are services destroying your valuation? 😬

While traditional businesses are valued on aspects like revenue, physical assets and historical performance, SaaS companies command premium valuations for one reason: high-margin recurring revenue. It's the financial backbone of a SaaS business.

You know what's not sexy to a SaaS business? One-time, project-based revenue.

And that's exactly the reason why many companies should rethink how they deliver professional services to your customers.

I was talking to the CRO of a fast-growing SaaS company this week. He said, in essence, that if he were to hire anyone in services this year, he'd hire people to manage partner projects, not to do the projects themselves for customers.

His focus? Building partner enablement, not expanding his internal services team.

Does he not want the additional revenue? Actually, no.

He's forgoing the addition revenue because he understands two fundamental principles: 1) services dilute software profit margins and 2) ecosystems scale customer success in the long run.

Let's break it down.

A healthy SaaS company typically operates with software gross margins in the 75-85% range. That's the beauty of digital products — the cost of delivering another copy of your software is minimal.

But services? Even a well-run services business operates at around 20-40%. The headcount component becomes a major cost factor that drags down the margin.

So for every dollar of one-time services revenue, it drags down your overall profitability. And that has a direct impact on your valuation.

Consider this stark comparison: my alma mater, Blackbaud, a company that has traditionally been reliant on services revenue, has a market cap of roughly 3x its revenue. By contrast, ServiceNow, a SaaS powerhouse with a thriving partner ecosystem, boasts a market cap closer to 20x its revenue.

(To be fair, there are other structural differences in the addressable markets for both of these companies that drive some of the difference here, but I digress…)

The difference? ServiceNow understands that its core competency is building and selling software. They leverage a vast network of partners — from individual enthusiasts and independent consultants to established service businesses — to handle the implementation, customization, and ongoing services their customers need.

And it's not just about profitable efficient growth. It's about customer outcomes at scale.

Companies like Salesforce (with 12,000 partners), HubSpot (with 8,000), ServiceNow (with 2,200), and Cloudflare (with 1,600) have built massive partner ecosystems because they recognize that partners often bring specialized industry experience and knowledge of related systems that internal SaaS teams simply can't match.

These ecosystems have become cottage industries unto themselves, creating a win-win-win scenario:

• Win for the Customer: Better outcomes, faster implementation, and access to specialized expertise.

• Win for the SaaS Company: Higher profit margins, improved valuation, and faster, more sustainable scaling.

• Win for the Partner: The opportunity to build a thriving business around a successful SaaS platform.

The reality is, most SaaS companies aren't built to run high-margin services organizations. Your expertise is in software development, sales, and marketing. Trying to scale a large, complex services operation internally is often inefficient, distracting, and detrimental to your valuation.

Are you still trying to scale your services team linearly with your customer growth? Or are you strategically leveraging partners to unlock the true potential of your SaaS business?

Are you building an ecosystem?

🤘