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
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.
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?
I’ve recently started working with Zendesk, and I can’t say enough about this Web 2.0 SaaS helpdesk company. In my last post, I made the point that most SaaS vendors just don’t get Web 2.0. Zendesk is the exception that proves the rule and I think this company has an amazing future.
You might think that the last thing the world needs is another helpdesk product. I personally can’t think of too many spaces that are more crowded with everything from cheap packaged software to large scale ERP-integrated SaaS offerings. So, what makes Zendesk special? They get what all the other B2B SaaS / Enterprise 2.0 companies are missing. When I submit their offering to the Web 2.0-savvy IQ test, their marks are off the chart.
First and foremost, Zendesk is a native Web-centric application that completely integrates the backend helpdesk with a company’s online customer support presence. When you turn on Zendesk, you not only turn on the traditional helpdesk ticket tracking, business rule automation and reporting, you turn on your customer support portal, online forums, mashup widgets, pervasive RSS and your support@yourcompany.com email–all these customer communication points are seamlessly integrated to your back end helpdesk. When I speak of B2B2C being an emerging disruptive force in Enterprise 2.0 SaaS…this is exactly it.
Zendesk launched in November of 2007 and in a short half-year has [an undisclosed but an amazing number of ] paying customers and an increasingly impressive list of brand names. Why? Because you can sign up and get going without any help at all. The website content, trial sign-up and purchase are seamless and is 100% automated. And, the minimalist design is so intuitive that no training is required. Although I know these guys like to give each new account a little tender loving care, the truth is that getting going is as straightforward as any Web 2.0 consumer site.
If your run a Web-based business, or simply want to provide better support over the Web, and agile customer service is more important to you than heavy-iron process automation and compliance on the backend…my pick is Zendesk.
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.
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.
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!
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 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.
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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