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?
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!
Recently, Fred Chong proposed a 4th force to driving Long Tail markets (in addition to the three Chris Anderson identifies in his book), which I attempted to clarify in my last post as corresponding to the Price component of marketing’s 4Ps. One of the unique aspects of this particular “P” is that it is the final piece that must fall into place to close a sale. In some ways, it is the dividing line between products that are sold to a market and products that are sold by a salesperson in that if a list price is not set, then a direct negotiation must take place between buyer and seller.
If we take Fred’s proposal seriously (I asked Chris Anderson to check it out and here is his response: “I agree that there is a fourth force, involving dynamic/flexible pricing. I hinted at that in the book, both with the “Rule 2: Cut the price in half. Now lower it.” theme from the original article and the “economic of abundance” chapter and its embrace of free. And, in a sense, my next book, FREE is all about this grand experiment in making money by giving things away. ), then a natural conclusion is that SaaS/Web applications that provide the ability to automate the negotiation process between individual buyers and sellers and set deal-specific pricing in real-time have the ability to drive the Long Tail to it’s natural limit, a market of one. In other words, Web 1.0 made content/information free, enabling companies to profitably service the long tail, but Web 2.0 is making interaction/communication free, enabling them to push out on the Long Tail from mass market to niche market to individual buyer/seller transactions. While it isn’t necessary to use a Web 2.0 approach to achieve this (e.g., eBay arguably was the first hughly successful offering of this nature), it will be interesting to see how much farther out on the Long Tail we can go by leveraging applications that directly connect individuals, such as social networks, chat, VOIP, etc. and offer very flexible and granular pricing capabilities, such as microfinancing and ad serving.
I can’t take credit for any creative thinking here, but I had such an epiphany reading Fred Chong’s most recent post on the Long Tail that I had to write about it. In his post, Fred proposes a 4th force to be added to the three identified by Chris Anderson in The Long Tail:
To which Fred proposes to add “democratize capitalism.” My first impulse was confusion,
having had a fair amount of economic theory drilled into me at the University of Chicago,
and knowing that “capitalism” is clearly too broad as it encompases virtually all capitalistic economic theory.
But, then I realized what Fred was really talking about was pricing, or monetization in
Web lingo. And it hit me! If you add pricing, the long tail forces correspond
EXACTLY to democratizing the 4ps of marketing, i.e., the go to market “forces” that every MBA student learns in marketing 101 and have solid microeconomic underpinnings (just the sort of perfectly structured idea that appeals to an ex scientist geek like me).
More plainly
product = democratize production
place = democratize distribution
promotion = connect buyers/sellers (or how about democratize promotion!)
price = democratize pricing
The microecconomic equivalents being commodity, transaction costs, information, and price
for the other econ geeks in the audience.
The relevance to SaaS and Web Applications being (as Fred discusses in his post) that
often pricing must be adjusted at the customer/transaction/user level in real time to bring SaaS and Web applications, e.g., Search advertising. But, the examples are not limited to SaaS products. Consider eBay and Priceline, both strong Long Tail examples that rely heavily on democratizing pricing, i.e., allowing a Long Tail seller negotiate or set a price directly for an individual buyer.
Notwithstanding my earlier post on the Long Tail, this (arguably more complete) model of the forces that enable the long tail provide the roadmap to mass customization for SaaS and Web applications.
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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