to how you take your new support pricing to market.
Charging for support without upsetting customers
To transition successfully to a paid support model, you will have to answer two key questions:
What am I selling?
What do I charge for it?
There's no best way to package your support services. Factors such as your current channels, your geographic coverage, existing contractual commitments, and the specific demands of customers in your own business all play a role. However, you'll need to decide on a basic model from the following list:
Everyone pays for support and the services are all the same.
You offer a free tier and one or more paid tiers.
You offer multiple tiers and they all have a fee.
One challenge here is that option two carries some risk: If you make the free tier too attractive, nobody will want to pay for support. Access to a live person, either via chat or tickets, should generally not be part of a free tier, or you’ll find that too many customers pick the free option.
So what goes into the tiers? Your specific situation will direct your choice, but here are some considerations:
If you offer three support channels, put your lowest cost channel in the lowest support tier, add the medium-cost channel in the middle tier, and put the most expensive channel in the top tier.
If you have agents geographically distributed, you could offer 8-, 12-, and 24-hour coverage in a three-tier model.
Offer stronger Service Level Agreement commitments for higher tiers of support. One option is to provide a wide enough spread across tiers so that at the low end you're measuring support response in terms of "day" and at the high end in terms of "minutes."
Consider entitlements like the number of users authorized to open support cases, assigning of a particular agent, specific value-add services, custom dashboards, and more. The only limit is your imagination.
Remember: It will be much easier to move existing free-support customers onto a paid support plan if you’re offering them new entitlements and channels. That way they’re getting something extra for their money.
The next obvious question is how much money, exactly, should that be?
Pricing your support offerings
You have two main choices for pricing your paid support tiers. Both will involve figuring out what it actually costs to support your customers. You can start simple: Take your total annual expenses (payroll, benefits, tools) and divide by the number of customers.
That will give you the minimum amount you can charge per customer and still have a positive gross margin. Remember that if you opt to have a free tier, you'll be passing more costs onto the paid tier customers to make up for the negative margin in the free tier.
You can now choose to either pick a flat fee for each tier or a percentage of subscription revenue (with a minimum floor). If you work with your finance team, deal desk, or pricing team, they can help identify a target gross margin for each offering.
Percentage-based pricing usually aligns better with each customer’s spending power. Once you cover your margins, why not charge more for the larger customers? Ultimately, you'll want to work with your sales and customer success leaders to determine how high you can go with pricing.
Rolling out paid support
Finally, you need to get the pricing into the wild. Start by only charging your new customers. Work with your sales team to inform them of the pricing and of any new support offerings that will help them make the sale (and increase their average deal size).
Once you have that process working smoothly, it is time to address your existing customer base. This is where the bulk of the economic benefit to the business will come from. Your rollout plan will depend on whether you're adding a paid tier on top of the existing free tier or if you're moving to a 100% paid model. The latter is much harder and needs a lot of care.
You might need a 6 or twelve month runway, with lots of messaging and lots of flexibility on deal structure and discounting. Build effective enablement materials, provide plenty of opportunity for your renewal team to ask questions and understand the “why,” and be available to support them in what might end up being tough conversations.
Once the pricing has been deployed, make sure to track the impact on the business and iterate when needed. You might not get it right the first time, so have the humility and growth mindset to make course corrections if need be.
Nothing shows value like real dollars
Ultimately, paid support is an exercise in taking a positive role in the growth of revenue while continuing to provide the high level of service your customers have come to expect. Generally speaking, customers are happy to pay for quality.
Up until now, you’ve provided that quality. Now is the time to simply align yourself with industry best practices that say that the quality has real monetary value.
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