SaaS channel partners have definitely received the short end of the stick compared to their software channel counterparts. With a few notable exceptions like Salesforce.com, Netsuite (and largest, but least recognized as SaaS, Google AdWords) there simply have not been enough customers or enough work to engender a thriving ecosystem of SaaS channel partners, at least not when compared to the sprawling extent of enterprise software channels. I think this is about to change.

Channels Always Follow the Money

There is one universal law that governs all channel management: CHANNEL PARTNERS MUST MAKE MONEY. The biggest channel mistake made by many a SaaS start-up CEO is to fall into the fantasy that SaaS channel partners are there to help your business. They are not. They are there to help themselves. And, how much money they can make boils down to a very simple formula.

SaaS channel money = SaaS channel value-add x SaaS application customers

And right here is the rub. Read more »

This may sound like evangelical cloud mumbo jumbo, but I’m actually alluding to the central importance of the ongoing customer relationship in the SaaS business model and its direct linkage to the financial success of a SaaS business. In the SaaS business model, the ongoing customer relationship is a continuous source of revenue, cost, business activity and risk. This contrasts sharply with traditional software where the short-term sales transaction has always taken center stage.

A traditional software vendor makes and sells perpetual license copies, whereas a SaaS business makes and sells ongoing service subscriptions. Each new SaaS customer brings a new thread of recurring revenue and cost which are woven into the larger tapestry of customers to create the total SaaS recurring revenue stream and associated SaaS cost of service. This fundamental shift in the unit of value from copies to customers turns the economics of licensed software upside down, and is still an elusive financial concept for the industry when evaluating SaaS costs, profitability, business valuation and capital efficiency.

Customers vs. Copies

In traditional licensed software, value is equated to the intellectual property of the code, and is monetized using copyrights in a fashion similar to books, music, and movies. Volume is measured in licensed copies and value is measured by the price of a license. But in the SaaS business model, volume is measured by the number of customer subscriptions and value is measured by recurring revenue. Read more »

From time to time, I come across what IMHO are really fantastic and enlightening blog posts and SaaS best practice guides that truly stand out above the rest….by authors other than Chaotic Flow . To me the value of these gems is immeasurable, because I generally have to read through a lot of crap to get to them. It’s a big Internet.

In the hope of adding more value than I alone can muster for my loyal Chaotic Flow readers and in the spirit of supporting the authors of these high quality gems by spreading their words to my small corner of the SaaS and cloud computing business community, I’m launching a new SaaS best practices community blog companion to Chaotic Flow dubbed Open Current (cute right?).

Open Current is an open repository of SaaS best practice insights and tools for executives charged with building SaaS and Cloud Computing businesses…moderated by yours truly, so ONLY THE BEST will be make it through the rigorous evaluation process (basically, I have to read it and think it’s earth-shatteringly good…but, please don’t let that deter you….help wanted, submit your favorite SaaS and cloud related posts!)

ANYONE CAN POST to Open Current and I need your help! Please comment on this post, email info[at]open-current.com, or directly submit your favorite SaaS and Cloud Computing blog posts, SaaS best practice guides, and industry research and reports for inclusion.

Pure on-demand software-as-a-service businesses are difficult to build.  It is the rare B2B SaaS startup that masters all the Dos and Don’ts of SaaS Success from the beginning.  When the going gets tough, many find themselves falling back on traditional enterprise software approaches to product delivery and business operations.  However, there is a big difference between making the strategic decision to deliver your product in a hybrid model and stumbling into a hybrid model through tactical mistakes. In the first instance the market requirements demand a hybrid approach, in the second executive management is simply not disciplined and creative enough to avoid it.

In an earlier post, I presented the relationship between pure on-demand SaaS and it’s closest hybrid cousins: managed services, packaged software, and enterprise software. The four models differ along the dimensions of pure commodity product (SaaS and packaged software) and pure online delivery (SaaS and managed services).  When a business travels down the hybrid path, it is making a choice to deviate from pure on-demand along one or both of these dimensions.  The farthest deviation being enterprise software. Seems straightforward enough.  So, why avoid a hybrid approach?  Let me state up-front that there are markets that absolutely demand a hybrid model—-a great example is anti-virus software, which requires a fat client for rapid response (packaged software), Internet delivery of virus definitions, software updates and threat alerts (SaaS) and a semi-automated, labor-intensive process for collecting, analyzing and categorizing threats (managed service). However, it is much more often the case that complex market requirements provide the rationalization for poor management rather than the rationale for good business strategy.

The Perils of Hybrid Models
Competitive advantage in SaaS is built by leveraging the Internet to lower costs through economies of scale or to develop differentiation through network-native capabilities. Moving away from a pure commodity product (toward managed services) breaks economies-of-scale, while moving away from pure online delivery (toward packaged software) breaks network-native capabilities.  Deviation due to a lack of discipline without compelling market requirements results in the textbook failure of competitive strategy:  getting stuck in the middle.

“The firm stuck in the middle…is almost guaranteed low profitability
…probably suffers from a blurred corporate culture.”

Sound familiar?  This is the primary reason that some of today’s most well known SaaS companies have yet to attain profitability.  It has nothing to do with the so-called up front investment costs of building a SaaS business (seriously…do NetSuite, Omniture and Success Factors ever plan to stop posting losses?).  They have given up too much competitive advantage in pursuit of revenue from markets where they are not competitive or from customers that they cannot serve profitably (as evidenced by this nice little financial analysis by Bob Warfield).

The Right Way to Go Hybrid
Many markets present challenges along both the dimensions of product uniformity and online delivery.  Unique customer processes,  complex technologies and heavy integration requirements for example can all create serious strategic hurdles.  To overcome them successfully, it is essential to be clear about exactly the business you want to be in and exactly where your competitive advantage truly lies.  Read more »

I consistently find myself lamenting the dearth of creativity in the SaaS community. Too many SaaS applications that could be as exciting as the Internet itself are offered up as enterprise software pushed through a browser, simply cheaper (and slower) than their otherwise indistinguishable client-server predecessors.

However, creativity is not easy to come by in any profession. Several years back, I found myself working in Delhi for about a month. In addition to work, my wife Christy and I set out to experience as much Indian culture as the trip would allow, visiting all manner of villages, markets, museums, shrines and the like. Christy, who is an artist, spent a great deal of time being driven around by the local Delhi taxi drivers in search of Indian miniature paintings, and never failed to bring back an interesting cabbie story as a bonus–mostly about wrestling with the driver in order to go where she wanted to go as opposed to where he wanted to take her…always a very special shop. While out on one of these adventures, she decided to go see a real Bollywood film at a local Delhi movie heater. The driver (who preferred to take her to a shop) said “Why would you want to do that? Have you seen one before? There are much more interesting things to do while you are here. Those films are all the same. If you have seen one, you’ve seen them all. There is a good brother and a bad brother. And, a pretty girl. In the end, the good brother gets the girl. Then, dancing! The end.”

Several weeks ago, Christy and I enjoyed seeing the film Slumdog Millionaire, which last night won Oscars for Best Picture, Best Director, Best Screenplay, etc. To our unbridled amusement, this was exactly the plot of the film. In truth, the film not only appears to lack originality, it is also highly derivative.  Produced out of the UK, it incorporates a wide array of European and Hollywood tricks. So, what makes it a great movie? The real creativity lies in its synthesis, not its originality. The decision to reuse this worn out Bollywood motif right down to the dancing that evidently even the Delhi drivers know as well as any film critic was clearly done with intent, perhaps for irony or humor or formulaic box office success or for all of the above. But, the film also weaves together a wealth of authentic India modernity from slum children and organized crime to reality TV and the indeterminate values of the new Indian middle class, while simultaneously staying true to its traditional genre.

It seems to me Read more »

Since it’s inception, software-as-a-service has labored under an identity crisis. What truly distinguishes SaaS from software? How should it be priced, sold and serviced? Is it possible to succeed with a hybrid approach where a vendor offers both SaaS and software versions of a product? Recently, Jeff Kaplan reported that Google will be offering Gmail as an installed service–flying in the face of the current conventional wisdom that SaaS players should stay true to their model. Alternatively, Oracle is finally making a serious challenge to salesforce.com with its Oracle CRM OnDemand (I know because their sales reps keep calling me, but I’m still not buying it).
What does it all mean?

First and foremost I would like to say that IF YOU ARE A STARTUP, it doesn’t matter if you are offering enterprise software, B2B software-as-a-service, online games, or even hardware—STICK TO ONE BUSINESS MODEL!!! Handling multiple business models almost always entails increased organizational complexity and heightened internal politics. It is often essential to separate organizational functions (e.g., sales, marketing, engineering, etc.) or even entire P&Ls (e.g., divisions, spin-offs, etc.) in order to achieve the right cost structure and culture required to be successful in each line of business. In short, it is death to a severely resource constrained company.

The most common software technology distribution models arise naturally from the economics of information goods. Computer software does three basic things: copies data, transforms data, and moves data. But, the unique thing about software (unlike hardware) is that it just happens to be made up of data itself. Why is this important? Because the costs of copying, transforming and moving data around is decreasing everyday, and in many circumstances it is economically equivalent to zero. This is why so many Internet applications are free! The more a software application lends itself to this sort of self-referential automation, the lower it’s cost. Pretty theoretical, so here it is in plain English. Custom applications are hard to deploy (copy and transform) and fat or data-intensive applications are hard to deliver over the Internet (move). And, here is the picture.

How costs give rise to different software distribution models.

The more you can align your business model with the underlying economics of the technology, the better off your will be. Perfect alignment is rarely achievable, because your customers will pull your business in one direction, while your technology will pull it in another. So, choose your customers and your technologies wisely! However, here is how the most common software business models line up with the technology choices above. Read more »

At the end of 2008, I promised a special new year post on SaaS Model Economics 101, so here it is.  Introducing the SaaS Scorecard, an online test to estimate the competitive advantage of your software-as-a-service business.

Click on the image above to go to the SaaS Scorecard and take the test.

The SaaS Model Scorecard is designed to help software-as-a-service entrepreneurs and investors evaluate the competitiveness of their businesses relative to licensed software and other SaaS competitors using the principles of SaaS Model Economics 101 and the Top Ten Dos and Don’ts of SaaS Success. Every attempt has been made to create a test that accurately reflects these economic principles, however, the goal is simply to provide feedback as opposed to analysis. That is, it’s really just a game. Have fun!

Scores are calculated across 20 key business dimensions that impact low cost advantage, differentiation, adoption costs, switching costs and network effects. For each dimension, a score is calculated for the potential competitive advantage that can be achieved, the current performance of the SaaS vendor in achieving it, and the combination of potential and performance resulting in the actual competititive advantage that is realized.

I’ve recently been asked a lot of questions like the following:

• Are there some applications that don’t fit the SaaS model ?
• When is the SaaS model appropriate ?
• Is it possible to have a “mixed” SaaS model ?

Mostly these are asked by startups that are struggling for growth or profitability and having difficulty actually achieving my Top Ten Dos and Don’ts of SaaS in practice.

To answer these questions accurately, it’s essential to have a strong understanding of how the SaaS model creates economic value over in-house, licensed or home grown software.  If you can create value, then the model is appropriate.  If you can’t, then in-house software is an equal or better choice.  And, as a SaaS vendor you will have no competitive advantage.

Be warned, that there will be few fluffy marketing tips in this post and the saas model economics series to come, and you are likely to encounter some very specific economics terminology.  This is SaaS model economics 101! It’s going to get a little heavy.

The only difference between software and software-as-a-service is that SaaS is delivered over a standards-based network called the Internet.  Therefore, all new economic value and competitive advantage must flow from this difference.  SaaS model economic value over software comes in two Web-enabled flavors:

1) A lower cost structure from economies-of-scale that derive from aggregating customers via the Web onto a single, vertically integrated infrastructure i.e., hardware, software, maintenance, etc. This cost savings is generally passed on to the customer through a low subscription price and is generally referred to as the SaaS model lower total cost of ownership (TCO)

2) Reengineering business processes by leveraging network automation e.g., online trial, integrating local offices, support chat, etc. and network effects, e.g., crowdsourcing, support forums, revenue-sharing monetization, etc.

Both of these sources of value can create sustainable competitive advantage for the SaaS vendor, 1) is a low cost advantage and 2) is a source of product differentiation.

However, when the nature of your customers, application or technology limit your ability to create value from either of these sources, then you have reached the boundaries of the SaaS model for your business, because beyond these limits there will be no competitive advantage over in-house software. Read more »

It has taken almost a decade for the software industry to absorb all the ramifications of moving from perpetual license pricing to SaaS subscription pricing. The longer payback period for investors, the headaches of high acquisition costs, and the upfront pre-revenue investments in infrastructure being just a few of the issues with which SaaS entrepreneurs and VCs have had to wrestle.
So, why go out on a limb looking for new revenue and higher margins by experimenting with even more unconventional monetization models? Won’t this just make a bad situation worse?

To temporarily borrow a well known trademark, the reason is simple: it’s the network. If there is a common theme emerging from this short list of dos and don’ts then this is it. It’s the network. It’s the Web. SaaS is not software. New business value arises from the characteristic that your software-as-a-service offering, unlike licensed software, can become a network hub that can connect any business entity, user or system it touches to any other: your prospects, your customers, your partners, your customers’ customers, your customers’ vendors, your customers’ partners’ customers, and so on all the way out to the edges of the Web. Given that value is created by the network, it follows that new network-based monetization opportunities are also created. Here is a quick (and very incomplete) list of new monetization opportunities open to software-as-a-service businesses. Read more »