EVOLUTION OF BPR

Re: NetSuite’s numbers are not what they appear

Posted on the February 29th, 2008 under Business Risk, SaaS by Gregory Yankelovich

In this posting of his excellent blog Dennis Howlett makes an observation I would like to question:

"In the on-demand world, you have to continue to grow the customer base in real terms. It seems that in NetSuite’s case, the customer base is not growing as rapidly as they are leading us to believe. Given that Nelson stated the expected customer additions on a quarter by quarter basis are expected to be in the range 300-500, you can be sure this is a metric that will be revisited."

In my experience managing SaaS organization, I learned that functionally rich and business process supporting (read "complex") applications provide opportunity for strong subscription growth on the existing Customer base. It is very difficult to "lose" a Customer in this environment because of their high operational dependency, cost and risk they would have to assume to undertake such a move. Since NetSuite seem to be in transition to different business model from the one they started from, it is only logical that many of their early Customers, who were attracted by very different value proposition do not find the new one very compelling, and leave. Obviously for them the risk & cost equation is not compelling because they do not require such a level of process support.

Given very high cost of Customer acquisition, due to cost of sales and post-sales ramp-up activities, the subscription revenue expansion ( i.e. more users/licenses using the applications within the same organization) offer excellent profit margin alternative to chasing brand new customers at any cost. I do not advocate Sales entrenching, but balanced management of the sales pipeline has good economic reason.

Disclaimer: I have absolutely nothing to do with NetSuite, no have any investment interest in the stock.