It’s old news that the Internet has disrupted channel structure across numerous industries. So why go on about the channel now? Because, cloud computing is transforming the Internet as a channel. The evolution from Internet applications that service people (SaaS) to Internet applications that service other applications (cloud computing) transforms the Internet from a direct website channel to an indirect cloud channel and fundamentally alters the economics of the Web. This evolution has already transformed consumer advertising with the rise of syndication and social media, but the impact will not be limited to B2C communication channels. It will deepen and spread through online B2B channels with the rise of cloud computing and platform-as-a-service (PaaS).

In this post, I’ll provide some concrete examples of how the new cloud channel, or more specifically how cloud computing in the form of Web service APIs and PaaS, is driving a fresh wave of channel disruption that leaves new entrepreneurial opportunities in its wake.

Read more »

I’ll say it again: SaaS is NOT cloud computing. As the industry rushes to embrace cloud computing, too many SaaS experts and vendors are simply updating their marketing messages with cloud buzzwords. This is not enough.

When I started this blog, the biggest challenge faced by SaaS vendors was getting our heads around the new lightweight paradigm for marketing and selling an on-demand Web application versus the heavy-handed direct sales approach of traditional enterprise software.

Today, a new challenge is arising. However, this time the threat comes not from the past, but from the future. Just as SaaS vendors have found their Internet footing, cloud computing is destabilizing the very ground beneath our feet. Depending on your SaaS business, cloud computing could impact everything from application architecture to channel strategy. Or, it may not affect you at all. Either way you should know. What is your cloud computing IQ?

The Cloud is the Computer

John Gage’s prophetic remark “The Network is the Computer” beautifully highlights the difference between SaaS and cloud computing. While SaaS applications provide on-demand services to millions of users across the Internet, cloud applications provide on-demand services to millions of other applications across the Internet. The network really is the computer.

Why should this matter to SaaS experts and vendors? Two reasons. Read more »

SaaS channel partners have definitely received the short end of the stick compared to their software channel counterparts. With a few notable exceptions like Salesforce.com, Netsuite (and largest, but least recognized as SaaS, Google AdWords) there simply have not been enough customers or enough work to engender a thriving ecosystem of SaaS channel partners, at least not when compared to the sprawling extent of enterprise software channels. I think this is about to change.

Channels Always Follow the Money

There is one universal law that governs all channel management: CHANNEL PARTNERS MUST MAKE MONEY. The biggest channel mistake made by many a SaaS start-up CEO is to fall into the fantasy that SaaS channel partners are there to help your business. They are not. They are there to help themselves. And, how much money they can make boils down to a very simple formula.

SaaS channel money = SaaS channel value-add x SaaS application customers

And right here is the rub. Read more »

The annual SaaS Summit is next week in San Francisco, so if you are going and would like to meet up, send me a note at joelyork [at] chaotic-flow.com. The program is All About the Cloud and while I’m a little bummed there isn’t more SaaS-specific content, you gotta roll with the times and this year is definitely all about the cloud.

This year the SIIA has stepped up to the plate
and is clearly taking the SaaS Summit to the next level.

I’m particularly looking forward to the Public Cloud vs. Private Cloud debate to be queued up by Phil Wainewright and Jeff Kaplan and will likely weigh in with my own view afterward. I expect this debate will not go away anytime soon and we’ll see a proliferation of private cloud software vendors and services, but in the end there is no escaping the reality that private clouds are to public clouds as your intranet is to the Internet. Big difference.

You can also follow the conference chatter on Twitter under the tag #aatc

This may sound like evangelical cloud mumbo jumbo, but I’m actually alluding to the central importance of the ongoing customer relationship in the SaaS business model and its direct linkage to the financial success of a SaaS business. In the SaaS business model, the ongoing customer relationship is a continuous source of revenue, cost, business activity and risk. This contrasts sharply with traditional software where the short-term sales transaction has always taken center stage.

A traditional software vendor makes and sells perpetual license copies, whereas a SaaS business makes and sells ongoing service subscriptions. Each new SaaS customer brings a new thread of recurring revenue and cost which are woven into the larger tapestry of customers to create the total SaaS recurring revenue stream and associated SaaS cost of service. This fundamental shift in the unit of value from copies to customers turns the economics of licensed software upside down, and is still an elusive financial concept for the industry when evaluating SaaS costs, profitability, business valuation and capital efficiency.

Customers vs. Copies

In traditional licensed software, value is equated to the intellectual property of the code, and is monetized using copyrights in a fashion similar to books, music, and movies. Volume is measured in licensed copies and value is measured by the price of a license. But in the SaaS business model, volume is measured by the number of customer subscriptions and value is measured by recurring revenue. Read more »

From time to time, I come across what IMHO are really fantastic and enlightening blog posts and SaaS best practice guides that truly stand out above the rest….by authors other than Chaotic Flow . To me the value of these gems is immeasurable, because I generally have to read through a lot of crap to get to them. It’s a big Internet.

In the hope of adding more value than I alone can muster for my loyal Chaotic Flow readers and in the spirit of supporting the authors of these high quality gems by spreading their words to my small corner of the SaaS and cloud computing business community, I’m launching a new SaaS best practices community blog companion to Chaotic Flow dubbed Open Current (cute right?).

Open Current is an open repository of SaaS best practice insights and tools for executives charged with building SaaS and Cloud Computing businesses…moderated by yours truly, so ONLY THE BEST will be make it through the rigorous evaluation process (basically, I have to read it and think it’s earth-shatteringly good…but, please don’t let that deter you….help wanted, submit your favorite SaaS and cloud related posts!)

ANYONE CAN POST to Open Current and I need your help! Please comment on this post, email info[at]open-current.com, or directly submit your favorite SaaS and Cloud Computing blog posts, SaaS best practice guides, and industry research and reports for inclusion.

For the life of me, I still can’t fathom how VCs value early stage startups. I think it is one part business logic and five parts voodoo (no offense to my VC friends, but you know what I mean). However, I’m guessing most SaaS-focused VCs know this SaaS company valuation principle in their gut even if they can’t reduce it to a financial projection: SaaS Customer Lifetime Value Drives SaaS Company Value. For what is a company if not the sum of its customers?

This is the final post in a series that aims to uncover the mysteries of SaaS financial metrics from a new angle, a little mathematics. In this installment, I’ll explore the important SaaS metric of customer lifetime value (CLTV) and introduce a new SaaS financial metrics rule-of-thumb that relates SaaS CLTV to SaaS company value.

Buyer Beware: The ideas presented in this installment of the SaaS metrics series are not meant to offer methods or models for evaluating the value of any particular SaaS company, but rather to offer credence to the gut reaction above. Use the formulas herein at your own discretion. Chaotic Flow, i.e., me, accepts no liability thereof.

SaaS Metrics Rule-of-Thumb #10
SaaS Customer Lifetime Value Drives SaaS Company Value

The financially accepted method for estimating the value of company is the calculation of the discounted value of its future cash flows, or net present value. Now, I’m not saying that anyone in InternetWorld actually uses this method, but for the sake of this series on SaaS financial metrics, this is the only approach that lends itself to mathematical analysis. So, I am stuck with it.

The exact mathematical statement of SaaS Metric Rule-of-Thumb #10 above is expressed as follows (see SaaS Metrics Math Notes below for the derivation):

SaaS Company NPV = CLTV x NEW_LTV

Where CLTV is the average SaaS customer lifetime value and NEW_LTV is an analogous measure for the lifetime value number of customers that represents Read more »

I just have to say it. SaaS sales compensation is not nearly as complex and mysterious as it has been made out to be. I’ve read so many discussions on SaaS sales compensation that claim you should do this in one case and that in another case, such that by the time you finish you can’t see the forest for the trees. Since I’m in the middle of this series on SaaS metrics, it seems high time I got around to addressing this topic (which I’ve been avoiding simply because I did not want to plant yet another tree).
So, here is the scoop….

Wait! Relax. Although at first glance, lifetime value may appear to be an overly complex metric to use for sales compensation, it is always proportionate to recurring revenue. So, you simply have to replace “price” with MRR or QRR or ARR in your favorite sales compensation model and you are fine. That’s it! Now you can apply any of the various sales compensation models that you already know and love. Your particular choice should match the specific goals, products, pricing and culture of your specific business, as with any other sales compensation design challenge.

The primary principle of sales compensation is to pay the sales rep in proportion to the value of the deal, usually measured by the price of the product. The value of the deal in turn Read more »

One of the mysteries I hoped to solve when I embarked upon this little SaaS metrics mathematical journey was the reality behind “The SaaS Company Magic Number” introduced by then Omniture CEO, Josh James, and immemorialized by my pal Lars Leckie over at Hummer Winblad. In principal, this number tells you how aggressively you should be spending to build up your customer base: “the key insight is that if you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.”-Lars Leckie’s Blog

In this installment of the SaaS metrics series, I will show why this benchmark works, and introduce what IMHO is the single most important SaaS financial metric for measuring the overall health of a SaaS business. Now, being as Josh and Lars have already laid claim to “The” SaaS Magic Number, I really have no alternative but to put all humility aside and dub my latecomer SaaS metric as “Joel’s” SaaS Magic Number (After all, I did similarly snag “The” Top Ten Do’s and Don’ts of SaaS, so it’s all good.)

SaaS Metrics Rule of Thumb #9 – Joel’s SaaS Magic Number

The truth be told I feel a bit guilty about the name, because Joel’s SaaS Magic Number is neither magic, nor mine really. It’s simply the the average customer rate of return, or rather the inverse of the average customer baseline break-even, 1/BE₀, that has so consistently popped up as a driver and a constraint in the SaaS metrics rules-of-thumb.

Where “ARR” is the average recurring revenue per customer, “ACS” is the average recurring cost of service per customer, and “CAC” is the average customer acquisition cost. Customer rate of return is powerful, because it measures the economics that make a SaaS business work (or not), whereas the individual revenue and cost metrics are simply accounting figures that in isolation say little about the health of the business. Let’s recap some of the things we know about this nifty magic number from earlier SaaS metrics rules-of-thumb.

Intuitively, the long run profitability of SaaS companies requires
the recurring contribution of current customers to cover the acquisition cost of new customers,
therefore the average customer rate of return for SaaS companies
must exceed both the current customer churn rate and the new customer growth rate.

So, what is a good value for Joel’s SaaS Magic Number? Well, I don’t think anyone could argue with 1, a valiant goal, but rather optimistic. Read more »