News | DistributionWhat happened when a travel startup axed its performance business modelThis article was originally published onBy Viewpoints | July 27, 2016 The initial Rocketrip business model was performance based. The company made money when their customers used the software to book travel.The more money a Rocketrip customer saved while traveling by beating their budget, the more money Rocketrip made.NB: This is an analysis by Michael Gilroy, a venture investor at Canaan Partners.On the surface, this sounds completely aligned, but as the team dug deeper, they got to understand a very structural conflict of interest.Old Business Model: "The initial Rocketrip business model was performance based. The company made money when their customers used their software to book travel."Share this quote Conflict: Rocketrip exists to save money on traveling. The company should not be making money when its clients spend money to travel. Period. Old Business Model: "The more money a Rocketrip customer saved while traveling by beating their budget, the more money Rocketrip made."Share this quote Conflict: One of the key facets of the Rocketrip technology is its ability to create budgets. They do this by triangulating data from GDS feeds, historical travel patterns and incredibly complex corporate travel policies (read: Black Box). When a customer beat their budget by $X, the traveling employee got a % of $X, the customer/company got a %, and Rocketrip got a %. The Rocketrip team is as high integrity as it gets, but there was a clear incentive for them to show higher budgets which would, in theory, increase the revenue. In addition to this structural conflict of interest, the performance business model had some less than ideal byproducts, such as lumpy billing.Since Rocketrip was billing based on a % of savings in each month, they had little to no insight into how big of a bill they were going to get at the end of every period.CFOs hated this because it made P&L forecasting so tough, which had an impact on Rocketrip's smaller venture-backed customers that are much more cost conscious.The graph below shows the monthly billing of an actual customer that was signed up on a performance basis.Clearly, there were some things that weren’t working. While it’s always tough to make big business changes based on the performance of a small number of customers, by early 2015 Rocketrip knew that they needed to make a change.The consistency of the logo churn really painted this picture.CEO Dan Ruch made the incredibly difficult decision to switch the pricing model from performance to SaaS. Changing your model is tough.There are a lot of things that go into a change in business model beyond the website script; retrain and hire sales team, retrain and hire customer success team, update billing and accounting methods; and figure out pricing (to name a few).This isn’t a flip of a switch, it’s a full identity transformation.Rocketrip made this decision over a year ago and they’re seeing a huge payoff. Logo retention is 100% (revenue retention is much higher than that), LTV/CAC increased 4x, but most important of all, annual ROI on travel savings for customers increased almost 4x.In addition to having complete visibility into expenses (complete visibility into Rocketrip revenue isn’t a terrible thing for us either), Rocketrip SaaS customers are simply more invested in the product.Since they’re paying up-front for the service, they invest more time and effort into on-boarding which results in more budgets getting created (a KPI illustrating engagement) and as I pointed out above, much more in savings.The table below shows a comparison of some KPIs from all performance and SaaS companies on the Rocketrip platform.A few things to note: Sometimes a Rocketrip customer will book travel outside of the platform, and are therefore not incentivized to save $. This means that an increase in Annual Trips / User equals higher engagement and generally more savings, not an overall increase in travel and expense.Annual Employee Reward = the $ amount of rewards that the employee gets to pocket based on their savings. Again, directly correlated with the amount of money a Rocketrip customer saves. As you can see, the delta between a SaaS customer and a performance customer is huge.SaaS customers are almost 2x more likely to book trips via the Rocketrip platform, and they’re also saving almost 30% more during each trip. Most importantly, the gross annual savings for the company per traveler jumped from $ 1,000 to $2,500 ($319 gross savings per trip multiplied by 7.8 annual trips per traveler).With these results in hand, Rocketrip has worked hard to convert many of their early performance customers to SaaS, though a small handful have yet to make the change.For the majority who have converted, the results of switching are also very telling. Annual trips per user increased by almost 40%. At the same time, savings per trip increased due to higher engagement.Current customers that are on the performance model save $1,371 per year, but after switching to SaaS customers see that same numbers increase by 52% to $2,088.Finally, revenue and churn numbers don’t lie. The two graphs immediately below show the first 11 months selling the performance based product alongside the same for SaaS.The ramp slope and predictably of revenue on the SaaS business is incredibly more attractive. Just below that we revisit quarterly churn, this time with SaaS included — goose eggs never looked so good. :) [yes, customers are signing annual contracts so churn was inherently limited, but that’s also kind of the point]Companies frequently tell me that they’re going to shift to a SaaS business model, and in 99.9% of those cases, it doesn’t make sense.The allure of recurring revenue and SaaS multiples are sometimes blind to reason. In this case, the Rocketrip team had a very real business purpose that was ultimately best for its customers, not for Rocketrip.Additionally, it made the long-term investment to put the proper SaaS infrastructure in place ahead of time.These two are necessary pillars for any company contemplating this shift, and I’d encourage them to use the Rocketrip playbook if and when they do.NB: This is an analysis by Michael Gilroy, a venture investor at Canaan Partners. (One of Rocketrips's long-term backers).NB2: Travel startup business model image via BigStock.