1)    There is only one instance of the product…it is a commodity
2)    The product is tightly coupled to operations, because EVERYTHING happens online (ideally).

I believe almost all significant SaaS failures can be attributed to violating one or both of these product fundamentals.  Here are some absolutely deadly mistakes that are a direct result of failing to adhere to these tenets.

Business plan failure - Insufficient demand
Typical Cause
Designing the product for a niche market that is too small and too demanding

Launch failure - High cost per lead and low conversion
Typical Cause
Failure to master online marketing and to build it into the product, e.g., ignoring SEO because it is some kind of black art and prioritizing advanced product features over the ability to provision a trial account and buy online

Adoption failure - Poor organic growth
Typical Cause
The product was designed for the sophisticated buyer, not the long tail.  So, it is too complicated and the purchase process has not been automated.  Prospects cannot find you online, understand the value from your website, try your product, buy your product and start using your product…all without your assistance.

Growth failure - Inability to keep up with demand
Typical Cause
Building an incomplete product with lots of features, loose ends, poor quality and an architecture that wasn’t planned to scale from day one

Maturity failure - Inability to turn a profit because labor costs are too high
Typical Cause
Adding labor BEFORE self-service automation, e.g., hiring too many sales reps instead of developing website content, trial and online purchase or hiring dedicated support staff without full leveraging blogs, forums and instructional video

Overcoming these obstacles requires the realization that SaaS businesses are product-centric, and that the product itself is a living, breathing member of the Web.  The operational implications of this are dramatic, entailing a shift in investment from high labor sales, marketing and support processes to business automation and innovation through the product.

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.

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.

OK SaaS vendors, here is a Web-savvy self-test…

(questions in order of increasing difficulty)

a) Can your customers find you on the Web, learn about out on the Web, try you on the Web, and buy you on the Web without any help or physical intervention whatsover?  I’m not saying you shouldn’t sell or offer help if it speeds up your pipeline; I’m asking if you didn’t offer help, can they can buy without it.  If they can’t, you have inserted unnecessary offline obstacles into online your sales process.

b) All your qualified prospects are on the Web.  Are you an expert at online marketing?  Are you actively using your Web-based product to increase your organic Google juice?  Or, simply paying for SEM. Do you have a real blog and social media strategy?  Or, just a lame, uncomfortable attempt at a corporate blog.

c) Your benchmark for usability is not that client-server system you are displacing, it is eBay, Google and Facebook.  Is your product so intutitive that traditional training isn’t necessary?  Can users discover new capabilties as they go along?  Are you creating entertaining, instructional video or just a boring help file to educate users?

d) Is your application Web-aware and cloud friendly?  Do you have an open, standards-based approach to integration built on a simple Web services frameworks such as REST and JSON?  Do you natively support RSS and widgets? Are you actively cultivating a developer community and crowdsourcing extensions and mashups?

e) Your customer’s customers are on the Web.  Does your application reach out to them?  Does your application enable more efficient communication and interaction between your customer’s employees and your customer’s customers.  And, what about social interaction between customers? Or, are you just lowering TCO by duplicating the capabilities of some legacy client-server system with a browser interface and a multi-tenant database.  Sorry salesforce…a truly breakthough idea…but it’s soooo 1996, today’s SaaS vendors can do a lot more.

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.

a)    Enterprise SaaS and Web 2.0 adoption is slow
b)    Consumer Web 2.0 applications can’t monetize

Answer:  They both only go half the distance

Most enterprise SaaS offerings are commodity plays that duplicate internal legacy system capabilities at a lower cost without productivity gains.  While enterprise Web 2.0 offerings offer modest productivity gains, but still must displace and integrate to powerful substitutes, e.g., your Wiki is cool, but Email and our Intranet seem to get the job done.  Web 2.0 consumer applications hit the wall, because consumers just don’t pay for software anymore.  Most startup exits are based on building usage, and then blasting users with advertising.

What is missing from this equation is the magic combination of a disruptive business process improvement backed by an equally disruptive change in business model enabled by these so-called disruptive technologies.   I’m old enough to remember the client-server re-engineering craze of the early nineties and the Web 1.0 revolution in the late nineties, but I don’t see the same drive for out-of-the-box thinking in Enterprise 2.0.  Where is the creativity?

Here is one for the record.  What happens when you combine B2B SaaS with B2C Web 2.0 into a B2B2C platform?

a)    You unleash enormous potential for productivity and service gains in marketing, sales, support, and product development by re-engineering end-to-end processes that connect employees directly to the customers they serve.  Most companies, even all the cool new Web 2.0 ones, limp along with incredibly weak integration between their internal systems and their external Web presence. Yet, few see the irony in the fact that their customers don’t interact with their CRM system.

b)    You create built-in monetization, because you are selling your product to businesses.  Businesses will spend money on your software, even while the core value-added of your offering is likely to be customer facing.  In fact, your monetization options extend far beyond simple employee-user based licensing, because you are now directly servicing your customer’s customers, e.g., advertising, cross-network benchmarking, complimentary content and web services, and revenue-sharing or performance-based affiliate programs.

Problem solved!

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.

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!

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.