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Archive for the category: Long Tail

SaaS Business Profitability – Build for the long tail and get the rest for free (almost)

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?

Forget SaaS, forget Web 2.0 collaboration, my Enterprise 2.0 money is on B2B2C

What do these seemingly disparate tech startup business problems have in common?

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!

The natural limit of the Long Tail

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.

The real long tail 4th force!

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:

  • democratize production
  • democratize distribution
  • connect buyers/sellers

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.

Don’t let the Long Tail wag your SaaS dog

There has been a fair amount of pondering over how Chris Anderson’s thesis on the Web’s transformation of the Long Tail in consumer markets might be applied to their business-to-business counterparts, and to B2B on demand software in particular. I’d like to take a slightly different approach and try to clarify where it does NOT apply, in order to better highlight its potential impact in areas that it does.

In my first Chaotic Flow blog post, I claimed that SaaS was fundamentally a mass market, commodity business. On the surface, this statement seems to run completely contrary to the Long Tail thesis. How can I possibly cite Google, Amazon, eBay and MySpace, the most notable enablers of the Long Tail phenomenon, as commodity SaaS providers. The answer lies in which products/services we are talking about.

The table below illustrates the potential source of confusion:

Company Commodity SaaS Long Tail Product
Google Web Search -Ad Serving Web content – Ads
Amazon Virtual Store Books, CDs, etc.
eBay Online Auction Aftermarket, niche and rare items
MySpace Social Network Friend content – Ads

Put a different way, while every Web page, song, and friend may be unique and appeal to a specific group of individuals (niche market), HTML code, MP3 files, and XML profiles are essentially the same and shuffling them around cyberspace is a mass market, commodity business. In fact, this inherent sameness is a critical element of the interoperability that has driven down the cost of information distribution and processing to nearly zero and thereby enabled the Long Tail phenomenon.So, how does the Long Tail fit with SaaS? In his thought-provoking book, Anderson identifies three primary forces driving the Long Tail: democratization of production, democratization of distribution, and connecting supply and demand. Or, in terms of on demand software: tools ala TypePad, aggregators ala Amazon, and filters ala Google respectively. All you have to do is ask yourself one question: “Am I a tool, an aggregator, or a filter?” For the majority of B2B SaaS application providers, such as Salesforce.com or WebEx, the answer is obvious: “I am a tool.” (Sorry, too easy ;) ) In fact, under this framework, it becomes clear that B2B SaaS mashup and mult-tenant platform plays, such as Salesforce’s force.com, are not only tools, but they are tools designed specifically to go after the Long Tail opportunity by democratizing production through self-service mass customization.

The core value proposition of the vast majority of enterprise SaaS application vendors, who are uniformly targeting the SMB market, lies in their ability to deliver basic (read commodity), enterprise-class capabilities ala to Siebel, Oracle, and SAP at a fraction of the cost. Attempting to address the Long Tail too early in their evolution could easily undermine this cost advantage and drag them into the “customization hell” that plagues traditional enterprise software vendors. That said, SaaS vendors are by far the best positioned to go after the B2B Long Tail as the sector evolves, because their base offering is a commodity. Into this plain vanilla code base, they can easily inject any number of unique flavors through mass customization techniques, such as extensive self-service configuration and standards-based interoperability.

There is a corollary to this proposition. Tools by their nature are flexible. They can be used to build a lot of different things, even other tools. If you are providing a B2B SaaS application that can easily be duplicated by more general, democratic tools, such as mashups, force.com apps, etc. Get out! You are about to get wacked by the Long Tail, because you will soon be competing with a multitude of do-it-yourself SaaS applications, widgets, and mashups. Better yet, take your thinking to the next level and become an aggregator or a filter. If the Long Tail phenomenon has any legs at all in B2B SaaS, one day there will be more on demand micro-apps than we know what to do with. (BTW, if you think this sounds crazy, get your creative juices flowing by paying a visit to sourceforge.net to see what a real, Long Tail software aggregator looks like in the open source world.)