Chaotic Flow

Streamlined angles on turbulent technologies

Being a huge fan of both open source and software as a service, I am often frustrated by the level of tension and debate that occurs between these two communities, because the disputes are pure demagoguery.  At their core, both delivery models are natural market responses to a very simple and disruptive economic force:  the devaluation and commoditization of software over time.

The economics are simple.  Once created, software is easily duplicated, and the software of the past becomes the building blocks of the software of the future.  Thus, the commodity software of the past is rapidly devalued to zero.  Open Source chooses to ride this force by separating out the free component through community ownership and development; it is a fundamentally socialist approach.  SaaS absorbs this cost through vertical integration, and strives to create new value and differentiation by delivering a holistic product; it is a fundamentally capitalist approach.  However, the economic goal of both delivery models is the same:  more stuff for all of us at lower cost.  My frustration arises from the fact that the communities do not seem to recognize that they have this single admirable end in mind, they only differ in their means.

While many open source developers would like to believe there is some ideological heroism in their efforts, the truth is that they are simply solving an economic problem for a very specific market segment, and having fun along the way.  Nothing wrong with that!  But, only companies with strong IT capability can participate in open source development and overcome the market transaction costs implied by this do-it-yourself assembly of a complete, high value system that supports their business.  Companies that create value for their customers far outside of IT, are much better served by SaaS.  No matter how you slice it:  THERE IS NO VALUE IN THE SOFTWARE OF THE PAST COMPONENT.  You only achieve value when you remix it with more current technology and services.  It’s a mashup world—get with it!

In an earlier post, I listed my top three sure-fire marketing tactics that work for on demand software.
Here are my top three that don’t…

1. Extensive offline marketing
2. Chasing elephants
3. Premature channel development

Offline marketing is almost always expensive, and as an on-demand service your revenue/user is usually far  too low to cover it.  Second, if a prospect is not online, he or she is missing a very fundamental qualification criterion for signing up for a Web application—they aren’t online!  I say extensive, because sometimes there are focused events or offline promotions that can provide a real return, or have ancillary benefits such as showing industry presence and credibility.  It really depends on your industry, product and target prospects.  But, they are few and far between. 

Chasing elephants is by far the biggest mistake an on-demand business can make.  You find a prospect that has cash. But there are missing features, a long sales cycle and special legal requirements, etc.  When you need cash this direction is tempting.  But, one too many stumbles away from your core strategy and you wake up to find that you are a ten customer consulting business constrained by the special needs of a few powerful customers—not a rapidly growing web application.

Finally, no one wants to resell your product or service either as an affiliate or a full scale VAR, unless they can make money at it.  Until YOU are making money at it, you will have a hard time convincing a channel partner to invest precious time and resources building specific capacity to do so.  It may be that your ultimate distribution model is fundamentally channel-based, by you almost always need to kick-start revenue yourself to prove your potential.  And, you will need to share the unique aspects of marketing and selling your product with your channel partners—which you can’t do if you haven’t been through it yourself.

What works?  Here are my top three…

1. Search (SEO and SEM)
2. Public relations
3. Easy, online trial

IMHO, these three are the proven blocking and tackling marketing activities to get an on demand business off the ground.  These three are fundamental and should be done first, because they all have marketing leverage beyond the individual activity.  SEO/SEM works because your customers are already looking for you–online.  You are just facilitating the buying process. 

PR works, because it is fundamentally viral and cheap.  And, I don’t mean just doing press releases or press relations, because the traditional online media world has blurred to such a degree with bloggers, social networks, etc.  I define PR as simply having a strong story to tell, and finding viral free ways to tell it.  Also, credibility is critical.  In the end, most marketers don’t really do most of the marketing of their products.  Ecstatic customers do it for them.  And, opinion leaders reinforce your trend to put you over the top.  

Finally, there is trial.   Even if you don’t a have complete self-service on-demand offering up and running, trial will allow you to apply resources at the highest value stage of the purchase process—right before close.  If you get them to trial, don’t let them get away.  Then, use your experiences to learn what you need to do to automate the trial to close to deployment process.

In my next post on the topic, I’ll give my top three that don’t work.

I recently did an interview on vator.tv for ivybrain.com that focused on marketing tips for entrepreneurs in on-demand software (soon to be posted). This is the first in a series of posts that summarize the ideas covered….enjoy!

1. Create and deliver a focused, high value product. Don’t try to solve every problem; keep the value proposition simple.
2. Choose a big market, so you can choose your customers. Don’t chase customers that need features you don’t have or would naturally sign up later in the adoption cycle. Ultimately, your value proposition has to draw customers to you…and the integrated product has to allow them to sign up and get going on their own.
3. Strive for 100% self service acquisition/deployment/maintenance and work rigorously to eliminate obstacles that require and hand-holding. Put people in place initially to do the hand-holding, e.g., education, sales, service, support…but recognize that while their tactical function may be to close a sale, the more important strategic function is learning. These folks are a direct line to your prospects that provide critical feedback to get the product just right and understand the details of what is stalling growth. Then, make it your company’s habit to use this knowledge to eliminate these obstacles through automation.
4. Develop online marketing prowess and creative PR. SEO, SEM, email marketing, and affiliate marketing are commodity skills; you must be a master at these (or outsource to a master) just to be competitive, and then you should be good and creative at more cutting edge marketing vehicles like blogging, social media, viral media and syndication. Plus, don’t underestimate that one incredibly great marketing or PR idea while mastering the basics…often that one creative blockbuster, viral marketing or PR idea can generate 10X demand. But, you can’t count on that long shot…so mastering the basics is a given.
5. Flexibility. You won’t get it right out the gate…so all of the above should be designed to create a flexible, rapid response to quickly zero in on your sweet spot, accelerate adoption, and grow rapidly. Expect failure. Learn from it. Move on.

It’s been a while since I have written a blog entry, but I am happy to say that it is for a good reason. I recently joined Conduit, an exciting B2B2C Internet startup as VP Marketing. The company has some incredibly cool things going on grounded in cutting edge, on-demand website syndication technology, so I have no doubt my experiences here will provide great inspiration for future blogging. We just closed a round of financing with Benchmark Capital, led by Michael Eisenberg and we are ramping up for some serious growth, marquee customer deals, and new product introductions (read: I am hiring in marketing…resume’s welcome) Our website has just been updated with the next-level of evolution in the company’s positioning (not the least of why I have been on a blogging hiatus). Finally, I am personally enjoying working with a fantastic, talented team and working at Conduit’s dual-country headquarters in Silicon Valley and Tel Aviv which keeps me commuting between two of the most beautiful cities in the world.

What’s not to like. Sababa!

Here is a picture I find myself drawing often. It is closely related my last B2B SaaS post regarding old enterprise habits, but it is actually much more general. Most Web application / Software-as-a-Service companies will find themselves spending up to 50% of revenue on sales and marketing. But, how much should you spend on sales vs. marketing. And, how tightly integrated do these two functions need to be? Of course it is common wisdom that sales and marketing need to work together, but this need is acute for most Software-as-a-Service companies. In enterprise software, where the price point is $100-500K per transaction, the marketing organization is only loosely coupled to revenue through lead generation, messaging /collateral / website, and generating awareness through events and PR. Contrast this with a consumer application, where the tables are turned completely and what sales does exist typically takes the form of partnering and business development—which may be revenue generating, but is not aimed at closing revenue directly, i.e., getting more users.

Most B2B SaaS offerings and B2B2C Web applications (e.g., email marketing, Gadget platforms, online survey research, customer and channel support, etc.) tend to fall right in the middle of this graph. One reason for this is subscription/transaction- based pricing (as opposed to a three year, 1000 user enterprise agreement), as well as the general expectation of a Web or SaaS application to cost significantly less than software. The result is that SaaS companies must continually strive for reduced selling costs, increased marketing efficiency and tighter sales-marketing integration to create a revenue-generating machine—often by leveraging technology to automate as much of the sales cycle as possible from awareness to trial to acquisition and even through to support and add-on selling.

The Internet sector is rife with companies that seem to have great product ideas, but can’t seem to monetize their offering. Strategically, this is almost embarrassing. I honestly can’t think of another industry that has this issue (feel free to clue me in if you know of one). While most small businesses and startups fail to ultimately turn a profit, Internet startups seem to stand alone in not having a clue as to what they intend to sell in the first place. It seems the only exit strategy for these startups is to be bought by a larger, cash rich company that offers something others are actually willing to pay for, like Microsoft, Google or Amazon, where they become a permanently free service or are absorbed into some larger tech stack as simply another feature. At any rate, because this blog is about strategy, many of the posts can be very critical. So, in the interest of balancing things out with a little optimism, I’ve decided to start a series called “Joel’s Picks” The companies I plan to highlight in this series are those that IMHO have real substance (read not hype) to their business model and exemplify sound business strategy and execution (and only time will tell if my judgment is sound).

LinkedIn recently announced it’s first baby step into the open social network platform game, and received no end of criticismin and around the social network futurist blogosphere. So, I’d like to go on the record as saying that while this criticism may be accurate from a technology evolution viewpoint, it is absolutely wrong from a business strategy point of view. LinkedIn is right to move slowly, because, a) their target audience is not using it for entertainment and doesn’t need all the newest gadgets now, b) isn’t on the bleeding edge of Web tech sophistication, and c) will not be as forgiving as Facebook’s if they screw up (and they could still screw up…social networking trust and privacy are risky business.)

So, why LinkedIn? Find me another social network that has a real chance right now of becoming huge based on subscription revenue alone. When I think of the recent trials and tribulations of Facebook, my first reaction is that “you get what you pay for.” While I know that most users do not pay the subscription fee on LinkedIn, this does not damper my optimism. The fact that some do exemplifies the value of the service. I can remember when Salesforce.com was free for licenses of 5 users or less; it isn’t anymore, in fact the license price is higher across the board. Too many social networks are going after target markets that simply don’t pay. Or at least they think they won’t. Haven’t these guys ever heard of market segmentation??!! I am talking to you Facebook.. My main point here is that it is strategically important to put a pricing structure in place that maintains a very low barrier to adoption, but does not preclude future revenue, i.e., users expect that once Facebook is free, it should always be free.

Rather than go on and on…here is a list of some of the things I really like about LinkedIn.

• A HUGE target market that truly leverages the inherent global reach of SaaS.
• A segmented, balanced revenue portfolio based on recruiter posting, limited advertising, and user subscriptions.
• Solves a problem for users, and it not simply entertainment that is used to capture users to solve the problems of marketers (like me).
• 2 and 3 imply that LinkedIn has all of its stakeholders coming and going and they LIKE it.
• Balanced revenue, plus a professional target audience encourages a proactive approach to privacy and trust, limited risk and liability.
• Social relationships/processes mirror their real-world counterparts, i.e., recruiting, networking, getting and giving advice, etc. These processes are enabled, not distorted by the technology or the business model.
• SIMPLICITY in design ala Google

So, please LinkedIn, don’t prove me wrong.

The software/Web/Internet industry is a tight community and SaaS vendors routinely recruit sales, marketing and engineering executives because they possess unique experience, knowledge and relationships within an industry sector, e.g., ERP, CRM, BI, retail, supply chain, etc. While this may often be a valid decision, every SaaS CEO should be aware of its pitfalls: old enterprise habits die hard. Knowledge and experience with the high volume, low cost approaches required to build a successful SaaS business, e.g., telesales, Web marketing and multi-tenant architecture, often hold greater importance, depending on the skills and experiences of the overall management team.

The wildly successful revenue model of enterprise software was built on solution selling, feature dominance, customization, and proprietary IP—all of which were expensive, because they were expected to delivery competitive advantage to the customer. Whether or not this was always the case may be debatable, but it is clearly not the case in B2B SaaS. The value proposition of SaaS is the exact opposite, which is why it poses a threat to enterprise companies. SaaS delivered under the value proposition of outsourcing non-strategic, commodity capabilities at the lowest possible cost. This is the essential conflict of the innovators dilemma in SaaS, and why you don’t see a lot of enterprise software companies jumping on the SaaS bandwagon.

When breakeven looks like it is years away, it can become incredibly difficult for managers to exercise the required discipline to avoid undermining the company’s long term strategy and inherent cost advantage. In the short run, it can quite sensible to pursue that six figure deal with unique functional requirements (after all the customer only needs this one thing!) , even if the sales cycle will take a little longer and the roadmap needs to be adjusted for this one customer. The enticement of this low hanging fruit can be further complicated by the strategic needs of the company. But, if these activities undermine the company’s attention and effort in building a low cost, high volume customer acquisition and product delivery machine, that million dollars in revenue will soon be overshadowed by multiple millions of dollars squandered in wasted effort.

As the classic R&B song by the Persuaders goes, “It’s a thin line between love and hate.” The Annie Lennox remake of this is one of my favorites from her album Medusa. But, this post is not about my musical tastes. It is about the thin line that major brands are walking as they seek to deepen their interaction with consumers through social computing and other highly interactive Web 2.0 technologies. As anyone familiar with the song can tell you: the thin line is quite simply TRUST. Trust is created through personal investment, interaction and disclosure, the very things that these technologies enable. When trust is violated in a relationship, the deeper the relationship, the deeper the anger. So, the lesson of Facebook’s Beacon stumble is one that every Web 2.0 company should pay close attention to—the trust ante has been raised. Just as Web 1.0 privacy and trust issues sprung from Web 1.0 technologies, such as cookies and tracking a user’s Web surfing behavior, Web 2.0 issues will center on the much more delicate and private matters of personal profile information, social relationships and heretofore private interactions among friends, colleagues, acquaintances, customers and strangers. In Web 1.0, the solution was to never track a specific user’s identity for marketing purposes and to implement permission based marketing schemes. Mark Zuckerburg’s recent apology for making Beacon opt out by default, highlights the fact that in the frenzy of Web 2.0 even the basic Web 1.0 lessons have been forgotten. When in reality, we need stronger rules of the game to safeguard identity at the network and associated behavioral level.

Most of the excitement around Web 2.0 and social networking to date has centered on the unbelievable advertising opportunities it will create by directly leveraging word-of-mouth and micro-targeting. In recent posts, I’ve argued that this is fundamentally bartering a consumer’s privacy (because the service itself is free). I’d like to propose here that there is a better way. The safest and most effective way for a company to leverage Web 2.0 and social computing is by applying their inherent strengths of interactivity and personalization to establish trusted relationships with new customers and strengthen relationships with current ones—not manipulate them and weaken trust in their brands. For example, real-world word of mouth is driven by referrals. Online social networks can easily facilitate this process without disclosing identity or altering it in a fashion that is unnatural to consumers. Let’s take a look at Facebook’s Beacon in this regard. Below is the text from the Facebook site describing the benefits and details of Beacon for businesses using Facebook (clearly the pre-apology policy…but it is still up in this form as of today…need to get those departments in sync Facebook!):

“Simply determine which user actions you would like publish to Facebook and add a few lines of code to your web page. Facebook Beacon actions include purchasing a product, signing up for a service, adding an item to a wish list, and more. When a user performs the action, they will be alerted that your website is sending a story to their profile and have a chance to opt out. No additional user action is needed for the story to be published on Facebook, and users remain in control of their information.”

While Facebook has fixed the “opt out” problem (what were they thinking??!!), my personal feeling is that the service is still not a natural process for consumers in that you usually decide to recommend a service or product after you have tried it, not when you buy it. A much more natural process, would be to ask the user if he or she minds if the business checks in with them in a few days to see what they think. Maybe let them rate the product, and if the rating is good, ask them if they would like to recommend it to their friends. For another angle, compare Facebook Beacon to Amazon’s reviews. Amazon has it right, because it is helping consumers and publishers in their common interests, not one at the expense of the other.