Founders You Must Be Profitable on Your Services Revenue | SaaS Metrics School | PS
Welcome to another edition of SaaS Metrics School! I’m Ben Murray, and today we're diving into an essential topic that’s been coming up a lot lately in discussions with SaaS founders – Professional Services Revenue. Professional services play a key role in scaling SaaS companies, especially those targeting mid-market or enterprise customers with complex products.
So, what exactly is professional services? This department handles the setup, configuration, onboarding, and training for your customers, ensuring they can successfully use your software. As your company grows, you'll likely have a dedicated professional services team. Early on, I’ve seen tech support, customer success, and even development teams manage these tasks, but as you scale, you’ll need to create specialized roles.
Professional services are especially crucial when your product is more complex and requires significant customer interaction for setup and onboarding. These projects can range from a day to several years, depending on the size and complexity of the implementation. But the key takeaway is that professional services is a vital function in delivering value to your customers.
Now, let’s talk about services revenue and margins. What should you aim for in terms of profitability? Generally, I recommend targeting services margins between 15-25%. This means your services revenue minus the expenses associated with your professional services team should result in a profit margin within that range. Sometimes, I’ve seen margins as high as 40-50%, but you need to be careful.
One of the age-old challenges SaaS companies face is balancing the relationship between sales and professional services. Sales teams often discount services heavily to close deals, which can hurt your services margins. For example, they might offer a customer $100,000 in ARR and $50,000 in services but discount the services portion by 30-50%. This is a problem because while ARR is essential for valuations, services revenue is a direct cash driver that helps fund your operations.
Ideally, if a customer pushes back on pricing for professional services, we should reduce the scope of the project rather than just discounting the price. Unfortunately, that doesn’t always work in practice, but it’s a good principle to follow.
From a CFO’s perspective, having discount policies in place with clear thresholds and approval levels is critical. This helps ensure that you’re not caught off guard by low-margin services deals after the fact. Early-stage SaaS companies sometimes rely on professional services as a source of cash flow, which is fine at first. However, as you scale, you need to break this reliance and focus more on your ARR.
I’ve seen many SaaS companies that don’t charge for setup, onboarding, or configuration. This is a huge missed opportunity. Not charging for these services is essentially giving away your labor for free, which can drag down your gross profit, strain your EBITDA, and create cash flow issues. If you’re a company with cash burn trying to reach profitability, this is even more important.
Even if you’re well-funded and cash flow isn’t an immediate concern, I still believe SaaS companies should make margins on their professional services. Why? Because as you scale, your professional services team will grow, and that’s a real expense with real headcount. You’ll need to fund that team, and it’s critical to ensure they operate like a self-sustaining business unit. Margins in the 15-25% range are modest but necessary to cover expenses and prevent services from becoming a drain on your financial performance.
To effectively manage your professional services margins, you need to have the correct SaaS P&L setup. It’s important to segregate your services revenue and expenses from other revenue streams to clearly understand your profitability. Without this separation, it’s easy to lose track of what’s happening financially in your professional services group.
So, my key takeaway for today’s lesson is simple: you must make margins on your services revenue. Look at your professional services team, evaluate their performance, and ensure you understand their financial profile. Treat this department like its own business unit and manage it accordingly.
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