Poor Performance Cost SaaS Businesses an Average of $195K in 2016

But it’s actually much more.

We work closely with the technology professionals responsible for monitoring the world’s largest SaaS solutions and have an intimate understanding of how important performance is to their businesses.

To fully understand the pains and costs pertaining to performance across the SaaS industry, we worked with TechTarget, a trusted technology media company, to survey 141 SaaS IT professionals. The findings are included in the recently published 2017 State of SaaS Performance report, which concluded that SaaS providers are incurring significant financial costs and are being forced to commit significant personnel resources to ensuring consistently high SaaS service performance.

We used the data from research report to calculate the estimated cost of poor performance to the typical SaaS business in 2016. Here’s what we found:

SLA Penalties

According to the report, 26.7% of SaaS IT professionals said their organization had incurred financial penalties as a result of unmet service-level agreements (SLAs) related to SaaS application performance. Of those that did suffer financial penalties, the average cost incurred was $359,000 according to respondents. Using this data, we estimate the average SaaS business paid $95,853 in SLA penalties last year.

Cost: $95,853 in SLA penalties

Personnel Resources

Survey respondents said their teams spend an average of 32 man-hours per week monitoring, managing, and remediating performance problems. We used LinkedIn Salary to find the median salaries of a typical SaaS IT team involved in monitoring, managing, and remediating performance problems (Operations, Software Engineer, Database Admin, System Admin, and Network Engineer) and calculated the estimated cost-per-hour of each employee to be $51.89. Thirty-two man hours at $51.89 per hour results in $86,340 in FTE cost.

Cost: $86,340 in FTE cost

Customer Churn

Most survey respondents (54%) experienced an unplanned service interruption in the past year and 21% of those said it resulted in the loss of a customer relationship. That means more than 1 in 10 SaaS businesses lost at least one customer from poor performance last year alone. According to InsightSquared’s 2016 SaaS Benchmarking Analysis, the average CLV (Customer lifetime value, or the total estimated revenue contribution from an average customer over its lifetime) is $125,000. Given both analyses, we estimate the average lost CLV to SaaS businesses to be $13,750.

Cost: $13,750 in lost CLV

Why the real cost is higher

Our estimation of lost CLV accounts for a single customer, although some organizations may have lost several as a result of performance problems. Also, businesses with larger enterprise clients have considerably higher ACVs (average contract value) and might suffer losses in the millions.

Calculated cost of poor performance to SaaS businesses in 2016: $195,943

Negative brand impact on new business

Jason Lemkin, EchoSign co-founder, says software companies get ~80% of new customers from existing customers when they hit scale from referrals, brand, or word-of-mouth. Poor performance, whether it be an unplanned service interruption suffered by over half of SaaS companies last year, or degradation of service quality, compromises brand and business. While we cannot confidently estimate the cost of negative brand impact, it may be large enough to be deemed catastrophic to some. Here’s why:

1. Competition gets an edge – Outages give your competition’s sales teams the FUD they crave to instill “fear, uncertainty, and doubt” regarding your service, dropping your win rate and leaving you more susceptible to having your customers poached.
2. Community sentiment is damaged – Forrester’s B2B Buyer Journey Mapping lists “peer communities” among the top vehicles in the early buyer stages and “social networks” among the top influencers in the late stages. Negative sentiment can end a journey as it starts or deter a willing buyer, lowering the number of open and closed sales opportunities.
3. Referrals are killed – NPS or Net Promoter score is based on a simple question, “how likely is it that you would recommend our service to a friend or colleague?” A single bad experience can turn a promoter (NPS of 9 or 10, extremely likely to recommend) into a detractor (NPS<6, not likely to recommend). Lemkin estimated that 40% of new customers come from pure referrals, which carry a 37 percenter higher retention rate. Turning promoters into detractors could eliminate referrals and swell the lost CLV figure from our initial analysis.
4. Price becomes an issue – Service issues add volatility and risk to your buyers’ purchase decision, which limit your ability to charge a premium and lower your ACV.

Download the 2017 State of SaaS Performance below to read more on the data used in this article.