Chaotic Flow by Joel York

Streamlined angles on turbulent technologies

Everybody wants their Internet startup to go viral. But, just what does going viral mean? In his book, The Tipping Point, Malcolm Gladwell spells out the mechanics of how ideas spread virally by modeling the roles of key individuals that he calls connectors, mavens and salesmen (highly recommended on the Chaotic Flow blogroll Worthy Reads). When it comes to the Internet, Josh Kopelman eruditely points out that you can’t go viral by bolting it on as a last minute marketing program. You must apply SaaS Top Ten Do #5 and build viral growth into the product.

The aspiration of this post is not to add to the complexity of these theories of viral growth, but to uncover the simplicity of viral growth through a little mathematics. This is the second post in a series on SaaS metrics that explores the impact of viral growth in SaaS using a simple heuristic model with the goal of extending the list of SaaS Metrics Rules of Thumb started in the first post in the series regarding SaaS churn.

The mechanics of viral growth vary greatly by product, customer, market, and even culture. But, the mathematics pretty much boil down to the singular idea expressed so well in the kitschy Faberge shampoo commercial from the 70’s and 80’s.

Viral growth is customer growth that is proportionate to the number of customers.

C_{n + 1} = ( 1 + g ) x C_n

All the connectors, mavens, salesmen and friends are rolled into the little “g” (for growth rate) in the formula above, which states that the number of customers in the time period n + 1 is equal to the number of customers in the time period n, plus a multiple of those same customers. You can think of g as the percentage of friends who actually told two friends who actually then went out and bought some shampoo divided by the amount of time it took them all to complete this circuit.

Like churn, viral growth scales with the number of customers.
When the viral growth rate exceeds the churn rate,
growth explodes through the churn limit.

If you read the previous SaaS metrics post on SaaS churn, you might recognize this formula, because it is identical to the churn formula only the negative churn rate -a has been replaced with the positive viral growth rate g. Thankfully, we can skip over the algebra this time and jump to the solution, simply by replacing -a with (g-a). This quick slight-of-hand gives us the formula for the number of customers in the time period n, C_n, that incorporates viral growth as well as churn.

C_n = b⁄(g-a) x ( ( 1 + g -a )ⁿ -1)

In this formula, ”b” is the baseline constant customer acquisition rate prior to either viral growth or SaaS churn kicking in. The mirror-like relationship between viral growth and SaaS churn in the formula above leads us to our next SaaS metrics rule of thumb.

SaaS Metrics Rule-of-Thumb #3 – Viral Growth Trumps SaaS Churn

The previous SaaS Metrics Rule-of-Thumb #2 claimed that in order to break through the churn limit, new customer acquisition growth must outpace churn. Because churn increases in direct proportion to the number of customers, the surest approach is to drive growth at a higher rate that also increases in proportion to the number of customers, i.e., viraly.  Moreover, investors generally expect companies to increase revenue on a percentage basis year over year.  Holding products and prices constant, this again requires viral growth of your customer base.  Viral growth can come from many sources, but I like to classify it into the following three distinct stages.

Stage 1 Viral Growth – Brute Force Sales and Marketing  (small g)

In any given industry, most companies will spend a rather fixed percentage of revenue on sales and marketing, regardless of the size of the company.  When the effectiveness of these efforts scales Read more »

This is the first post in a series on SaaS metrics where I plan to develop a variety of SaaS financial metric models using simple mathematical heuristics. In the process, I hope to highlight important relationships between key SaaS metrics and develop a short list of valuable SaaS Metrics Rules-of-Thumb.

SaaS Metrics Rule-of-Thumb #1 – SaaS Churn Kills SaaS Company Growth

Consider a SaaS company that acquires new customers at the constant rate of “b” (for bookings), and has a percentage churn rate of “a” (for attrition). The number of customers after n periods of time “C_n” is given by the following formula:

C_n+1 = b + ( 1 – a ) x C_n

C_n = b + b (1-a) + b (1-a)² + b (1-a)³ … + b(1-a)^n-2 + b(1-a)^n-1

C_n = b⁄a x ( 1 – ( 1 -a )ⁿ )

This formula can be approximated at the two extremes of early growth and maturity.

These two boundaries are shown in the chart below along with the blue curve representing total customers over time.

As a SaaS company grows, absolute churn increases with the total number of existing customers and will limit growth if new customers are not added at a faster and faster rate.

In the early days, churn is small and the customer base grows unimpeded at the customer acquisition rate. As the customer base grows, the absolute value of churn increases and soon overwhelms new customer acquistion. When the customer acquisition rate, b, equals churn, a x C, then the number of customers coming in the door is exactly equal to the number leaving. At this point further growth is impossible, limiting the total customer base size to the new customer acquisition rate divided by the percentage churn rate. This limit might be more than satisfying if you run a bootstrapped, private SaaS business as your primary means of personal income. But, it is unlikely to satisfy investors if you are a VC-backed SaaS startup, bringing us to…

Read more »

SaaS Do #8 Enable Mass Customization is a core principle for building SaaS applications. Salesforce.com, for example, has taken it to new heights with offerings such as the Force.com platform. However, do SaaS-based development platforms such as Force.com represent a fundamental shift in application development, or are they simply the SaaS equivalent of Microsoft Visual Basic for Access? How do they stack up against cloud computing platforms like Amazon Web services? This post examines the potential for competitive advantage through mass customization in cloud computing vs. SaaS.

The short answer is this…
Mass customization in cloud computing is more natural, more flexible, and offers more potential for competitive advantage than in the wildest dreams of SaaS, because cloud computing is built on Web services that are a) inherently abstracted, b) independent components and c) accessible at every layer of the technology stack.

Note: In a previous post, I claimed that the salient difference between SaaS and cloud computing is that SaaS has largely been about Internet applications used by people, whereas cloud computing is about Internet application components used by other computers. More succinctly, Websites vs. Web Services. Although everyone seems to have their own definition of all the cloud buzzwords, I’m going to be rather specific and equate them as such: Cloud = Internet, SaaS = Websites for human users, Cloud Computing = Web services for computer users. My intent is not to debate or define the industry terminology, but simply to keep track of what the heck I’m talking about here at Chaotic Flow.

The Role of Meta-data in Mass Customization
Mass customization in SaaS is achieved by converting hard-coded application functions into meta data configuration settings.  For example, multi-tenancy converts hard-coded deployments of multiple customer databases into a single database infrastructure where each customer deployment is identified by a unique customer ID. All the technical miracles that distinguish one customer’s data from another customer’s data are abstracted to this single piece of meta-data to enable data-driven functionality like Customer[1].Name = “Company X” and “Customer[2].Name = Company Y”. Voila!  Mass customization = meta data abstraction of functional capability.

More Natural – The Inherent Abstraction of Web Services
Mass customization is more natural to cloud computing vs. SaaS for one simple reason: meta-data abstraction is inherent to Web services, but it is optional for websites. SaaS applications must be carefully architected to enable mass customization at all, i.e., it is a matter of good SaaS application design discipline to employ a multi-tenant database, configurable security settings, customizable page views, etc. In contrast, every function of a Web service is inherently abstracted to meta-data in the XML inputs and outputs of the API.

The Xignite stock quote Web service can return a wide variety of information
such as the current stock price, an intraday stock chart, and financial news
that varies by the stock symbol (meta-data) supplied to it.

For example, given a particular stock symbol (meta data), the stock quote Web service above can return a wide variety of information about a company such as the current stock price, an intraday stock chart, and financial news. Let’s say Company X above is a manufacturer that uses this Web service to create a website with detailed, current financial information about the company for potential investors. Read more »

In SaaS, it’s virtually impossible to sell someone a lemon, because SaaS customers typically get to try before they buy, and they can walk at any time simply by canceling their subscription. In contrast, traditional enterprise software vendors are notorious for obscure product capabilities and pricing, because up-front purchase creates a short term financial incentive to avoid disclosing any more information than the minimum necessary to close the deal. The enterprise customer thus enters a long and intricate dance with the enterprise sales rep in order to develop the trust required to overcome the risk of signing that fat license check. When combined with the uncertainty of buying a business critical application over the Web, most SaaS startups quickly find themselves between a rock and a hard place by the need to engender an even higher level of trust than their enterprise competitor, while simultaneously having nowhere to hide their shortcomings.

A SaaS marketing strategy of complete and total business transparency
removes constraints to unleash the volume and deal size of online transactions.

So don’t! The best SaaS marketing strategy for building trust is complete and total transparency. With the right attitude, this apparent weakness can be deftly turned into a competitive strength that accelerates growth by streamlining SaaS adoption costs and risks. When you apply the SaaS marketing tactic of public online disclosure of your product capabilities, pricing, terms, service level agreements, support process, performance metrics, platform security, privacy policy, company history, customer satisfaction ratings, etc., you remove constraints to unleash the volume and deal size of online transactions by simplifying the buying process, preempting risk-related objections, and building a reputation of the highest integrity.   Moreover, you ensure high rates of customer satisfaction and success by avoiding the project failures that have historically characterized enterprise software by only signing customers that are a good fit for your service.

Ask yourself how much you spend right now on Google AdWords without ever having spoken to a sales rep. How does this compare to your own average selling price for online transactions?  Now, ask yourself why.  The answer is transparency, from company reputation to cost-per-click.

PS Trish Bertuzzi from Bridgegroup asked for specific examples, so please see the comments if you are interested in the response. And, feel free to add your own examples of SaaS vendors that are doing a good job at transparency.

More posts in the SaaS Marketing Tips Series:

• SaaS Marketing Tips – Metrics that Make a Difference
• SaaS Marketing Tips – Don’t Be CRUD on the Cloud
• SaaS Marketing Tips – Search is About People, Not Engines

The growth challenge of most SaaS vendors can be boiled down to the following simple formula:

revenue growth = price x volume = average MRR x new sales velocity

Delivering on the promise of low total cost of ownership, the price of SaaS is often an order of magnitude lower than the price of licensed enterprise software. This low price point creates enormous pressure on volume. Reaching profitability may require a new customer every week, every day or even every minute! Increasing sales velocity is the essence of the SaaS business challenge.

At each stage of the buying process, your SaaS prospect will encounter adoption costs and risks that reduce your sales velocity. I like to compare this to scaling a cliff where adoption costs are measured by the height of the cliff and adoption risks are measured by the difficulty of the climb.

How high are the adoption costs and risks that your SaaS prospects must surmount?

…Here are seven proven strategies for increasing SaaS sales velocity by reducing the adoption costs and risks more >>>

The preceding is an excerpt from a guest blog post by Chaotic Flow at Sandhill.com
Just click through for the complete post. Cheers! JY

I’m in the process of updating my blogroll, and I’d like to expand the SaaS-Cloud section. If you write a SaaS, Cloud, Startup, Sales or Marketing blog, or have some favorites that you read, besides Chaotic Flow of course, please leave a comment or send me an email. Looking for active blogs with loyal readers that deliver consistent, well thought out original content, and I’m happy to do a link exchange if your blog meets these criteria. (blogroll located at the lower right sidebar)

Cheers,
JY

It seems that everyone is jumping on the cloud bandwagon.  Cloud this, cloud that, everything cloud.  Salesforce.com has all but rebranded its entire business as cloud.  Instead of sales force automation, we now have “Sales Cloud 2” (and “Service Cloud” and “Custom Cloud” and “Collaboration Cloud” with nice little TM’s attached, so if you were thinking of using them for yourself, you can forget it!).  I suppose it might be a good thing.  Personally, I was getting pretty tired of Salesforce.com trying to “force” this brand, “force” that brand on me.  I really don’t have a problem with the cloud buzz per se.  I think it is good for the industry, because it creates excitement, momentum and funding for B2B Internet companies.  But, I am concerned that all this unbridled rebranding and repositioning is obscuring the underlying technological and economic shifts which characterize this next stage of Internet evolution.

Cover from the Pink Floyd album Obscured by Clouds.
Not really relevant, but I needed a picture.
Retweet if you’re a Pink Floyd fan!

The Web 1.0 Internet revolution, of which classic software-as-a-service is a part, arose as a result of the universal interface offered by the Web browser.  Suddenly, anyone could access any global computing resource over the Internet as long as they had this one, standard client application.  It didn’t really matter what happened on the back end, because everyone was plugging into the same application on the front end.  I like to think of this as application – user interoperability.  The economic implication of this paradigm shift was that you could now aggregate customers around the globe onto a single Internet application.  Say for example, ordering books or sales force automation.

The shift we are seeing now is driven by increased interoperability on the server side, or rather application – application interoperability.  Read more »

If you read my SaaS Sales Management Tips series, then you may have noticed a glaring absence of detail with respect to specific SaaS sales organization strategies. The reason for this conscious omission is that there is no one right strategy. There are only the strategies that are right for your specific SaaS business at a specific point in time with your specific situation, i.e., customers, products, growth, maturity, etc. However, these strategic decisions can make or break the growth and profitability of the business, because more than any others they determine the balance between maximizing revenue and minimizing acquisition cost. They are some of the toughest choices a SaaS Sales VP or CEO has to make.

The SaaS Adoption Dilemma
The third post in the SaaS Sales Tips series discusses strategies for accelerating organic growth (SaaS Success Do #3) by making it possible for your customers to buy from you even if you don’t show up for work. But, what do you do when you need revenue today and your under-educated customers and your overly-complex SaaS product just can’t seem get it together on this approach? You’ve just encountered the SaaS Adoption Dilemma, a situation that arises when your adoption costs are way too high and you must choose a strategy for lowering them. Your very unpleasant short term choices are a) forego revenue until your online marketing and support reach maturity or b) cover up the problem with people and wreck your acquisition costs (SaaS Don’t #4). If you’re measured on revenue as opposed to margin and you earned your sales stripes in enterprise software, then you will probably choose option b) without a second thought. But, you may have just made your quarterly commission while sinking your company, your stock options and your job when the business runs out of cash.

The organizational strategies of option b) typically come in two flavors: pre-sale lead reps to find, educate and qualify prospects and pre/post-sale technical services reps to ensure successful on-boarding and ongoing use of the product. While the vision should be for these activities to be 100% automated, the reality is that they rarely are in the early days and that there is a limit at maturity to the achievable degree of automation set by the inherent complexity of your product and self-serviceability of your customer. These constraints imply a steady state organization at maturity–for example a ratio of 3 sales reps to one lead rep and one technical services rep–that you are sure to overstaff in the early stages before you have fully automated adoption through online marketing and support. The danger is that you lock into this bloated, early stage organization model and create excuses for not simplifying adoption through automation, thus killing your long term profitability. A great way to stay on top of this threat is to include all ancillary staff in your calculation of sales productivity: revenue per rep, where rep includes everyone required to acquire and keep a customer, not just the sale rep.

SaaS Sales Organization Options Arranged by the Strategic Dimensions They Address

Hunting, Farming, and Other Pastimes
Conventional wisdom holds that SaaS sales organizations should be split into separate sales and account management groups that are responsible for new business and recurring business, hunters and farmers respectfully. While this is a good rule of thumb, it is not always the case. Read more »

There is always more work to do in a startup than there are people in the company or hours in the day to do it. Everyone has heard horror stories about endless twelve hour days, all nighters and death marches. Some startups fail not because the idea is bad, but because they just can’t seem to focus effectively on turning the idea into a profitable business. This is the second post in a series entitled Startup Musings that discusses managerial challenges unique to the startup executive. This post covers a few handy tips on how to make the most of the few resources you’ve got.

Choose What NOT To Do
When you’re small, and looking to get noticed in a much larger crowd, it is far better to do one thing exceptionally well, than to do a lot of things mediocrely. In a startup, this simple rule of thumb applies to the highest level of strategy all the way down to the lowest level of day-to-day activities. In a word, FOCUS! Given that there is always more to do than you possibly can, the most important organizational skill of the startup executive is the ability to look an idea square in the eye and say, “We don’t need to do that, because it won’t impact revenue, save money, or make us more competitive.” You’ll be surprised how quickly this little acid test will shorten your to-do list.

Sounds Like a Volunteer!
Getting focused is hard, but staying focused throughout the organization is even more difficult. Bringing a good idea to fruition is something like 5% strategy and 95% execution. Read more »