TWIS#26- This could change your life… Understanding Sales Complexity in SaaS

This Week in SaaS #26

  • David Skok on Sales Complexity- how it effects everything. If you read one blog post this year about SaaS- read this one.
  • Appirio on the problems that Cloud can cause by being to agile… and remain vigil to cloudwashing
  • SaaS use cases for iPads starting to emerge :)
  • Great post on how to develop marketplaces, or Ecosystems as they would be known in SaaS
  • Lincoln on SaaS M&A- Vendors buying SaaS companies for their DNA then losing it?
  • Joel York get’s it wrong on SaaS Channels- IMHO
  • Phil Waignrights comments on All About the Cloud
  • Zendesks pricing hike messup… one huge mess!
  • In other news: Intuit, Heroku, Android, Docs.com, SAP, Cloud by Numbers, Earnouts and Huddle

TWIS Events

I’m talking on a SaaS panel at HostingCon July 19-21 in Austin, Texas - with Jeff Kaplan, Lincoln Murphy and others- so for TWIS readers I’ve got a discount code and a pass to give away :)

To enter- email me jp@justinpirie.com with the subject “HostingCon”

I’ll draw it on Monday the 31st of May, so you’ll just have time to get the early bird pricing :)

If you can’t wait until then, you can use the discount code “SaaSGroup2010″ which will provide an extra $60 off the current pricing of a full conference pass with lunch for all three days (about $399.00 at the moment).

It looks like a great conference.

TWIS#26

David Skok has written a seminal post this week- How Sales Complexity impacts your Startup’s Viability I’ve reproduced much of it here because it is simply one of the most game changing posts of the year.

An obvious requirement for a successful startup is that they are able to make more money from a customer than they spend for a customer, i.e. Lifetime value (LTV) should be greater than cost of customer acquisition (CAC) (see my prior blog post, Startup Killer: the Cost of Customer Acquisition). In this post, we’ll focus on the complexity of the sales cycle for various different types of B2B software and hardware products, and looking at how that impacts the viablity of startup business models by increasing CAC. And I will introduce a “zone system” that entrepreneurs can use to help evaluate different start up sales models.(Note: This post is primarily about B2B technology companies. Some of the concepts may apply to B2C internet, or to other industries, but it was not written with them in mind.)

Understanding Sales Cycle Complexity

Let’s start by looking at the sales cycle spectrum. Some products/services are easy to sell, and buyers will feel comfortable buying them online the first time they visit a web site, while other products and services require complex sales cycles with multiple on-site visits, meeting with various decision-makers, a protracted proof-of-concept trial of the product, etc.

The following diagram attempts to portray the spectrum that exists from the simple to the complex:

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That makes sense perfect sense- he goes on:

Impact of Sales Complexity on Customer Acquisition Costs (CAC)

If you are like me, you would expect the Cost of Customer Acquisition (CAC) to rise as sales complexity increases. So the first time I talked about this topic, I drew the following simple graph:

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However, when I looked a little deeper into the costs, a very different picture emerged. The diagram below shows rough estimates of how CAC increases with the complexity of the sales process. (For a look at the spreadsheets that support these estimates, take a look at the embedded spreadsheets in Startup Killer: the Cost of Customer Acquisition.)

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Now let’s create a more accurate graph with these estimated numbers:

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What we see above is something quite surprising: using the rough numbers that I had estimated for these different categories, CAC appears to increase exponentially as Sales Complexity increases.

To help understand this phenomenon further, I looked at the estimated numbers against a logarithmic scale:

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The above diagram illustrates the same phenomenon in different way: using my estimated numbers, the cost of customer acquisition (CAC) jumps by about 10x as you move between these different sales models.

That’s quite a revelation. In fact quite is an understatement. That’s the first time I’ve seen it expressed so clearly and backed up with quantitative research. I guess that’s why we’re all so obsessed with Freemium. So maybe price isn’t the issue- maybe it is Sales Complexity.

Reducing CAC by reducing Sales Complexity

The numbers indicate that it is possible to reduce CAC by very significant amounts if you could change your sales model from:

  • Inside Sales –> No Touch
  • Direct Field Sales –> Inside Sales

This is obviously much easier said than done. But the impact is so powerful, that it bears serious thought and brainstorming.

What causes Sales Complexity?

To understand if we can reduce sales complexity, we need to understand its causes. Here is a quick list of things that will make a product or service have high sales complexity:

  • Complex to understand and/or evaluate, install, configure
  • Requires multiple people to get a purchasing decision (frequently caused by a high price)
  • Mission critical
  • Has high cost if it fails (e.g. data loss, significant financial impact), and the risks of failure are high
  • Expensive – high cost to the purchaser, and/or takes a long time to get an ROI
  • Affects many other IT systems, people or departments
  • Requires significant change to the way people work
  • Requires the purchase of other elements, or integration/development work to make a complete solution
  • No customer references that have the same usage needs as the buyer
  • Pricing complexity, where the buyer can’t easily figure out the right configuration, etc.
  • Custom contracts need to be negotiated

The list is probably incomplete, so please add your own thoughts via comments.

There are two other factors relating to your buyer that can make it harder to sell a product:

  • Where there is low customer pain
  • Where there is no sense of urgency

If you are an entrepreneur looking at your next startup, the following sections will help you understand the impact on your business of a product or service that has the specific sales complexity properties.

Customer Monetization (LTV) must exceed CAC

As stated in the introduction, for a profitable business the money that you make from your customers must exceed the cost that it takes to acquire them. i.e. LTV must be > CAC.  (This topic is covered at length in Startup Killer: the Cost of Customer Acquisition.)

As Sales Complexity and CAC increase, this means that businesses need to find a way to charge their customers more money for their product/service to remain profitable.

To get a customer to pay for a much higher priced product in today’s tough economic environment, I believe there are three driving forces that need to be in place:

  • Value: the customer needs to perceive that they are getting good value for the money they are paying
  • Pain: the customer needs to be experiencing some significant pain that they need to see resolved
  • Urgency: there needs to be a sense of urgency to get the problem resolved

The combination of these three factors could be said to equate to your ability to monetize the customer (Lifetime Value of the Customer, or LTV).

Lets look at what happens when we plot Value/Pain/Urgency with a logarithmic scale against Sales Complexity:

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Startups that fall below the line are likely to be in the Unprofitable Zone where their buyers will not be willing to pay them enough money to cover just their sales and marketing costs. See diagram below:

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A Zone System for evaluating Startup Sales Models

Using the above chart, it is now possible to group startups into a series of interesting zones based on the complexity of their sales process. Lets start with the Red Zone.

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He goes on to analyse the zones in detail- but concluding the post:

Conclusions

The most fascinating new insight that I discovered while writing this post, was how CAC grew at a roughly exponential rate as sales complexity forced higher levels of human touch into the sales process.

Given this, I recommend that B2B Entrepreneurs gain a clear understanding of the sales complexity of their proposed new business, and carefully contrast this with the associated customer value / pain / urgency levels. This comparison should help them understand if they have what it takes to make a viable business model. (A viable business model requires that you are able to monetize your customers at a higher level than it costs you to acquire them – i.e. LTV>CAC.)

The data also shows that it is extremely important to consider ways to redesign your product/service and resultant go-to-market models to minimize the amount of human touch involved in the sales process. It is not enough to simply want to use a lower touch sales channel. The product/service has to be simple enough to evaluate and purchase for it to work in that channel.

If you have an existing business, my recommendation is that the CEO should be leading brainstorming sessions with his or her VPs of Products, Sales and Marketing to see if it is possible to move from one tier of sales complexity to a lower tier.

Key Takeaways

  • Understand the sales complexity of your business. Figure out your LTV and CAC, and make sure that your LTV>CAC so that you have a viable business model.
  • Look for ways to decrease your sales complexity, which might involve redesigning your product and leveraging engineering resources to eliminate issues in the sales process.
  • Realize that reducing sales complexity is an achievable goal, and should be an ongoing process that merits a significant investment.

Brainstorming suggestions:

  • Do you have a clear documented picture of the issues in your buyers’ mind in each step of the sales cycle that have to be resolved before they can make a purchasing decision? (This needs to be in hard copy form for the brainstorming group to be effective. It is rare that I find this step has been properly completed.) For more details, refer to Building a Sales and Marketing Machine.
  • What attributes of your product/service are causing it to require a complex sales cycle? Can these be changed?
  • What would be required to allow your company to use the next step down in sales model (e.g. to move from Field Sales to Inside Sales, or from Inside Sales to No Touch Self-Service)?
  • Are you using all the latest techniques for leveraging the web including Inbound Marketing, lead scoring and lead nurturing, marketing automation, SEO, SEM, social media, web video, etc. Those interested in pursuing the Low Cost Sales Model would do well to study the techniques and behaviors pioneered by the leading companies like SolarWinds, Acronis, HubSpot, ConstantContact, etc.
  • Does your Web site answer all the questions and issues that arise in your buyers’ minds during their purchasing process?
  • Are you making it easy for the customer to sell themselves, including providing a free trial?
  • Is your pricing causing you problems by increasing sales complexity? Could you reduce entry level pricing to the point where only a single individual is required to make a buying decision?
  • Can you use a free product to help acquire customers that you can later up-sell or cross-sell?

Important Final Note

It would be wrong to read this article and conclude that any business with high sales complexity is a bad business. There is nothing wrong with having high sales complexity provided you are able to get large enough orders, in a reasonable time period, to cover your cost of sales. That is a very viable business model.

The opposite situation is also worth stating: any business that has low sales complexity but inadequate value provided to a customer is very unlikely to be successful.

Flipping heck! It’s going to take some time to sink in, but the takeaways are absolutely clear- Sales Complexity can kill chances of profitability if the LTV isn’t greater than CAC.

Key Takeaways for me:

  • Sales Complexity grows exponentially not logarithmically
  • We should all look at how we can reduce Sales Complexity- as that will drive a massive reduction in cost.
  • If you do have sales complexity- you better ensure you can get large enough orders before your cash runs out.
  • Sales Complexity does not always have to equal pain / cost, it just predicates price if you have it…

Is David now the best individual SaaS VC, knocking Bessemer off the top?

Mark Koenig from Appirio was out visiting customers last week and his customer threw him an interesting curve-ball:

At one client, we were discussing the well-documented ability of cloud providers to deliver a new release every four to six months, and how best to incorporate newly released functionality – using the example of salesforce.com Chatter – into the organization. It was at this point that our client – the CIO - threw a curve ball: “those rapid release cycles can be a problem.”

I got ready to hit that ball out of the park by talking about the importance of participating in release previews, and gathering advice from customers participating in the beta release, as well as the importance of organizational change management. That’s when he went on to explain that on an earlier cloud project their e-commerce system went down because one of their on-premise software partners was not able to keep up with the rapid changes in the cloud solution.

Nasty nasty curve ball. Our experience has been that cloud integration is generally easier than on premise integrations because of the service-oriented architecture foundation on which most cloud solutions are built. So all I could think about was how frustrating it must have been for thatCIO: feeling held hostage by a vendor who provided a key element of his e-commerce infrastructure when all he was trying to do was improve his customer experience and introduce new products. The amount of incremental revenue he was missing out on while he waited for his traditional on premise vendor to catch up with his cloud vendor crossed my mind too. While thinking about what it must have been like to integrate that application into their environment the first time around, I took a weak swing and said something about how integration is perennially the hardest part of any substantial implementation effort.

My initial reaction would have been totally the same and probably would have argued that users are now trained by Google and Facebook to expect constant changes in the UI, driven by the “what would it look like if I designed it now culture” that exists in those companies for creating the best products and not the integration problems it’s creating for his on prem vendor. In fact that’s exactly what I did argue, when I was sat on a panel at a legal company CIO event last week…

I’ve been replaying that conversation in my head ever since, and now I’m ready to step into the batter’s box again. Yes. Not being able to adapt your business processes and introduce new products and services because your application architecture is too brittle to handle it is a big problem. No question. But being able to move so fast that your on-premise apps can’t keep up is a pretty high class problem to have.

This increase in agility is one of the primary reasons that organizations are choosing to move their business onto the cloud-based applications and platforms. In the cloud, applications can be configured and re-configured to adapt to changes in business processes or to the introduction of new products and services, with minimal impact to the future upgrade path. And there are cloud integration platforms with pre-built and configurable integration templates to help knit applications together. Sure there may be the occasional on-premise app that makes for a challenging integration, but in the long run, moving to the cloud means that IT can focus on innovation instead of infrastructure.

Appirio are one of the key proponents driving the understanding that the key driver of ROI in SaaS comes from the increased Agility. Here’s some ammunition for helping your prospects think more clearly about their move to the cloud:

So what is a CIO to do when some vendors who comprise the application architecture can’t reach cloud speed soon enough? Waiting until every solution provider in your portfolio is cloud-based is not the answer: the competition will have feasted on you by then. A more proactive approach is to conduct a portfolio review with three aims in mind:

  • Which applications in my portfolio can be migrated to the cloud platform (or platforms) of my choice? (Hint: it’s not just your least strategic apps.)
  • Of those that remain, which have vendors with a roadmap that will support my move to the cloud? Which have substitutes in the cloud ecosystem that I should consider?
  • What is the best path to the cloud for my organization?

The best path to the cloud will be different for each organization. What each organization should do the same, however, is to create a roadmap and a business case based on the analysis above, chart the course, and check progress frequently along the way.

And fundamentally we need to bang the Agility drives ROI drum until people understand the true value of SaaS and Cloud. They wrote another great post-

Over the past 2 years, these questions, combined with the need to do more with less, has had dramatic impact on the enterprise adoption of cloud computing technology. Companies facing IT budget cuts postponed or canceled expenditures on their traditional on-premise infrastructure, and spent money on cloud computing projects instead. Salesforce, Successfactors, Taleo, Concur, and other cloud-computing pure plays had record years in 2009. SAP, Oracle, Microsoft, HP, not so much. The receding tide of the economy exposed some ugly rocks indeed, and allowed CIOs to chart a better course toward achieving their goals.

The receding economic tide also exposed many IT industry stakeholders who weren’t wearing their bathing suits. ISVs were resisting the switch to SaaS because of the impact to their revenue streams. Data center providers were relabeling old technology with new names, selling “private clouds” to companies that had no business operating data centers. Services firms were going along, because they have more to gain than they have to lose in the transition to the cloud. Many IT professionals themselves were resistant to change because of fears to their job security.

Now, as the tidewaters slowly return, the IT industry is faced with the same question as the broader economy—will we use this opportunity to fix our underlying problems? or will we go back to “business as usual”?

Our view is that there is no going back. CIOs who initially were attracted to SaaS solutions for their lower TCO are now discovering that they have a powerful platform in their enterprise, one that’s suitable for running more and more of their business. They’re moving from opportunistic adoption of point SaaS applications to what’s being called “cloudsourcing”sourcing complete business solutions from one or more cloud platforms.

A low tide isn’t always pretty. But if the focus forced by tough economic conditions helps you chart a path towards clearer waters, then a crisis truly is a terrible thing to waste.

And in this business, we’re very happy to see clouds on the horizon.

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LOL :)

But joking aside, we’re starting to see situational computing driven a la iPad coming to market- UrbanSpoon this week announced their Restaurant Management app RezBook. TechCrunch posted:

Urbanspoon plans to continue its assault on OpenTable, and its weapon of choice is going to be the iPad. I am not talking about Urbanspoon’s slick iPad app which is already out and is aimed at consumers. I am talking about the RezBook, which is part of Urbanspoon Rez and is aimed at restaurant owners.

When it comes out in June, RezBook will be a full reservation system. Instead of writing down reservations in a paper book, restaurant owners will be able to enter them directly into the iPad, see bookings by time and by table. With a $500 iPad and RezBook, any restaurant will be able to afford a computerized reservation system. It won’t be free. RezBook will charge $1 per reservation, plus a low monthly fee. It will be much cheaper than a dedicated reservation system, and slightly cheaper than OpenTable, which is the company Urbanspoon is really going after.

RezBook works hand-in-hand with UrbanSpoon Rez, an iPhone application that launched last Fall. Urbanspoon Rez helps restaurants promote open tables and add a Rez button to their Websites, their page on Citysearch, mobile apps like Urbanspoon, or to other sites and apps through CityGrid. RezBook takes those incoming reservations and manages them on the backend, and creates a customer database in the process.

The combination of Rez button promotions and the iPad’s off-the-shelf affordability should allow Urbanspoon to target a wider swath of restaurants than the kind you currently find on OpenTable. At least that is the plan. I place RezBook in the same category as Square’s iPad app, which turns the tablet into a mobile cash register. Both of these apps leverage the iPad to bring sophisticated business software to small merchants with the promise of bringing them into the digital age.

I think this is a brilliant example of a SaaS app utilising an iPad to break into a new market segment utilising features made commonly available by the iPad that previously would have required expensive hardware and or configuration. SaaS makes this simple and easy.

Those of you that are regular readers on TWIS, know that I’m a fully paid up member of Lincoln Murphy’s 7 Revenue Streams in SaaS Club and that I always look for and share practical information- one of the key revenue scalable and profitable revenue streams in Lincoln’s model is Ecosystem- where you create a marketplace for people to build on top of your technology- think Apps for the iPhone or the salesforce.com AppExchange. The Ecosystem radically differentiates them from their competitors.

Yet it is chicken and egg- which one comes first?

I was delighted to come across this post by Jason Cohen on starting ecosystems- or as he calls it marketplaces:

A sizable percentage of Capital Factory startup submissions take the form of the “marketplace.” In fact, 3 of the 10 selected companies from the past two years have followed this business model.

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Marketplace companies are notoriously difficult to start, so I’m constantly amazed that so many entrepreneurs chose this route. Maybe it’s the “go big or go home” mentality? If there’s a business plan less likely to succeed than a restaurant, this has to be it.

But it’s not impossible; here’s some of the pitfalls and how to address them.

A marketplace is born

A “Marketplace” connects buyers and sellers who otherwise have trouble finding each other….

These companies typically make money either by charging sellers for listing (akin to the yellow pages) or by charging a sales commission (akin to a “finder’s fee”). It’s easiest to charge sellers because they’re the ones trying to make money.

So what’s the problem?

The hardest part of any business is the beginning, but this is especially true for marketplace companies because you have a classic chicken-egg problem.

Specifically, buyers don’t visit the site because you’re obscure and lack inventory, but sellers aren’t interested in listing because there’s no buyers.

It’s worse than it sounds because you also have what I call the double company problem: You’re trying to build two companies at the same time, and both have to succeed or you’re dead.

He went on:

Forget automation: Do everything manually

One of the allures of the marketplace business is that once you reach critical mass, you should be able to “sit back, relax, and let the money roll in.” Automation is the key; buyers and sellers have to find each other and perform transactions without requiring additional human beings.

But just because automation is the goal doesn’t mean it’s the way to start.The good thing about automation is it’s efficient; the bad thing is you cannot learnbecause you’re not involved in the process. And at the start, learning is where youshould be spending most of your time!

For example, when SpareFoot began they weren’t sure how to charge storage companies. Should it be a $20/month listing fee? Or a flat “finders fee” per lead? Or a commission on leads which convert to sales? Could they charge extra for a “premium” listing? Should purchases go through SpareFoot so they can extract their cut, or should they bill storage companies separately?

If they had picked a strategy and automated it, there’s a low chance they would have picked the right one. All that time spent writing and debugging code, worthless.

Instead SpareFoot decided to automate nothing. When a potential buyer made a search, they grabbed their email or phone number and said “Thanks, we’re going to find you a great deal by Thursday.” Then they banged the phone all day, calling up regional storage facilities. Their pitch was awesome: “I’ve got a lead for you; his name is John Doe and he’s looking for a 10×20 with air conditioning. If your rate is competitive, we can do the deal today. By the way, if you want us to send leads like this to you all the time, it’s $20/mo to list with us.

The bold phrase in there is damn compelling, right? And of course they varied the offer based on current pricing theory or in real-time based on the interaction with that particular storage facility.

None of this — determining the pricing structure and amount, building relationships with facility managers, and ensuring buyers’ success — would have happened if they started by writing code or any other sort of automation.

Happy buyers before the network effect

Clearly the value of a marketplace increases as it grows — both as a business and to the buyers and sellers.

This is most apparent with companies like eBay and Craig’s List: The immense variety of listings facilitates long-tail transactions that would be impossible with a smaller, more specialized marketplace.

But at first your marketplace won’t be large, so to get started you have to deliver value even though you’re small.

He suggests you:

Solve the seller side first

It’s typically easier to solve the seller side of the equation than the buyer side.

After all, the value proposition to the sellers always boils down to “You’ll make more money,” whether that means a new sales channel or a way to monetize surplus inventory. Sellers are often already selling, which means they’re easy to find and they answer the phone. With the right proposition there’s little reason for them not to try you out.

and:

Use a novel strategy for attracting buyers

The buyer side of a marketplace often boils down to a numbers game: If you can get N visitors per month and P% of them buy, it works. Typically P is small, so Nhas to be really big.

Unfortunately that puts you into the same position as every other website on Earth — competing for traffic.

If your answer to how you’ll attract big N are things like SEO, Google Ads, and word-of-mouth, that’s an automatic fail. First of all, this is what everyone else is doing, so none of this is a competitive advantage. Second, you can’t directly control any of these things, so it’s do-and-pray, not a strategy.

Interesting!

At least we have the advantage that we should have the buyers and the data but are looking to expand profitability and differentiate…

We’ve been covering SaaS M&A extensively in TWIS- and this post by Lincoln rang true:

Evangelos in his post on M&A activity in SaaS thinks it will be mid to late 2011 before legacy companies really ramp their acquisitions of SaaS firms. We saw an uptick in activity starting in mid-2009 with some major legacy vendors brining us in to help vet SaaS companies for acquisition, but I think it was just the tip of the iceberg. As he states, the ramp will happen when vendors realize that doing it themselves is harder than just buying a company; and it will likely be due to their lack of “SaaS DNA.”

Whenever Sixteen Ventures is involved in due diligence or market intel work for a legacy company seeking to acquire a SaaS firm, a lot of effort is spent in understanding that “DNA” that makes up the target firm. Legacy companies still don’t “get” SaaS so they think by acquiring or “injecting” SaaS DNA into their firm, the entire organization will overnight become a “SaaS company.”

In theory that is nice, but in practice I’m not so sure. SaaS is often fundamentally different than the core business of a Legacy Software company. It just is. And while the “SaaS DNA” that they brought in could be beneficial, it is usually the acquiring company that is unwilling to change that causes the acquired DNA to whither away and die; the host is rejecting the transplanted material.

I’ve seen that absolutely first hand- as soon as people’s lock in goes, they leave. But what should acquirers do to retain talent and transform? Lincoln looks at it from the other perspective:

But this isn’t all doom and gloom! In fact, it is actually good news as it shows that every time a legacy company acquires a SaaS firm,  a new opportunity is born in that space. For instance, if you have a SaaS WMS solution,  you might have looked at Smart Turn being bought by Red Prairie as a death knell for your firm. A well funded market leader, possibly going IPO, just got acquired by a legacy market leader and now they’ll eat your lunch.

But there are other potential outcomes. First, if the company that acquires your competitor has their own Legacy Baggage (negative market sentiment, a distrust of their practices, over priced, etc.) that baggage will spill over nicely to their “new On-Demand product.”  Plus, the new company will likely cave to pressure to do one-off installs and customizations of their product since they don’t really understand SaaS, leading to the same negative market sentiment that befell the acquiring company.

In some cases, we recommend that firms start a new company from scratch or continue to operate the acquired company as a wholly owned subsidiary to keep from commingling the two. Trust is a HUGE factor in SaaS and many legacy software companies do not have the trust of their customers. The customers are happy to use their software if they get to run it themselves but would never want the vendor to run it for them. How can you take advantage of their newfound baggage?

Just as interesting is the serious likelihood that both companies have used negative marketing campaigns against each other or their delivery methods/business architectures (SaaS is insecure, legacy software is antiquated and broken) and now they are one. How do they position their products now? This can create an amazing amount of market confusion for another vendor to take advantage of.

Finally, there is always the possibility that the acquired company will die on the vine, never having a chance to really take off under the direction of their new owners. Perhaps the acquired company will linger in the purgatory that is a “hybrid” organization (both On-Premises and SaaS) while the executives, with strong non-competes in that space, wait out their prison sentence. This creates amazing market opportunities for savvy and strategic SaaS vendors.

I guess that’s what Bob, Rick and the team at Boomi will be thinking after CastIron’s acquisition by IBM…

Unbelievably rarely do I disagree with Joel York, but his post a couple of weeks ago on channels for SaaS was completely wrong IMHO- Lincoln again sum’s up the main arguments:

The thing that has analysts and pundits excited by things like VMForce is that now the “channel has something to do“… as if the only reason for a channel is to build on or extend a platform. Extending an application, and essentially building a platform, a la SFDC’s Force.com and AppExchange can be a fantastic opportunity for the core vendor and the surrounding ecosystem; but its exactly that – an ecosystem. This has very little correlation to traditional channels and more closely resembles developer programs in legacy software companies, but that analog doesn’t do it justice. Further, the notion of a true ecosystem is an opportunity quite unique to SaaS or other single-instance, multi-tenant “cloud” applications or platforms. Celebrating that technology VARs finally might be able to add value to SaaS or Cloud apps is not progress. In fact, its a rerun from legacy software and an attempt to justify the existence of VARs.

There has always been a HUGE opportunity for SaaS and the channel that only a few companies are really taking advantage of. The reason? Other than the lack of industry support and promotion of these opportunities, it requires the SaaS or Cloud (or whatever) company to stop thinking like a “software” company and start understanding just what they have at their fingertips. They are service companies who can provide tremendous value not only to the end-customer but to intermediaries that help the SaaS vendor reach those customers. In some cases, its possible to directly monetize the relationship the SaaS vendor has with the intermediary.

Of course, progress isn’t helped along by the traditional channel consultants or former VP Channes at XYZ Legacy Software Corp who wants to get into SaaS or “Cloud” trying to force their traditional channel management best practices square peg into the round hole that is SaaS. There is so much Legacy Baggage coming into SaaS and Cloud (due to bandwagon-jumping) that it is really bogging down the substantial progress that seemed to be happening in terms of next-generation channels, network effect, ecosystem, etc. Announcements like VMForce that are actually quite revolutionary unfortunately don’t help because they can so easily be twisted to fit nicely into that legacy baggage being drug along by “industry insiders”

At Sixteen Ventures, we have always looked at SaaS as something far beyond “software” delivered over the web. Whether its SaaS or Web Apps, if there is multi-tenancy and you’re solving a business problem, the opportunities for channels, specifically distribution via Trusted Advisors, is significant. Forget traditional VARs, the real opportunities are in understanding who the end-customer is, who they trust, and giving tools to everyone that sits between the vendor and the end-customer so that all involved can add, and extract, value. If there is a third party involved at the “technology level”, they aren’t a traditional VAR; likely they’re an integrator using the services or tools from above. Think of the relationship between SaaS vendor, intermediaries, and end-customers as a value-chain or value-network.

Look at a company like Xero, with their SaaS accounting package, and how ~50% of their business is via channels; specifically CPA and Accounting firms. They work through the trusted advisors to get to the end-customers they want to use their products. But Xero isn’t just giving spiffs or a cut of revenue to those professional firms; that would be misaligned with the business of their channel partners. Xero actually helps the trusted advisors do more of their CORE business by giving them tools, insight, visibility, etc. into their end-customers’ activity, data, and operations. This is far more valuable to Xero’s partners than some cut of monthly revenue and much more aligned with the business model of their partners.

Would CPAs or Accounting firms want to touch installed software? Some have in the past, including affiliations with products like QuickBooks, Great Plains, etc. because it made sense on paper; they shared the same end-customer. But the logistics didn’t work. Few non-technical companies want to get involved in “software;” so Xero simply provides a service. And everyone in the value-chain wins.

It is great that VARs finally have something to do with “the Cloud,” but for SaaS vendors, the message being sent by the “industry” is still off-point. Just because you don’t have some technical layer that will allow you to engage technology VARs doesn’t mean that channels are not available to you. On the contrary. There are likely far more lucrative channels out there if you understand how to find them; look for Trusted Advisors that share the same end-customer with you and figure out how to help them do more of theirCORE business while also helping the end-customer.

I would add only one more thing- that the main driver of cloud is agility- adding a brittle layer of “customisation” that the VAR’s deliver smacks of software of old, where customisation could cost 10x the price of the software- don’t let channels do that to SaaS!

Phil wrote a great post about the opening keynote to All About the Cloud which stuck a chord with my day to day life:

From a sentiment perspective, the opening session has set an interesting tone, perhaps best summed up by Saugatuck Technologyanalyst and CEO Bill McNee, who has just completed a presentation on current market trends. His very first statement was that the world is not moving wholesale to the cloud — the cloud will co-exist with on-premises IT infrastructure for the foreseeable future.

“I don’t like the word hybrid,” he added. “We call it an interwoven world. The vast majority of the new money will go the cloud, but we’ll build bridges between these two environments.”

The opening keynote, by Intuit CTO Tayloe Stansbury, reinforced this message from a different perspective. “Likely you know us for boxes of software that people run on their desktops,” he had begun by saying. He went on to discuss Intuit’s early commitment to using the cloud to deliver services, beginning with the launch of the web version of TurboTax in 1999, and ran through the company’s now vast catalog of online software and services. All of its SaaS lines, he revealed, amount to $1 billion in revenues, and the total revenues of what Intuit calls connected services — which adds to the SaaS total other important online services that don’t fall into classic definitions of software such as merchant services and tax e-filing — come to $2 billion. “That accounts for about 60% of our company’s revenue,” he concluded (shouldsomeone tell Sage I wonder?).

So conventional software vendors are becoming cloud providers, while cloud providers are having to learn how to work in harmony with conventional IT infrastructure. Cloud is here to stay, but I sense a new maturity at this year’s conference, which sees it taking its place within the evolving mainstream software industry. What does that mean for concepts like private cloud? Well that’s the subject of the panel I’ll be moderating tomorrow, so let me leave the answer to that question until then.

Well put Phil- I need to pen some of those thoughts in more detail shortly…

Zendesk really messed up their new pricing rollout this week… I love the title of this TechCrunch post- Zendesk Apologizes For Suddenly Hiking Its Prices, CEO Hopes For “Make-Up Sex”- Genius!

A lot of companies can learn a thing or two from how Zendesk has now dealt with the huge backlash from its customer base after the startup changed its prices overnight (which resulted in a lot of their users suddenly paying up to 300% more than what they signed up for years ago).

In a blog post, titled “Sorry. We Messed Up.”, the company doesn’t mess up its mea culpa:

When we decided to make a change to the Zendesk pricing structure for our existing customers, we tried to be as thoughtful, transparent, and straightforward as possible. We failed. We let you down. And we apologize.

While it’s refreshing enough to see a company stand up in the middle of a shit storm and unequivocally state that they indeed screwed up, Zendesk is also trying to turn the ship around.

As a result of the backlash, they are now killing the time limit of the half-baked grandfathering terms they tried to appease their earliest and most loyal customers with at first.

That basically means all customers will continue to receive the same functionality they’ve had in the past, in addition to the new community support and knowledge base features that were announced on Tuesday, all while paying the same price they’ve been familiarized with. Which sounds to me like the only correct way to go about this.

As an added bonus, here’s what Zendesk CEO Mikkel Svane just e-mailed us:

Hey Robin and Leena,

We just rolled our price changes back for existing customers. It has been a hectic 48 hours talking to our customers. But it has also been a very educating process. We’ve had a very public argument. Despite our good intentions we understand we did wrong and we feel miserable. We hope our customers will accept our apology.

And we hope for make-up sex. But let’s see about that ;-)

Mikkel

I wonder how many customers effectively jumped ship and are no longer interested in make-up sex, but having seen the company’s response to the backlash I do hope many of them will take Svane and co up on it. Just don’t send us pictures, please.

Nice! ;)

In other news:

Just in case you’re wondering- “Where’s the Google i/o news?”, there’s loads, too much in fact… I’ll have that all wrapped up for you next week :)

Have a great week

Justin

jp@justinpirie.com

Also read...

  • http://twitter.com/MichaelDunham MichaelDunham

    All the best in your new gig – Sounds like an exciting opportunity. Anything I can do t0 help I'm always available.

    When you up to talk about some of this on a podcast … :-)

  • http://www.justinpirie.com Justin Pirie

    Thanks mate- I was thinking about getting you on a podcast ;)

  • http://www.facebook.com/people/Sung-Jin-Kim/100000773058162 Sung-Jin Kim

    “The Moving Cloud: To surpass or To be followed?”

  • http://www.justinpirie.com Justin Pirie

    Sung-Jim: what do you mean?

  • http://www.facebook.com/samarpan Samarpan Dutta

    @justinpirie Great post! liked the way you put the #multitenancy debate to rest. See how #Cordys takes multitenacy seriously http://bit.ly/9mYXpk

  • http://www.justinpirie.com Justin Pirie
  • http://www.opteso.co.nz Pete Clouston

    Hi Justin,

    re: SaaS ROI -
    can you offer ideas as to potential methodologies for quantifying the return, objective and subjective?

    Thanks, Pete

  • http://twitter.com/janawiggins Jana Wiggins

    Priceless!

  • http://giffconstable.com giffc

    Thank you for the kind words Justin! You remind me I really need to go look at Meeker's latest deck. Hope you're having fun with the new gig

  • http://www.justinpirie.com Justin Pirie

    Hi Pete – I'll try and lay out some of the key ROI arguments out this afternoon.

    Best

    Justin

  • http://www.justinpirie.com Justin Pirie

    Thanks!

  • Aaron

    Interesting – especially the mobile SaaS predictions.

  • http://twitter.com/daveconcannon Dave Concannon

    Thanks for the mention Justin, glad you found it useful.

  • http://www.justinpirie.com Justin Pirie

    My pleasure Dave- great post- not often discussed!

  • http://www.growcomms.com/ Russell Palmer

    Justin,
    very thorough round up of the industry happenenings this week. I especially enjoyed the interview with Eric Domage on cloud security aspects. My eyes usually glaze over when the topic of security comes up because I find it very technical, but Eric put his points forward in a way that is easy to understand and make a lot of sense.

  • http://www.justinpirie.com Justin Pirie

    Eric is really good. Security for the rest of us in the real world!

  • Anonymous

    Interesting The examples show high CAC costs (referred to d.skoks) for an SaaS but what do you recommend doing if a startup’s CAC is high due to x reason a direct sales force for example? Aside from the above mentioned within the examples on how to drive CAC down or LTV upnnWhat would you or anyone following advise or strategically adjust to obtain the same objectives ( sales/rev etc) there needs to be some constructive comments around these half examples, for instance recommending not using a direct sales force is not really constructive because it might deter away from the sales/rev objectives, but a strategy, substitution to lower the CAC associated with the force could be something we could all discuss and benefit from

  • kennsaa

    Interesting The examples show high CAC costs (referred to d.skoks) for an SaaS but what do you recommend doing if a startup’s CAC is high due to x reason a direct sales force for example? Aside from the above mentioned within the examples on how to drive CAC down or LTV up

    What would you or anyone following advise or strategically adjust to obtain the same objectives ( sales/rev etc) there needs to be some constructive comments around these half examples, for instance recommending not using a direct sales force is not really constructive because it might deter away from the sales/rev objectives, but a strategy, substitution to lower the CAC associated with the force could be something we could all discuss and benefit from

  • http://www.justinpirie.com Justin Pirie

    Have you checked out TWIS#26?nn http://www.justinpirie.com/2010/05/twis26-this-could-change-your-life-understanding-sales-complexity-in-saas/ nnThe first question to ask- is there enough pain (value) to justify the high selling point of a direct sales force?nnIf there’s not- then you might need to reconsider… I’ve had this question posed so many times over the years- so I don’t wish to take assumptions based on your email- but they hint at the same underlying issues.nnSaaS is really an upside down business, distribution and user experience are much more important than the software. If you can’t nail those two- then you’re going to struggle to acquire customers…nnMarketing and Sales is almost more important than anything else

  • http://www.justinpirie.com Justin Pirie

    Have you checked out TWIS#26?

    http://www.justinpirie.com/2010/05/twis26-this-could-change-your-life-understanding-sales-complexity-in-saas/

    The first question to ask- is there enough pain (value) to justify the high selling point of a direct sales force?

    If there’s not- then you might need to reconsider… I’ve had this question posed so many times over the years- so I don’t wish to take assumptions based on your email- but they hint at the same underlying issues.

    SaaS is really an upside down business, distribution and user experience are much more important than the software. If you can’t nail those two- then you’re going to struggle to acquire customers…

    Marketing and Sales is almost more important than anything else

  • DCowan

    Excellent blog Justin, very insightful. I think your 10 point plan is exactly what Partners should be doing. The GB Olympic committee did something similar about 6 years ago, taking someone else’s model (business plan/services/product – it applies across the board I think), in this case Australia’s, and put their own spin on it to offer their athletes (customers) a better chance of succeeding, fast forward 4 years to Beijing 2008 and GB surged past Australia in the Gold Medals department and now they look to GB as a model to follow despite it being an upgraded version of their own idea!nPartners can certainly retain their clients with a smart implementation of some or all of your points……. as you say, it’s not all doom and gloom!

  • DCowan

    Excellent blog Justin, very insightful. I think your 10 point plan is exactly what Partners should be doing. The GB Olympic committee did something similar about 6 years ago, taking someone else’s model (business plan/services/product – it applies across the board I think), in this case Australia’s, and put their own spin on it to offer their athletes (customers) a better chance of succeeding, fast forward 4 years to Beijing 2008 and GB surged past Australia in the Gold Medals department and now they look to GB as a model to follow despite it being an upgraded version of their own idea!
    Partners can certainly retain their clients with a smart implementation of some or all of your points……. as you say, it’s not all doom and gloom!

  • http://www.justinpirie.com Justin Pirie

    That’s a really interesting perspective. I didn’t know about that parallel.

  • http://www.justinpirie.com Justin Pirie

    That’s a really interesting perspective. I didn’t know about that parallel.

  • http://www.commensus.com/Cloud-Services/Hosting-and-Virtualisation/Cloud-Hosting-Virtual-Server-Hosting Virtual Server Hosting

    They also need to marketing Cloud as an aid for business strategy rather than the strength of their services which are too difficult for a financial director to comprehend

  • http://www.commensus.com/Cloud-Services/Hosting-and-Virtualisation/Cloud-Hosting-Virtual-Server-Hosting Virtual Server Hosting

    They also need to marketing Cloud as an aid for business strategy rather than the strength of their services which are too difficult for a financial director to comprehend

  • http://www.justinpirie.com Justin Pirie

    Can you expand on that? What do you mean by “business strategy”?

  • http://www.justinpirie.com Justin Pirie

    Can you expand on that? What do you mean by “business strategy”?

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you’re on the right track… I recently wrote about this topic on my blog http://bit.ly/fAkVpf, Here’s the intro to that post:nnThe reseller channel generally does not work for SaaS companies, especially at the early stages (sub-$20M in revenue). This is driven by two things: n1. SaaS solutions generally don’t require an intermediary. They are easy to find (online), easy to deploy (nothing to deploy), and easy to use. This is obviously not the case with SaaS solutions that require a significant process change on the customer’s side, but more on that below.n2. SaaS license revenue stream in the first year (where the reseller needs to make the most of his money) is a fraction of what perpetual license products receive. So the reseller either has to settle for a fraction of the revenue he expects from his perpetual license vendors, or he needs to get a cut of subsequent year subscriptions (which would be a waste of your money).nnThe only way to engage an indirect channel in an SaaS delivery model is around the professional services that need to encompass your solution. In effect, the only indirect channel I’ve seen work for SaaS companies is the value-added service provider partner. This is where a partner delivers the business process re-engineering required to successfully implement your solution at a customer site. In that case, the service provider derives his revenue from the services billed directly to the customer… while deriving less revenue from the SaaS license margin you would provide on top of that.nn

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you’re on the right track… I recently wrote about this topic on my blog http://bit.ly/fAkVpf, Here’s the intro to that post:

    The reseller channel generally does not work for SaaS companies, especially at the early stages (sub-$20M in revenue). This is driven by two things:
    1. SaaS solutions generally don’t require an intermediary. They are easy to find (online), easy to deploy (nothing to deploy), and easy to use. This is obviously not the case with SaaS solutions that require a significant process change on the customer’s side, but more on that below.
    2. SaaS license revenue stream in the first year (where the reseller needs to make the most of his money) is a fraction of what perpetual license products receive. So the reseller either has to settle for a fraction of the revenue he expects from his perpetual license vendors, or he needs to get a cut of subsequent year subscriptions (which would be a waste of your money).

    The only way to engage an indirect channel in an SaaS delivery model is around the professional services that need to encompass your solution. In effect, the only indirect channel I’ve seen work for SaaS companies is the value-added service provider partner. This is where a partner delivers the business process re-engineering required to successfully implement your solution at a customer site. In that case, the service provider derives his revenue from the services billed directly to the customer… while deriving less revenue from the SaaS license margin you would provide on top of that.

  • http://www.justinpirie.com Justin Pirie

    Great post Firas! I really like your thinking on channels.nnAs a counterpoint to your blog post, I would argue there are some cases where building a channel early can benefit, where I work we have a very successful channel model that started way before your suggested revenue target- but then the channel wanted to sell our type of solution. So the only exception to your rule is if the channel are actively seeking that product to sell, then I think it would be foolish to turn them away.nnHowever, I don’t think that’s a normal use case… The majority of SaaS apps are disruptive and are taking complexity away from the end user, an as such don’t need as many services to install and maintain. Being disruptive isn’t always a good thing if you want to build a channel…nnBut in essence you’re right, if you want a channel, you need to create what I call “channel pull”. Essentially you have to create direct demand in the marketplace before channel will start selling. If you don’t do that, the channel won’t sell anything…nnAnd your remarks on what it takes to make a successful channel work are absolutely spot on. We have a dedicated channel team supporting them.nnIn essence- from a SaaS vendor perspective, building a channel is not something that should be taken lightly. For me- “we’ll create a channel” should go in the same bucket as “it’ll go viral”…

  • http://www.justinpirie.com Justin Pirie

    Great post Firas! I really like your thinking on channels.

    As a counterpoint to your blog post, I would argue there are some cases where building a channel early can benefit, where I work we have a very successful channel model that started way before your suggested revenue target- but then the channel wanted to sell our type of solution. So the only exception to your rule is if the channel are actively seeking that product to sell, then I think it would be foolish to turn them away.

    However, I don’t think that’s a normal use case… The majority of SaaS apps are disruptive and are taking complexity away from the end user, an as such don’t need as many services to install and maintain. Being disruptive isn’t always a good thing if you want to build a channel…

    But in essence you’re right, if you want a channel, you need to create what I call “channel pull”. Essentially you have to create direct demand in the marketplace before channel will start selling. If you don’t do that, the channel won’t sell anything…

    And your remarks on what it takes to make a successful channel work are absolutely spot on. We have a dedicated channel team supporting them.

    In essence- from a SaaS vendor perspective, building a channel is not something that should be taken lightly. For me- “we’ll create a channel” should go in the same bucket as “it’ll go viral”…

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you and I are on the exact same page. I would love to bring our combined thoughts together into an article that we can post on our community site http://www.OpenViewLabs.com We’re always looking for SaaS thought leaders to contribute.

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you and I are on the exact same page. I would love to bring our combined thoughts together into an article that we can post on our community site http://www.OpenViewLabs.com We’re always looking for SaaS thought leaders to contribute.

  • http://www.justinpirie.com Justin Pirie

    Thanks- that sounds great! I’ve got a call with Corey today- so I’ll mention it to her ;)nnJustin

  • http://www.justinpirie.com Justin Pirie

    Thanks- that sounds great! I’ve got a call with Corey today- so I’ll mention it to her ;)

    Justin

  • http://twitter.com/ITLab_JasonC Jason Currill

    Distribution is dead – data residency makes it breath again! discuss?

  • http://twitter.com/ITLab_JasonC Jason Currill

    Distribution is dead – data residency makes it breath again! discuss?

  • Robert

    Any update on this? u00a0Have OneLogin fixed your issues? u00a0

  • Robert

    Any update on this?  Have OneLogin fixed your issues?  

  • http://www.justinpirie.com Justin Pirie

    Hi RobertnnWhat issues are you referring to- the ones in the review?nnJP

  • http://www.justinpirie.com Justin Pirie

    Hi Robert

    What issues are you referring to- the ones in the review?

    JP

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  • msurkan

    I completely agree with Justin’s comment that “The good times, as we knew it in the IT channel are gone.” In fact, I would go so far as to say that the entire “channel” itself is in the process of becoming extinct. Most resellers were little more than order takers in the first place and in the world of SaaS there is little for them to do. The channel is just the latest link in the chain to be eliminated by the disintermediation of the Internet.