Several years ago I was biased against Software-as-a-Service (SaaS) startups offering consulting services. The previous thinking was that it was better for the startups to focus exclusively on recurring revenue and to hand off any consulting revenue to partners. Now, I believe the top priority is to deliver an amazing solution and make customers happy. While that can be done with partners, startups are better off doing it in-house for quality control reasons during the early years. Once the startup hits the growth stage ($5 million+ in revenue), incorporating channel partners becomes more important.
Here are a few thoughts on consulting services revenue in SaaS:
- SaaS valuations multiples aren’t affected by services revenue as long as it’s less than 20% of total revenue (e.g. a startup that’s heavy on consulting revenue won’t be viewed favorably, all things equal)
- Freemium products, which are self-service to get started, still have consulting opportunities
- Most technologies need a couple generations of refinement before they’re self-service (email marketing has reached it but marketing automation hasn’t)
- Productized services are a great way to deliver customer hand-holding
- Bigger companies are even more likely to pay for services, and often expect it, as change management is hard
Consulting services, and the corresponding revenue, are commonplace in the software world, SaaS or otherwise. SaaS startups would do well to ensure customer success and incorporate consulting services as needed.
What else? What are some more thoughts on consulting services revenue in SaaS?
David Cummings on Startups 
How can startups with their limited resources and focus afford to do consulting as well? How have the companies that you have seen managed to pull this?
By offering consulting services to support technology offering or by having a separate consulting business that offers services to the tech firm to keep the financials separate except through a holding company or independent company structure. The consulting revenue maximizes short term revenue and staff members bill for this work through either retainer revenue or independent statements of work. The combination of software and services offers a premium solution to the most strategic and valuable customers, plus adds revenue to support more rapid growth.
My advice is to start with consulting revenue and font bike a product until you know the customer’s pain point and the mvp. Consulting revenue will help pay the bills in the early stages – months 12-36 without having to give up equity, but instead using bootstrap capital. Also, the consulting will reduce the need for funding and make you more aware of market demands. I have found this to be the best way to capitalize an early stage company in Atlanta. SAAS companies require too much capital and startup runway for Atlanta investors unless supported by an existing business or early stage revenue. This will also help carry you through slow periods and down economies.
A great local example of this is MailChimp which emerged. From the Rocket Science Group consulting firm consisting of Ben Chesnut and Mark Armstrong. Other examples are Satellite which emerged from Search Discovery, and IgnitionOne (formerly SearchIgnite) which emerged from 360i.
i agree with this. We at Kapost tried to avoid services for a while but have now embraced it for all the reasons you mentioned.
If you want to have good retention numbers you need to do all you can to make your customers successful and this is a primary way to do that