If you own, manage or are considering starting a software-as-a-service business, then you can’t afford NOT to check out these fundamental rules of the game and cutting-edge tips for success.
Hot off the presses!
Enjoy,
JY
Because B2B SaaS roots are in enterprise or office software which have traditionally been delivered on a CD, i.e., like any offline commodity that is physically seperate from the business itself, the opportunity to change the game by building your business into the product is one of the most overlooked by SaaS vendors.
When you move your software product online into a software-as-a-service delivery model it enables you to connect the product directly to your customers on the outbound side and directly to your internal systems on the inbound side. I’ll dig deeper into how you can leverage this for your customers to create disruptive economic shifts in the market in another post, but for now I want to focus on how this enables you to reengineer your fundamental business processes by building them out from your product.
Perhaps the best role model for building the business into the product is one of the earliest Internet success stories: Amazon.com. Although most of what you can buy at Amazon is a physical product, the fact that it gets shipped to you is almost an afterthought–you could achieve the same purpose by ordering through an offline catalog. What you are really buying when you shop at Amazon is convenience and credibility, and these capabilities are fundamentally features of Amazon’s SaaS application. It includes affiliate referrals, product search, offers, recommendations, one-click checkout, order management, support and nurturing. More specifically, it automates the buying process. Amazon’s affiliate programs spread points of entry (links!) all over the Web, and when you reach the Amazon website you are naturally led through every stage of the purchase cycle. These are the automated business processes you want to build out from your SaaS product.
Chances are that your business is different from Amazon’s in some fundamental ways, e.g., target customers, product complexity, community involvement, etc. and you will need to tailor your approach to your market. But, I’ll bet if you study this success story and fully understand the implications, you will find analogies that you can apply to your business. For example, crowd-sourcing has become a very popular approach to international translations, but Amazon was crowd-sourcing automation of the decision stage of the book purchase process10 years ago by encouraging customers to create reviews and top 10 lists.
For more on how to build your business into the product, check out…
Quiz: What is the most successful enterprise SaaS application to date?
Hint: It’s not Salesforce.com
It is ironic, but the unfortunate fact is that most SaaS vendors see the Web as little more than the browser through which they deliver an enterprise software application. In fact, the phrase itself software-as-a-service, creates a subtle bias toward viewing the business as simply a piece of traditional software delivered on-demand over a network. Connecting an application to the Web unleashes disruptive economic forces that go far beyond multi-tenant architecture and reduced TCO. It enables viral organic growth, low cost customer acquisition, business productivity gains across-the-firewall, and new monetization models to augment simple license subscription. That is why the most creative SaaS vendors are realizing that the real opportunities for business innovation lie outside the firewall and are transforming their SaaS offerings into Web 2.0 businesses.
Below is a list of principles that can help you transform your low-cost, commodity SaaS into a high-value Web-based business.
Reach out and become a hub on the Web
Build the business into the product
Reach across the firewall to unleash disruptive economic forces
Monetize creatively
After I’ve had a chance to elaborate on each of these ideas in a separate post, I’ll provide the answer to my somewhat trick question above. However, I’m hoping that the solution will emerge as obvious.
If you are a software-as-a-service (SaaS) provider and deliver your product over the Web, then by definition you are Web publisher, so act like one. Web publishers, whether their business is news, games, e-commerce, or a simple blog, are obsessed with increasing site traffic and converting it to registered users. On the Web, there is one and only one source of site traffic: links.
Links from search results, links from search ads, links from banner ads, links from websites, links from blogs, links from feeds, links from widgets, links from bookmarks, links from toolbars–links, links, links. Becoming a hub on the Web means creating a nexus of incoming, high quality links to your website from sources that are relevant to your business, and most importantly relevant to your prospects’ needs. There is nothing else online as cheap or as effective in generating demand.
Links come in two categories: paid/transient and free/permanent. The more free links you have, the fewer paid links you need. Most SaaS vendors immediately jump on the SEM bandwagon to get paid search traffic. They also apply SEO techniques to optimize keywords on their websites, but only obscure keywords are useful without high PageRank, and high PageRank requires (that’s right, you guessed it!) links.
What is your link strategy? Links opportunities abound and arise naturally from your online business, but you have to be conscious of their critical improtance to captialize on them. For example, who is part of your potential online community e.g., customers, partners, investors, employees, colleagues, expert blogs, social networks, events, associations, directories, etc. and have you engaged them in a manner that generates online content and discussion that results in links? Do your traditional online marketing and PR activities generate tons of effective links?
Clicking on a link is often the first step in the online sales cycle. Understanding and improving your Web presence is as important as (more important if you are a startup) improving your sales pipeline close ratios, because you have to get the leads in order to close them. So, are you measuring your Web visibility as acurately as your pipeline? Can you identify a qualified link as effectively as you can identify a qualified lead? Do you have a concrete plan to get more links and increase your PageRank? If not, it is almost certain that the ROI on spending your marketing dollars to increase your organic web presence will be much higher than increasing your budget for SEM or banner ads.
This is post number 3 in a series of 5 on transforming SaaS for Web 2.0 success.
Succeeding in SaaS requires a fundamental shift in sales and marketing mindset from push to pull revenue generation. Lower revenue per transaction, and even lower first year subscription revenue creates intense pressure to decrease average customer acquisition cost. It is not possible to drive revenue through the high-cost offline marketing and sales approach that is well known to enterprise software.
This shift entails an unpleasant loss of control over the sales process and forces SaaS companies to focus more keenly on facilitating purchase than on driving sales. If this sounds like semantics, consider how you personally develop interest in and buy products on the Web. Are you more likely to respond to an unsolicited email and attend a Webinar or click on a link in a blog post? How often do you click on sponsored search links versus organic results? Your prospects don’t behave any differently. You as the customer are in control, and there is no marketer or salesperson present to wrestle that control away from you.
With the customer firmly in control, the role of sales and marketing shifts from chemist to catalyst—from driving revenue to accelerating organic growth. Accelerating organic growth entails stimulating demand and facilitating the purchase process by understanding and leveraging a prospects natural buying behavior. The goal is to eliminate purchase barriers and to respond on-demand with whatever information or motivation is necessary to encourage the prospect to take the next step in the buying process.
Being at the right place at the right time requires up-front investment in so-called free marketing tactics, e.g., SEO, public relations, blogging, social marketing, video, automated nurturing, newsletters, case studies, interactive demos, product trial, etc., so that content is ready and waiting to be served up when needed. In reality these activities are not free; they are simply free at the time of use, shifting the economics of revenue generation from direct, variable sales and marketing costs to indirect, fixed costs. In fact, this characteristic provides a convenient financial definition of organic growth:
Organic Growth = New Revenue generated with (near) Zero Marginal Acquisition Cost
No advertising, no outbound marketing campaigns, no sales calls, no technical inquiries, and no manual order processing. This viewpoint clearly highlights the primary benefit of accelerating organic growth: leverage. Increasing organic revenue decreases the average acquisition cost per deal and increases overall profitability. Moreover, accelerating organic growth and lowering marginal acquisition cost systematically expands available market potential by enabling the business to sell to the outer reaches of the long tail.
SaaS business owners and managers should continually ask themselves the simple question: How can I get more prospects to find my product, evaluate my product and buy my product over the Web even if no one comes to work in the morning.
This is post number 2 in a series of 5 on transforming SaaS for Web 2.0 success.
The following is an excerpt from a guest post I wrote for SaaSBlogs
Most SaaS businesses embrace the idea that Web-based delivery and a multi-tenant architecture create economies-of-scale and lower TCO. Hence, they price their annual subscriptions at 1/5 to 1/20 the cost of an enterprise license. However, these savings only occur in R&D and IT infrastructure. Achieving a stable, profitable long term cost structure requires proportionate expense reductions in sales, marketing and support operations.…But how?
In many ways, marketing a software-as-a-service (SaaS) application is more like marketing packaged software, computer hardware or consumer electronics than enterprise software. Failure to make this paradigm shift has meant the death of many a SaaS startup. The reasons are simple. First and foremost, enterprise software is usually delivered in an unfinished state. The so-called product is delivered and then configured, customized, integrated and QA-ed onsite to deliver a unique solution–a product of one. This is more akin to the artisan products of a cottage industry than to manufactured commodities.
The fact that SaaS is a commodity delivered via the Web entails a shift in business model that affects everything from product design to organization design. Below is a summary of characteristics that contrast the traditional enterprise software business model to the new SaaS business model.
In the world of SaaS multi-tenant architectures and bargain basement prices, the entire business model hinges on having a single commodity sold at high volumes. Moreover, SaaS is marketed and delivered primarily within a single channel, the Internet. This creates incredibly tight coupling between the product, business strategy and operations. In particular, there is an unusual itermingling of the product itself with the other 3P’s of marketing: price, promotion and place. For example, a change in pricing model will usually entail simultaneous changes to both your Web ordering code and your license management code. And, search engine optimization (SEO) is likely to impact how your product is designed and delivered over the Web, not just your marketing website and landing pages.
I was recently asked the question of what is the ideal cost structure for an on-demand software business. There are very few benchmarks out there of successful mature SaaS companies, so I’d like to propose the following as the cost structure to which on-demand software companies should aspire. Whether you can actually achieve it in your business is likely to be a result of market demands, technology and sadly enough company culture (as many SaaS business are still saddled with enterprise habits)
Below is what I would characterize as the typical enterprise software company cost structure. This model is no accident, and it has proved to be immensely profitable over the last 20 years (just ask Oracle and Microsoft). It is characterized by drivers that work synergistically to create the whole: perpetual license pricing, feature competition, solution selling and customization. All of these characteristics (and their ensuing complexity and costs) derive from the underlying buyer belief that the system will deliver some level of competitive advantage. While this may have been true 20 years ago, and may still be true for some fundamental business processes, it is patently untrue for 90% of most IT infrastructure today. Hence the rise of SaaS and Open Source.
Unfortunately, the preceding paradigm is a self-reinforcing business model that naturally evolves toward this equilibrium. It is incredibly difficult to break out of economically and culturally. Below is what I am proposing to be the natural equilibrium cost structure of a well run on-demand software business.
This model is equally self-reinforcing and composed of a number of drivers that work together synergistically: subscription-based pricing, product simplicity, and the continuous automation and integration of marketing, sales and service processes throughout the product and the company’s overall Web presence based on catalytic learning. By catalytic learning, I mean that while sales and marketing still have the tactical role of closing everyday business, they also have strategic role of structuring the purchase process, identifying roadblocks and eliminating them through product-based and Web-based automation. There should be very little division between the product and the company’s overall Web presence–they should be seamlessly integrated into a single, highly-automated customer experience. For example, if a customer is forced to pick up a phone or send an e-mail to talk to a person in order to try, buy, deploy, integrate or maintain your product, then your business is not truly on-demand will be bleeding cash from the higher labor costs. I will also propose that a company is better off starting with this cost structure from the get-go and resisting the urge to chase revenue by adding excessive direct labor resources to the sales and marketing process. Doing so merely undermines the culture required to build a successful on demand business. Labor should be highly leveraged through product and the Web automation, so before adding a high-touch resource to hold a customer’s hand directly, you should look for Web/product-based solutions to remove roadblocks to demand generation, trial, close, and use.
More than once I’ve pointed out that marketers of B2B SaaS applications should look to the consumer side for inspiration to lower costs of sales by automating the sales and marketing process and integrating it thoroughly into the product itself.
However, after sitting on a panel on social media platforms at Digital Hollywood last week, I realized that there is considerable wisdom that can be transferred in the other direction. I’ve often maintained that B2B marketing is actually harder, or should I say more like pulling teeth, than B2C marketing. The reason for this is that B2B marketers have always had the luxury (or burden) of having deep access to the customer’s decision making process. B2B marketers have been engaged in the development of demos, white papers, reference accounts, referral programs, user groups and conferences, influencer marketing in the form of analyst relations, press relations, evangelist/advocate programs, and lead customer pilots, etc. etc. for decades (if not centuries!).
Whereas consumer marketers have been largely restricted to the two A’s of the well known AIDA model, i.e., generating awareness at the beginning of the buying cycle and providing promotional offers toward the end to motivate purchase—until the advent of social media. Unfortunately, the advertising practices and institutions for plugging into the two A’s are so well established that they are still being applied by rote to the ID stages, e.g., Facebook’s now infamous experience with beacon. Advertising practices in B2C have focused on doing things TO consumers in order to “drive awareness and purchase” whereas B2B marketing has been focused on solution selling practices that do things FOR their customers by focusing the customer’s need/pain/ROI and facilitating the purchase process to ensure that it proceeds as smoothly as possible.
IMHO, the changes we are seeing in marketing practices brought on by social media, syndication, and the Internet in general are completely analogous to the changes we’ve been watching inside the enterprise over the last 20 years and they require a similar reengineering mindset to master them (to resurrect a passé catchphrase from the 90’s). The emotional and rationale behaviors that people go through as they make a purchase and develop a relationship with your brand have not changed; however, the new technology allows significantly greater access to and opportunity for automation of these processes. For example, rating systems not only allow consumers to record their recommendations, they accelerate and broaden the reach of a natural, human buying behavior through automation. Both B2B and B2C marketers can learn a lot by reexamining what B2B marketers have been doing manually in the ID stages of the AIDA model with the intent of finding opportunities to reengineer and automate these using social media technologies.
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…
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.
The goal of this blog is to share knowledge and opinions that will help executives at Internet software companies that create and deliver B2B Software-as-a-Service (SaaS) and B2C Web applications to critically analyze real-world, go-to-market strategies and tactics by applying sound business principles to the disruptive technologies that are reshaping our lives.
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