Leading up to the second half of 2021, ServiceNow set markers, targets, and had given a lens into how they plan to achieve their lofty goals of becoming a $10B enterprise vendor by FY24 and $15B by FY26. At the end of 2020, ServiceNow reported subscription revenues of $4.3B and had an impressive FY21 Q1 quarter bringing in subscription revenues of $1.29B. It appears that they are on their way to achieving their goals but there is still a significant gap that they believe they can close in a fairly short period of time.
From an annual contract value (ACV) perspective, ServiceNow believes there is a 5x growth opportunity for its existing customer base, and the total addressable market presents a 35x growth opportunity. Given many customers have renewals coming up at the end of 2021 (ServiceNow’s year-end) and given ServiceNow is clearly going to use these renewals to push themselves closer to their $10B revenue target as they go into FY22, here are some key takeaways from the recent Financial Analyst Day held in May, including insights into how current customers can ensure they appropriately plan for their upcoming renewals between now and FY24.
Organic Growth is Fueled by Multiple Drivers
Obtaining new customers and new logos are always a focus for enterprise vendors like ServiceNow and that will never change. Like many other cloud vendors, if not all, when ServiceNow adds a new enterprise customer they will use their land-and-expand strategy. This strategy includes cross-selling, upselling, and increasing prices at renewal. Just remember their mantra of expanding the number of customers who spend $1M+ annually.
ServiceNow continues to experience tremendous success in the cross-selling of products across their different platform solutions (i.e., IT workflows, Customer workflows, Employee workflows, and Creator workflows). Products under the IT workflow umbrella include ITSM, ITOM, or ITBM and to ServiceNow and their customers, these are the “core’ products ServiceNow has been providing since inception (although once under the ITSA Unlimited product).
In addition to the IT workflow products, ServiceNow continues to gain traction selling CSM to their customer base. CSM falls under their Customer workflow umbrella and is currently one of their fastest growing markets. CSM has a $400M ACV run rate of business and over 1,500 customers.
Another important product for ServiceNow that they are pushing into customer portfolios is HR Service Delivery (HRSD) which falls under the Employee workflow umbrella, along with the recently released Safe Workplace Suite. HRSD now has an impressive $350M ACV run rate.
ServiceNow is also aggressive pushing their security solutions, most specifically Security Operations (SecOps), which is an IT workflow product. In fact, SecOps just crossed $100M ACV.
As part of their cross-selling efforts, ServiceNow is clearly focused on their Creator workflow products and getting them included in as many deals as possible. Most specifically, they are looking to gain traction for products such IntegrationHub and App Engine.
Cross-selling leads to more products and based on all public announcements, it is clear that ServiceNow equates success with how many multi-product deals they have closed. During their Financial Analyst Day presentation, ServiceNow called out that 87% of their deals include three or more products. 65% of their deals include five or more products, and only 5% are single product deals. They also noted that in many of their $1M+ deals, key products included were ITSM Pro, CSM, SecOps, and HR.
Customers should also be aware that ServiceNow has a 99% renewal rate among those with three or more products. Therefore, if you are an enterprise customer that is committed to less than three products, you can rest assured that you will become a focus in ServiceNow’s continued growth plan as they look to increase their stickiness through cross-selling to drive more product adoption and get you over the 3+ product threshold.
ServiceNow is also focused on upselling their current customers from the standard editions into the more robust costly professional (Pro) editions/packages. Two particular products that ServiceNow is pushing include ITSM Pro and CSM Pro.
ITSM Pro continues to be a key focal point in ServiceNow’s growth plan. They have seen tremendous success in the number of customers adopting the ITSM Standard SKU. In fact, on Analyst Day, it was stated that ITSM Standard is 75% penetrated. Although ServiceNow continues to see great success in ITSM Standard, their focus remains on upselling existing customers into the ITSM Pro SKU as well as getting net new customers to adopt ITSM Pro at the outset. 20% of customers have already adopted the ITSM Pro SKU, however, ServiceNow aims to have 55% of its customer base in the Pro SKU.
Similar to what I alluded to earlier, CSM continues to be a major selling point for ServiceNow, with 30% of ServiceNow’s customer base already adopting CSM Pro. It is also important to note that in Q1, ServiceNow launched the Enterprise edition, which is the more robust, costly edition of the Pro SKU for ITSM as well as CSM. ServiceNow aims to have 20% of their customers adopt the ITSM Enterprise SKU.
They also see the ability to expand with their most recent acquisition of LightStep, which pushes ServiceNow into the app monitoring/observability space, and these AI-powered experiences will also help create new upsell opportunities.
Growing Customers with Multiple Products:
ServiceNow has been successful in expanding their product offerings within their existing customer base. This is an effective strategy that they implement because the more products that get pushed into a customer’s portfolio, the stickier they become. It also creates leverage for ServiceNow because they can hit customers with price increases if certain protections are not in place, or they may use the bargaining chip of forcing customers to keep certain products in their portfolio with the hopes of avoiding a price increase, getting adoption by promising a more seamless integration process. These tactics cause the customer to lose leverage and ultimately results in an increase in spend.
For customers that do not have the appropriate price protections in place, such as renewal-term price protections or future product price protections, expect ServiceNow to leverage the ability to hit them with an increase to their existing pricing, which in turn increases the go-forward ACV. ServiceNow, like other enterprise cloud vendors, also use their ability to increase pricing at renewal to influence the customer to add a net new product or move to a more robust edition. These customers may hear something like, “We could do something about those price increases, if you would be able to pull in the product under consideration.”
Getting More Customers to Pay $1M+ per Year:
Currently, ServiceNow has 1,093 customers who spend over $1M annually, however, they expect to reach 2,000 customers at > $1M annually by FY24. For those customers that are still under $1M per year, expect your logo/name to be on a board somewhere at ServiceNow with your sales executive plotting and planning what levers he/she can pull to get you over that important threshold.
As you can see, as part of ServiceNow’s Financial Analyst Day, they have provided an up-to-date lens into how its plans to achieve its lofty goal of becoming a $10B enterprise vendor by FY24 and of ultimately becoming a $15 billion leading enterprise cloud vendor by FY26.
Having these insights will only get you so far, though. It is imperative that you properly incorporate them into a well-thought-out and orchestrated negotiation strategy. It goes without saying that giving yourself enough time to do it correctly is also critical and will impact the likelihood of achieving the deal you should have with ServiceNow.