Last week ServiceNow released their earnings for the first quarter of 2018, ending on March 31st. Looking at the numbers at face value certainly paints the picture that they are doing well — their total revenue is up 37% year-over-year (y-o-y) and they beat their guidance by $18.86M.
The important takeaways come from the drivers behind these numbers. ServiceNow is selling far more solutions than just their core product, IT Service Management (ITSM). In fact, 16 of ServiceNow’s top 20 deals this past quarter included three or more key products. This aligns with what we are seeing, as many renewals and net-new deals include multiple products beyond ITSM, specifically some combination of IT Operations Management (ITOM), IT Business Management (ITBM) and/or Customer Service Management (CSM).
- Total revenue = $589.2M (37% increase y-o-y)
- Subscription revenue = $543.3M (40% increase y-o-y)
- Subscription billings = $638M (33% increase y-o-y)
- Professional services and other revenues = $45.9M (11% increase y-o-y)
- Total gross profit = $445.7M (76% margin)
- Subscription gross profit = $447.9M (82% margin)
- Professional Services and other gross loss = ($2.2M) (-5% margin)
To put it lightly, ServiceNow is crushing it. As part of their transformation from an IT service to an enterprise-wide platform, expansion is the key to their success. In terms of your agreement with ServiceNow, their expansion may also be the key to your success.
Products such as HR Service Delivery and CSM are a big part of ServiceNow’s growth. Customer success is another key focus area for ServiceNow and they have aligned all of their customer success teams under one group reporting to the Chief Revenue Officer, Dave Schneider.
ServiceNow, just like other major cloud SaaS vendors such as Salesforce and Workday, has identified customer success as the key to their go-forward revenue growth. It is one of their key investment initiatives and they have committed $25M in incremental spending to customer success for 2018. Customer success is measured not in terms of whether the cloud service runs properly technically, but rather whether it delivers what it was expected to deliver, and whether the customer’s expected business outcome is achieved.
What Does This Mean for You?
If you are a current customer, or you are evaluating a potential relationship with ServiceNow, it is integral to understand what’s important to them. If you don’t understand the goals of the salesperson sitting across from you at the negotiation table, you will inevitably leave agreement flexibility, potential investment opportunities, and significant dollars on the table.
If your organization is actively exploring an adoption or you are engaged in renewal discussions with ServiceNow, have they included products in their proposal you’ve never seen before or were not originally considering, such as CSM or HR Service Delivery?
This is not to say that these solutions are not valuable to your organization, but rather to show you an example of ServiceNow’s behavior that is indicative of their true goal — to get their customer base to adopt and continue to rely on multiple products. Ideally, they would have a base of customers that have adopted multiple products and the annual contract value (the coveted ACV) would be over $1M per customer. The more that you adopt and go “all-in” on ServiceNow’s products, the more leverage they have to keep you. Make sure to leverage your interest in (and more importantly, your ability to adopt) multiple products to get appropriate concessions.
Another key to your negotiation is right-sizing their expectations. Every new product, line item, package and application must be scrutinized.
- Why is this product in my order form and what are the benefits for my organization?
- How were the costs derived?
- How committed are you to customer success?
- What happens if the expected business outcomes are not met?
Not everything is as simple as a price times the number of users. You must make it clear that adoption can only occur after complete transparency has been provided, the specific value to your organization has been identified, and your contractual needs have been met.
From Q4 of last year to this past quarter, ServiceNow’s renewal rate raised from an already staggering 97% to 98%. When you couple that with increased pricing, additional solutions, and stickiness to your organization, it only becomes more important to leverage their expansion during your negotiation.