Chaotic Flow

Streamlined angles on turbulent technologies

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.

Why is Google so successful? Most people reply to this question by saying that it is the company’s superior search technology. This is why Google is so popular, but this is not why Google is such a successful company. Google is successful for one simple reason: it made advertising invisible, thus creating huge value for users and web publishers simultaneously. I believe this is the fundamental business challenge for platform makers of social media (social networks, blogs, rating systems, media sharing, etc.) and syndication (rss, widgets, toolbars, personal home pages, etc.), i.e.,. simultaneously delivering high value for web publishers and their communities without being intrusive.

Social media and syndication sit to the right and left of search. Search is great for catching people when they are already looking for something, i.e., in the middle of a purchase process. It is less effective in creating awareness, facilitating a decision and building brand loyalty. These are the strengths of social media and syndication, because these technologies leverage the organic, local connections of the Internet (as opposed to search which adds them up and presents the aggregate results). As such, they have the ability to reach out and engage the single individual, allowing him or her to discover your content surreptitiously, spread it virally and subscribe to it permanently.

This is enough to make businesses based on these technologies immensely popular. It is not sufficient to make them successful. Becoming an integral, useful and most importantly invisible part of the users purchase process will.

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…

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.

If there are two areas of cross-disciplinary study I would recommend for every Web PR and Marketing professional it would be linguistics and postmodernism.   The reason is that Internet marketing (and branding/marketing in general) is driven by forces described by these disciplines…and the ideas have been around for 50 years, so there is no need to reinvent the wheel by figuring it out for yourself.  I’ve seen a number of blog posts triumphantly delcaring that The Medium is the Message, and while true, I personally didn’t learn much from them that I didn’t already know from postmodern theory.

I’d like to try and clarify an idea that I think is creating great turmoil for most PR firms and media outlets in general, from blogs to wikipedia to cnet.  The difference in Web 2.0 is not that the medium has suddenly become the message, the medium and the message have and always will be fundamentally inseparable, the difference now is that a) anybody can create a message and b) anybody can modify the media.  This change is blurring the lines between PR and marketing, and IMHO to be successful in PR 2.0 and Marketing 2.0 you have to get these two fundamental shifts.

Old school PR adhered to a certain set of ethical rules designed around a certain media structure.  News was FILTERED by experts in the form of reporters and editors who controlled access to FIXED media channels, e.g., a magazine, a newspaper, a TV show, etc.  This was the world of broadcast media.  The ethical PR person followed this model by making sure the message being offered was newsworthy and by pitching this newsworthy story to these ordained few.  While this paradigm still exists, it is being rapidly eroded by user generated content and the Web’s inherent fugibility.   Now there is a spectrum of credibility caused by variable filtering that extends from MySpace to Wikipedia to the New York Times.  And, the medium itself changes every nanosecond with each new link that is created.

Depending on your product or service, your news credibility requirements take on different flavors.  For B2C, sufficient credibility may simply be what everyone else is doing…a trend.  For B2B, it is more likely to come from the more traditional experts or perhaps some of the newer ones like popular blogs.  The pressure on PR firms and marketers alike to adapt and take advantage of this new paradigm is strong.  Many will not survive the transition.  The two most important ideas that must be relearned are that a) your communication channels are radically expanded by social media and user generated content…you must have a solid understanding of your potential online media outlets and the right message for each and b) it no longer stops there, you must learn to modify the medium to your advantage.  More concretely, don’t just go to the NY Times and pitch your case study, consider what your presence should be on social networks, blogs, etc that are relevant to your customers…ask yourself:  Where do my prospects congregate on line?  Can I create my own community around my brand?  Then, create your own content and adapt the message to both the audience and the medium: don’t just make a viral video, because they are hot…you might be as well served simply by posting insightful comments to the right blogs.  And finally, focus on the medium itself to accelerate distribution and build a trail that leads back to your own website.  Link, link, link. Syndicate, syndicate, syndicate. Everywhere, all the time.  A news story in the print version of the NY Times lasts a day and then goes into library archives.  A blog post or a gadget can be redistributed across the Web, and a link from your story back to your website on a page rank 9 site has a much longer lifetime in cyberspace than the print equivalent in physical space.

Viral and loyalty are two words you don’t often see right next to each other as a single unified marketing concept.  Viral marketing is almost exclusively associated with acquisition and loyalty as closely tied to retention, so they are natural opposites…right?  Wrong!  If you read my previous post on the syndication revolution being driven by the natural response of Web businesses to users spreading their time and attention all over the Web with the help of search, the inherent value of the web syndication model begins to emerge.  What if you could virally attract users to your content and then hold them there?  This IS syndication, whether it is RSS, podcasts, gadgets, toolbars, etc.  Syndication at its heart is two simple concepts:  distribution and subscription.  It allows you to follow your audience to the farthest reaches of the Web by virally distributing your content, and then it allows your potential audience to sign up for ongoing, deeper engagement through subscription.  How cool is that!

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!

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.