TWIS#10 Freemium Special with Lincoln Murphy- This Week in SaaS

This Week I’m delighted to present a Freemium Special with Lincoln Murphy of Sixteen Ventures.

Lincoln has just published a brilliant paper- The reality of Freemium in SaaS– the best look at Freemium from a SaaS perspective I’ve ever seen and we’ve got an exclusive interview for TWIS.

JP- Some people think that Freemium is a Business Model. Why do you think it isn’t?

LM- Freemium is a marketing tactic, not a business model, because you’re exchanging your software for your prospect’s attention, the same way you would by purchasing advertising; you buy attention. How can that be a business model if there’s no revenue and it’s replacing a marketing function?

If you want to give away free access to your subscription business in the hope that people will eventually pay to use the product, regardless of how you segment, then this is Freemium. Its just marketing. Any time you give something away for free, it should be in an effort to get them to buy something else. Substitute “give something away for free” with “mark down by 50%” or “buy one, get one” and you can see how this is just a marketing tactic to acquire customers. Marketing is not a business model, but supports a business model.

Just to muddy the water even more, I’d say if you monetize the “free users” in any other way than through premium conversions (ads, for instance) than you are not truly doing Freemium. You’re cheating and making money in other ways. Shame on you. Freemium, at its core, is about getting people to use a product that is free in perpetuity and try to upsell them into paying customers.

JP- Doesn’t it make sense for a company to give away software instead of buying advertising?

LM- Maybe, but only if you understand that you cannot build a business off of “free”… somewhere, somehow, someone has to give you some money. If that money comes from the free users stepping up and paying to use the system, you can say that Freemium, in its truest definition, works. If you monetize those users in any other way (for example selling access to there eyeballs to advertisers or aggregating their network effect data and selling it) then you are admitting that Freemium, as advertised, doesn’t work. If it did, you wouldn’t need ancillary revenue streams to benefit from the glut of free users.

Of course, if you didn’t attempt to benefit from the glut of free users by monetizing them in as many ways as possible, you would be making a mistake and thus, very few companies actually do “pure” Freemium. This likely contributes to the failure of whatever model they chose, by the way, as companies extend beyond their core competencies into advertising sales, for example, or ruin the user experience by running generic Google Adwords in their app.

JP- It would seem to me that we’re collectively obsessed with businesses that rely on network effects to be successful, like LinkedIn, Twitter, Facebook etc and there are few B2B software companies that rely on this the same manner. Do you think this clouds our collective judgement?

LM- Yes. Think for a second about how many companies there are that can raise hundreds of millions of dollars, have a billion dollar valuation and only have two customers. I’m talking, of course, about Twitter. Are there others? Not many, and yet, how many startups, bootstrapped ones at that, are trying to give the product away or bring it to market with no plan. Twitter can do this because they have millions of dollars which has bought them time to figure out a revenue strategy. Do you have the time and resources to take your time to figure it out? Most likely you do not.

But we are obsessed with, and pay attention to companies like Twitter because they are so rare. They are anomalies. More often than not, everything that is known about these companies is what is reported on Techcrunch or other web-focused business blogs. This is fine until startups start to use what they read there to base their business decisions. In many ways, this is like trying to learn about how to break into the entertainment business from TMZ. In the real world, companies without revenue aren’t talking IPO, but bankruptcy.

JP- On what do you base the statement “SaaS Vendors using the freemium model almost always fail?”

LM- Failure comes in many forms, and as I stated in the paper, if the goal of Freemium is to generate more paying customers, then it often fails. I don’t mean to imply that the failure of the Freemium model always leads to the failure of the business, but it has. Even more often it gets companies close to failure and even more often gets them from ever really getting started.

For those companies that have acquired a large user base, but not converted very many to paying customers, my suggestion is for them to figure out how to take advantage of that user base before they bring the company down. It might be time to let go of the notion that they will convert and look for opportunities around Network Effect data and Ecosystem for additional monetization possibilities.

JP- Can you give us examples of companies that publish their conversion rates from free to pay?

LM- First, we should remember that my paper was very clearly targeted at B2B SaaS vendors, not mass market applications. Where I spend most of my time is in helping domain experts bring products to market that are targeted at a very tight niche or specific business problem by leveraging the SaaS Business Architecture. The bigger the addressable target market, the more the “numbers game” of Freemium might land in your favor. My concern is for the niche or vertical SaaS plays that fall into the trap of thinking they are the same, distribution-wise, as mass market apps.

To answer your question, very few companies publish their conversion rates. Most of the publicly available information is anecdotal. I did cite Evernote in the paper (via a Techcrunch article), as it might have application for business customers, but it is just as much a consumer-oriented app. I tried to illustrate how their high conversion rates actually aren’t when you look at simple stats: free users to paying customers. And to get to this point they’ve had to take on $25M in funding. And this is considered a success story.

Some other resources on conversion rates are here, but they are not B2B SaaS:

  • Andrew Chen has a bunch of great stuff on his blog about Freemium; I encourage everyone to check out his archives and subscribe to his feed
  • Buzzgain as a nice post on Freemium Metrics
  • Don Dodge on Freemium – a few years old, but good. Likely where the oft-cited “3% average conversion rate” came from.

JP- Hmmm that’s really intersting. SaaS vendors are slow to share best practice and it’s VC’s like Bessemer who have really been the best knowledge sharing. Are there any SaaS industry figures we can reliably use?

LM- All of this talk about a specific conversion rate for the “industry” is a red herring. SaaS isn’t an industry or a market, it’s a Business Architecture. The focus is on the wrong thing. Here’s the dirty little secret; it doesn’t matter what the average conversion rate for Freemium is because like most things in business, if it doesn’t apply to your market, it doesn’t matter. Who cares what the conversion rate for Evernote is if you have a time tracking solution for the building maintenance industry. When trying to find conversion rates, at least look to the same market, type of application, etc. Finding those numbers published is going to be difficult if not impossible. You might have to talk to people in the know; investors in that sector, current or former employees of your competition, etc. Buy someone a cup of coffee and see what kind of intel you can get.

Ultimately this just perpetuates the problem, though, as it doesn’t even matter what the conversion rate is in a competitive product. The only thing that matters is what your conversion rate needs to be to make this process successful, if you are doing Freemium already what the conversion rate currently is (measure everything, know the difference between users and customers, etc.), and how to bridge the gap or change course if it isn’t working.

Now, if you want careful industry analysis, Softletter, the folks behind SaaS University in Dallas next week 1/26/2010-1/28/2010 where I’m speaking on “Monetizing Multi-Tenancy,” just did a huge survey of SaaS vendors on Freemium and will be publishing their findings very soon. Stay tuned for that; it should be very telling, indeed.

JP- Rick from Softletter kindly donated a pass to TWIS readers but it would be great to see you presenting. I was wondering why did you write the Freemium paper?

LM- My goal in writing this paper is to open peoples’ eyes to the potential pitfalls and to compel companies looking to, or already employing and not succeeding with, the Freemium model to take a second (or third) look at it and make sure its the right thing for them and their market. Some of the greatest feedback on the paper has been from those companies that said “wow, we thought it was just us and our implementation of Freemium that wasn’t working.” It might be them, or not, but one thing is for certain; I got them to take a look at what they were doing. Maybe it saved their business.

By the way, I’m not an industry analyst pulling data from a database to come up with this paper (pretty obvious to some of the commenters!), I’m just giving anecdotes from my own personal experience with SaaS startups of many different sizes and stages. Your mileage may vary and if it does, please speak up! Comment on my blogs, tweet me @lincolnmurphy, whatever… I’d love to hear about Freemium success stories in B2B SaaS.

Just to restate my point, Freemium implementations in B2B SaaS have a poor track record when converting free users to premium customers. When you add in advertising revenue, or other monetization methods, you’ve shifted the focus away from Freemium so the point is moot.

JP- Why did you accuse free of being a cop out?

LM- Because I like to stir the pot a bit! If you look at the mentality of technology startup founders, especially those going out on their own for the first time, there is definitely an attitude that it is easier to pitch investors then to go out into the market and make sales. I think this should be a pretty well understood point if you’ve been around this business for any length of time. If you extrapolate that mentality out to product development and marketing, you can again see where Freemium, and the ability to not have to “make the sale” fits in nicely.

There is often the attitude by the founding engineer who believes in their product so much that if they can just lower the barrier to entry and get people to slide in, once in, the product will “sell itself.” The thought continues that if they get traction, no matter what kind, VCs will come knocking with large checks in hand and then they can hire a proper sales and marketing team to do the dirty work. Even better is that the traction will attract a bigger company to the small startup and they’ll be acquired for a princely sum. None of this is a strategy, its just hope.

JP- That’s interesting- I often see that as a product guy- Normally it’s becuase they haven’t got to product/market fit and can’t convince anyone to pay so instead of solving that problem they make it free. They never manage to cross the “penny gap”.

LM- Exactly. I think, in that scenario, rather than giving the product away for free to avoid dealing with the pain of making sales, the technical founder is better off finding a co-founder more skilled in the art of “business” to help them take the product to market and to make sales. Sure, now they have only half of the pie, but in the long run it will likely be a pie that actually gets out of the oven and makes some money!

In later stage companies that opt for Freemium, I often see this as an act of desperation and/or co-opting marketing methods from other companies without really understanding why they should do it. I certainly like to get involved before they get to this point, but we can help no matter the stage.

JP- I would add a great product person too- but I’m biased. You contend that rarely do existing companies feel the need to default to freemium- why?

LM- What a coincidence, I happen to know a great product guy. So, Phil Wainewright wrote a great piece for ZDNet where he used my paper as a jumping off point to talk about why Freemium is Bad for Business. He agreed with most of what I had to say except for one point; that existing businesses don’t default to Freemium. I think he might have missed the point a bit when he used Google as an example of an existing company that does default to Freemium in their “apps” business.

Too often people cite Google as an example of a company that does Freemium but this is wrong. Google is in the advertising business and everything they do is geared toward acquiring new eyeballs for their ad inventory; Google Apps is just another piece of their core advertising business. So, according to my point above, Google does not do “true” Freemium since they monetize with Ads. Users are just a cost of doing business in order to attract their true customers; advertisers. In fact, to get out of seeing Ads in Google Apps, you pay them money for the “premium” product, and then manually turn them off (they are on by default!)

JP- I guess people confuse the “shoot for the moon” approach of those companies where the user landgrab is more important than early monetisation versus the realities of the segment they’re in- you used the example of time management in the construction sector earlier- that’s never going to be or need the scale of a Google.

LM- Yes, Google is a bad example to use since most companies don’t have the resources, especially bootstrapped startups, to build products without any real go to market strategy and just roll them out for free and see what happens. Many have the resources but cannot risk shareholder value on wild chances. Google can; as long as they are creating new ways to deliver ads or extract usage patterns, then nothing is a waste. Even if the product ultimately flops, or the acquisition doesn’t pan out, if they served ads and collected usage patterns for a while, it was probably worth it. And in the case of Google Apps, it turns out its actually a cool way to get people in front of the Google brand all day while being productive and not just searching so it worked.

When I said “existing companies” in the paper, I didn’t have Google in mind. I was talking about legacy software vendors, small ISVs, or those not in the software business at all, like consultancies, professional services organizations, or the like. These existing companies don’t want to give stuff away for free. They understand the value they bring to their market, and the need to return share holder value. They recognize an opportunity to leverage the SaaS Business Architecture and the multiple revenue streams to generate maximum stakeholder value.

JP- Indeed- I really like your work on the 7 revenue streams which is on your blog. I was wondering why you say are free users not hot prospects?

LM- Simple; The numbers don’t lie. Publicly disclosed and anecdotal numbers, along with those obtained confidentially, indicate that overall conversion rates are quite low. It is pretty clear that when the vast majority of users never convert, even those who are active in the system, they are not hot prospects.

But I think the real question shouldn’t be “are the users hot prospects,” instead it should be “why did they become users in the first place?” Are you bringing in users that are not hot prospects? Is it something you are doing that is causing the wrong type of user to sign-up for your product? Too often any sort of activity or traction is considered progress. This isn’t exactly true.

JP- I guess you’re right- if they’re not converting then they can’t possibly be hot prospects. The only other reason to keep them is for other reasons, like network effect, advertising etc and then you’re not pure play freemium….

LM- To follow-on to my mention of Techcrunch from earlier, I’ll bring back the notion of the “Techcrunch effect” which was popular a couple of years ago. For those not familiar with it, for any startup profiled on the Techcrunch site, the first 275k users (the number of subscribers to their feed at the time) didn’t matter because they were just there to try out the site or app. Startups were either going to investors or the industry and saying “look at us, a quarter million users in the first day!” It was when people called shenanigans on these numbers that the TC effect was coined and the first 275k users were deemed unimportant because they would likely never really use the system or become paying customers. Fast forward to today and the TC effect has been dampened with the popular invite system, but the effect is still being felt in other ways. Are you creating your own TC effect by bringing in large amounts of users that will never pay to use the system and mistaking that for progress?

Another possibility is that the users actually were hot prospects when they came in and the free product doesn’t work as advertised so they either stop using it or put up with it but would never pay a dime for it. If a poorly executed free product is any indication of what the premium product is like, few will convert.

JP- Indeed- the penny gap as mentioned before. That’s why product market fit is so important. This might seem obvious now, but why should free users not be considered customers?

LM- Demian Entrekin already took issue with this on his blog in a post titled “Users or Abusers“.

He took issue with my attempt to differentiate between those people using the product for free and those paying money; users vs. customers. Its funny because the only reason I broke it out like I did was some of the reviewers wanted me to explore it further. As Demian said, its not very clear. I get that. Its difficult because in software we’ve always had “users” and we’ve always had customers, but for the most part, they were one in the same. The user of an ERP system was still generating revenue for the software company even if the customer was the Enterprise. In other words, the ERP company might have charged the Enterprise customer for each user of the system. In SaaS, and in particular with the Freemium model, we have the notion of non-revenue generating users. They aren’t customers. Period.

JP- Ah, OK- I get it now. Customers in pure play freemium are only users who pay you money- Users who don’t pay aren’t customers.

LM- To adequately understand the impact of your Freemium strategy, you must differentiate between those using your product for free and those paying for access. For Freemium to be successful, or for a SaaS vendor to know when its time to change course, requires management and monitoring of critical metrics. These metrics can be skewed when the vendor doesn’t really understand the difference between the the users of the system, application customers, or even stand-alone customers (network effect data, advertisers, etc.) and how all of this comes into play.

JP- Yes- sometimes people call them “Vanity Metrics”- metrics that make you feel good but don’t help your business at all. A bit like you’re TechCrunch example above.

LM- That said, I don’t care how you refer to the people that consume your resources, just know that those who pay are different from those who don’t and that there is a cost for users who do not generate revenue. I’m just glad, like the Freemium topic overall, this is being discussed and I thank Demian for talking about this topic; even if he didn’t like the title of the paper or the tone!

JP- I can understand that- I sympathise with his views but what I’ve come to realise I’ve never advocated Freemium in it’s purest sense, only as a hybrid and as a marketing tactic. Perhaps I didn’t realise that, but I do now. Why did you call freemium a virus?

LM- As Josh Kopelman of First Round Capital says in a great blog post of his, many startup marketing plans call for a product “going viral” for user growth.

Quite often for startups looking at Freemium, you will often find a large amount of reliance on “going viral” to get to market. The reality is, no matter how well you build in the viral loops to your application, going viral is not really something you can make happen. You can do things to help it along, even pay to grow a viral campaign (many campaigns that seem organic are actually quite contrived), but you can do little to guarantee its virality. Because that is often the plan on how to make the “numbers game” of Freemium work, and it is often little more than hope, I refer to it as the Freemium Virus.

As with many viruses, little good comes of them. Freemium seems to itself be viral and has spread to startups around the world, causing it to be perceived as more popular than it really is. An interesting look by Bernard Lunn on ReadWriteWeb at 103 SaaS companies found only 6% have a Freemium model, showing it is much less popular than the buzz might have you believe.

And with vendors like 37 Signals and Survey Monkey, among others, starting to de-emphasize their free versions based on pricing page re-designs, it seems this marketing tactic might be losing favor with some of the mass market, but still B2B SaaS companies who have traditionally leveraged the model. I think in B2C (entertainment, games, etc.) its likely here to stay and in those areas it makes a lot more sense.

JP- But I guess we need to focus on our sector- B2B SaaS and what actually works for us, not gaming or entertainment etc. Why do you say that Free = Zero Value? Surely if someone is using it they are trading their time and attention for your software?

LM- True or not, like it or not, some people think free means “no value”. Its a perception issue. While these types of blanket statements are great at getting people’s attention, you need to know your market. How does your market, and specifically those making the decision to bring your product into their company, feel about “free”? Its up to you to know this before you dive in with Freemium. It might be fine, or it could sink you before you leave dock.

JP- I guess a good way to do this would be to compare yourself against your competitors. If you’re competitors are free and gaining traction then it might be fine, but you’ve got to ask- why would you want to enter a sector where the competition gives away their product for free…. Do you think business customers have issues with free?

LM- I also said in the paper that if a startup offers their flagship product for free that this will throw all sorts of red flags up with potential customers. Startups, even well-funded ones, are a risk for business customers of all sizes. How does a startup giving away their core product look to the target market? Does it matter that you have multiple pricing tiers, SLAs, etc… nope, you lost because the end-customer couldn’t get past “free”. Its not fair, but that doesn’t matter. You didn’t know your market and you lost out because of it. Know your market is the overall lesson here.

A quick note, however, on how startups often deal with this lack of trust; they eliminate barriers to exit. To appease the customer, or potential customer, they often build tools to expedite the exporting of data (and in some cases application code) for the users when they want to leave. This effectively eliminates any need for the end-user to stick around, which means they likely won’t convert. This type of knee-jerk reaction is tied directly to the notion that their product is so great that once the users are in, they’d be crazy not to start paying.

JP – Thanks Lincoln- it’s been a pleasure and I can’t encourage people enough to check out the Freemium paper- it will open your eyes!

LM – Absolutley! Thank you for the opportunity to set the record straight and to help spread the word about this popular, touchy and potentially confusing subject.

JP- Thanks again!

Briefly, in other news:

Ash Maurya wrote a brilliant post on Continuous Deployment in practice– something Eric’s been blogging about for ages:

Of all the Lean Startup techniques, Continuous Deployment is by far the most controversial. Continuous Deployment is a process by which software is released several times throughout the day – in minutes versus days, weeks, or months.

The biggest waste in software is created from waiting for software as it moves from one state to another: Waiting to code, waiting to test, waiting to deploy. Reducing or eliminating these waits leads to faster iterations which is the key to success.

Ash then goes on to outline his journey and the techniques he used to achieve nirvana. Inspirational stuff.

Sachin Rekhi wrote a really nice post on what he’s learnt from being an Entrepreneur in Residence at a VC firm. If you’re in the process of creating a new business- these are some great points to think about:

I thought I would take a moment to share some of the most compelling lessons I learned during my Entrepreneurship-in-Residence.

Evaluating Opportunities

Why Hasn’t it Existed Before. One of the most valuable thought exercises for innovative opportunities is to think about why your solution hasn’t existed in the market before. If there are structural changes that have occurred in say the last 5 years that make this opportunity possible today, then you may be on to something. If there are no such changes and you simply think that “no one has thought of this before” then I would urge you to dig deeper, as you may simply not have enough domain expertise to know why it is a bad idea.

Seek Leverage. For every startup opportunity, think about how to get the most leverage in the ecosystem to command the lion’s share of the value created, as opposed to being limited to taking a small sliver. This was one of the most important perspectives VCs offered. For example, Trinity helped me think through how to take an end-user product idea and expand my thinking to eventually become a platform for an entire ecosystem.

Human Behavior is Fundamentally Consistent. When looking at introducing new consumer behavior, look for analogies that exist in the offline world or using previous technology that may be applicable to this new behavior. For example, while Twitter is definitely a novel service, it can be fundamentally thought of as an expansion of the the traditional town hall concept.

Disrupt Incumbents. In certain spaces, after the market leaders gain significant market share, they stop innovating and simply focus on servicing and maintaining their existing customers. This creates opportunities to disrupt these spaces with cutting edge technology. For these spaces, think “if I were to re-invent this space from the ground up using present day technology, what would it look like?”

Original Thinking. When you look at some of the biggest innovations in the past decade (Facebook, Twitter, YouTube), they often come from original thinking. The founders of these startups are often young and unlike their older brethren, haven’t yet fossilized their world view into the existing paradigms. This thinking creates opportunities for innovation.

I particularly like #4- Disrupt incumbents with the key question- what would that service look like if it was invented today and unless the competitor has a brilliant innovation culture, there’s an opportunity. Steve Blank wrote a brilliant post today on firing founders– because of the mismatch of their early stage skills with the skills needed as the company develops. But he does point out that this often causes the company to lose it’s innovation and risk taking culture in favour of execution- which is no bad thing- but creates opportunities for startups to disrupt!

I wrote about two things this week- which you would have seen if you subscribe to the RSS- Is Cloud Computing doomed or EC2 over optimised and Cloud Consultancies view Customer acquisition as key to selection. The first post was interesting because since Amazon introduced spot pricing, latency has risen significantly- coincidence? Secondly I picked up an interesting comment in the Appregatta blog- that they actually look at a SaaS vendors Customer acquisition strategy as a key component to their selection process when they’re looking for SaaS products for their customers. They think if you’ve got a bad customer acquisition strategy you’re more likely to fail. SaaS vendors take note!

I couldn’t resist sharing this Dilbert on Cloud Computing with you:

Dilbert.com

Have a great weekend!

Justin

p.s. I’m still available to hire! 😉

Also read...

Comments

  1. Interesting – for me I guess value in a group “should be” the ability to share information, ideas, best practices with my peers. Unfortunately it has never worked out that way for long as you point out. And frankly, the overhead involved in keeping the “noise” down is just too much most of the time. So – groups, forums, etc – eventually devolve to become noisy and you either ignore them or drop off.

    I have to admit the addition of lists has been one of the greatest things Twitter has done. I think of it as a filter system where I can quickly check information from sources “I” trust and want to hear from and “I” selected. It isn't that I don't value what may come from other sources in my follower pool. It is a way to focus on a limited subset and participate with them separately.

    I think subgroups “could” work this way to some extent, but still they lack some of the simple features that make the Twitter lists so valuable. I don't have to repost anything for my tweets to be in the stream on the lists I appear on. I don't have to do anything to appear on a list other than contribute value to the list owner. <<period>>.

    Without a lot more moderation than anyone has time for – I don't know how that simple idea coulld be translated to LinkedIn in its existing form. So, we're left with a “community culture” that needs to guide things and honestly – culture is a hard thing to cultivate. All I can imagine is that we keep posting things about the culture and promoting it. It won't end with this article I'm sure.

    Reply
  2. Interesting – for me I guess value in a group “should be” the ability to share information, ideas, best practices with my peers. Unfortunately it has never worked out that way for long as you point out. And frankly, the overhead involved in keeping the “noise” down is just too much most of the time. So – groups, forums, etc – eventually devolve to become noisy and you either ignore them or drop off.

    I have to admit the addition of lists has been one of the greatest things Twitter has done. I think of it as a filter system where I can quickly check information from sources “I” trust and want to hear from and “I” selected. It isn't that I don't value what may come from other sources in my follower pool. It is a way to focus on a limited subset and participate with them separately. Think of it like bookmarking or RSS subscriptions. It is a personal choice of what I need/want to be able to access efficiently.

    I think subgroups “could” work this way to some extent, but still they lack some of the simple features that make the Twitter lists so valuable. I don't have to repost anything for my tweets to be in the stream on the lists I appear on. I don't have to do anything to appear on a list other than contribute value to the list owner. <<period>>.

    Without a lot more moderation than anyone has time for – I don't know how that simple idea coulld be translated to LinkedIn in its existing form. So, we're left with a “community culture” that needs to guide things and honestly – culture is a hard thing to cultivate. All I can imagine is that we keep posting things about the culture and promoting it. It won't end with this article I'm sure.

    Reply
  3. Hmmm – you didn't mention Google's announcement of the “cloud OS” – Chrome which is supposed to be aimed – as their new browser is – at web-enabled (SaaS) applications. It is a big shot across the bow of MS which is still mired desktop legacy, fighting off players like Salesforce who encroach on their enterprise offerings, and trying to sell Azure without their traditional channel buy-in.

    We live in very interesting times as they say….

    Reply
  4. Agreed- my feed reader has gone mental with all the chrome OS posts but I need a couple of days to gestate on it I think. Web only operating systems…

    Reply
  5. the Chrome story is a little more than “web only.” As some one pointed out – it allows a level of hybrid approaches we have mainly seen in apps based on things like Adobe Flash and Flex. Meaning – some client-side app that does some of the compute specific to a user and saves backend cycles. There are also hybrids coming for enterprise apps that layer on external apps while doing the heavy lifting locally.

    When this is fully exploited, it will greatly increase the move to interapp communication and lessen the need for every app to “do it all in isolation” …. Mash ups by any other name….

    Reply
    • I completely agree- I'm still computing the implications for enterprise (to excuse the pun) – when all apps are run in the cloud- what that'll do to Microsoft's business…

      I guess the first requirement is fast, reliable internet, second apps in the cloud- although I'm guessing you can use TS/VNC if you needed access to a fat app. To me that sounds ideal for offices and then fuller OS's on laptops.

      Thinking about the compute requirements also could dent hardware refreshes but less processing means less power consumed too. Plus, Google has a certain trust factor- I was talking about it this evening and I suggested to someone that hates computers that they might try a Google OS and they were really positive about it- since Google is one of the few things they understand…

      Reply
    • Hey Mike

      This is an interesting perspective- no skype as yet on Chrome OS.

      Chrome OS only supports flash at the moment (no silverlight) and apparently skype won't run in flash… so no skype support on Chrome OS…

      hmmmm

      Reply
  6. Hey Mike

    This is an interesting perspective- no skype as yet on Chrome OS.

    Chrome OS only supports flash at the moment (no silverlight) and apparently skype won't run in flash… so no skype support on Chrome OS…

    hmmmm

    Reply
  7. Justin, good post, especially with all the links. I think we're all discovering that selling to ISVs is hard work and not for those without legs in terms of sustaining cashflow. Leave education to the bigger guys, except the bigger guys are almost all in the same boat of not knowing what they don't know. Is the answer that more ISVs will have to fail in their attempts to transition to SaaS before there will be a market for such consulting services, or ??? Walter Adamson @g2m http://xeesm.com/walter

    Reply
  8. Justin, good post, especially with all the links. I think we're all discovering that selling to ISVs is hard work and not for those without legs in terms of sustaining cashflow. Leave education to the bigger guys, except the bigger guys are almost all in the same boat of not knowing what they don't know. Is the answer that more ISVs will have to fail in their attempts to transition to SaaS before there will be a market for such consulting services, or ??? Walter Adamson @g2m http://xeesm.com/walter

    Reply
  9. Justin,
    great post – you cover a lot of topics. I truly think that we're seeing a sea change in how marketers think about buyers, driven by:
    – the change in the way buyers find information
    – the collapse in the difference between “brand promise” and “brand reality” driven by social media
    – the shift in many industries to recurring (or equivlent) revenue, rather than upfront, which necessitates a focus on account satisfaction/renewal/growth

    As this happens, it's driving a changing set of skills of marketers, from copy/creative skills to customer analysis, operations, and process – in order to understand buyers and deliver the right message at the right time.

    Great post, let's hope 2010 is the year we all think it will be.

    Steve

    Reply
  10. Hi Justin,
    Actually I was the one at the EuroCloud meeting that you couldn't identify. Whereas the Cloud term isn't well liked by the average CIO, the average SME business person “gets” the Cloud concept much more quickly than having to explain Software as a Service (or ASP or other alphabet soup). It's not perfect, and there is an argument to avoid the Cloud term too and just talk about online or web based solutions, but focus on the business benefits in simple terms – cheaper, more flexible, 24/7 acccess, removes IT headaches, faclitates collaboration etc. One of the continuing failiings of our industry is we are just too full of jargon when we sell this stuff.

    Reply
  11. Hi Justin,
    Actually I was the one at the EuroCloud meeting that you couldn't identify. Whereas the Cloud term isn't well liked by the average CIO, the average SME business person “gets” the Cloud concept much more quickly than having to explain Software as a Service (or ASP or other alphabet soup). It's not perfect, and there is an argument to avoid the Cloud term too and just talk about online or web based solutions, but focus on the business benefits in simple terms – cheaper, more flexible, 24/7 acccess, removes IT headaches, faclitates collaboration etc. One of the continuing failiings of our industry is we are just too full of jargon when we sell this stuff.

    Reply
    • Sean Ellis is superb- a blog well worth following…

      Just checked link traffic- 50% more clicks on Fridays than Mondays means people probably have more time to read stuff…

      Reply
  12. Justin, Thanks for another useful issue.

    I agree that, for most SaaS companies, controlling customer acquisition costs (CAC) and matching them to the lifetime revenue stream will be the key determinant of success. I would include “retention” in the equation (“CARC?”), in that companies typically cannot afford the cost to acquire customers more than once.

    The comment from Oracle SVP Anthony Lye that “Customers no longer trust vendors,” is disturbing. I would maintain that SaaS solution vendors unable to gain customers' “trust” are likely to fail. Vendors must convince prospective customers that they'll deliver the service and a stream of enhancements over the lifetime of the subscription. In other words, SaaS vendors are selling “promises,” not products. People typically don't believe – nor pay for – promises from people they don't trust. (I wrote more about trust and relationships here: http://saasmarketingstrategy.blogspot.com/2009/…)

    Reply
    • My Pleasure Peter- I'm just in the process of writing #5…

      I agree with you wholeheartedly about the importance of retention- that's why it has it's own measurement in the Bessemer Laws….

      Where it says “Customers don't trust vendors” shouldn't apply to SaaS vendors as their churn will be shocking and they'll be out of business very quickly. That rule hasn't applied in traditional software however….

      Cheers,

      Justin

      Reply
  13. Justin, Thanks for another useful issue.

    I agree that, for most SaaS companies, controlling customer acquisition costs (CAC) and matching them to the lifetime revenue stream will be the key determinant of success. I would include “retention” in the equation (“CARC?”), in that companies typically cannot afford the cost to acquire customers more than once.

    The comment from Oracle SVP Anthony Lye that “Customers no longer trust vendors,” is disturbing. I would maintain that SaaS solution vendors unable to gain customers' “trust” are likely to fail. Vendors must convince prospective customers that they'll deliver the service and a stream of enhancements over the lifetime of the subscription. In other words, SaaS vendors are selling “promises,” not products. People typically don't believe – nor pay for – promises from people they don't trust. (I wrote more about trust and relationships here: http://saasmarketingstrategy.blogspot.com/2009/…)

    Reply
  14. My Pleasure Peter- I'm just in the process of writing #5…

    I agree with you wholeheartedly about the importance of retention- that's why it has it's own measurement in the Bessemer Laws….

    Where it says “Customers don't trust vendors” shouldn't apply to SaaS vendors as their churn will be shocking and they'll be out of business very quickly. That rule hasn't applied in traditional software however….

    Cheers,

    Justin

    Reply
  15. Justin,

    Your “Startup Pyramid 2.0” is worth a longer discussion, perhaps in a future issue of TWIS.

    I'd agree that “Economics” deserves its own layer if it refers to a start-up's need to match costs to lifetime revenues. For SaaS companies, building a product that matches the product's capabilities with the market's needs is just the start. The more difficult challenge is delivering, marketing, and selling it for less than the revenue it will generate.

    Happy holidays to you as well,

    Peter

    Peter Cohen
    SaaS Marketing Strategy Advisors
    http://www.saasmarketingstrategy.com

    Reply
  16. Happy new year to you too, Justin. Your dedication to TWIS, even on New Year's Day, is impressive!

    The note on customer acquisition metrics used by Matt Breznia and Xobni is evidence that a company's engineers aren't only to found in the development group. Some have migrated over to marketing! In the more successful SaaS companies, I often see better connections between groups – marketing, sales, support, product management, development – and a greater understanding of each others' role in acquiring and retaining customers.

    Reply
  17. Much of what you are talking about here is customer experience satisfaction. Not only are the numbers important but finding out why the product is or is not selling is key. Monitoring the channels is important but at the end of the day what are customers expecting to find in your product. I think one big thing that we can take away from great market research as a SaaS vendor is our competition. What do they have what don't they have. And, for our target consumer which matters most.

    One thing I've never seen on a Web app which I think would be great if you are indeed the leader in the product line is a comparison chart against your vendors. Allow your user the transparency to see who you are competing with and why they should buy from you. You control the entire sale at that point, apples-to-apples.

    Reply
    • Yes- product / market fit is key. That pmarca post I mentioned midweek is inspirational- http://bit.ly/7FU5Tk if you haven't seen it.

      I have seen comparisons before- but it is a key takeaway from this post- you've got to help your customers understand where you're positioning your product. I saw this recently: http://bit.ly/6s8uRX comparing themselves against their competitors.

      Reply
  18. Justin thanks for mentioning GetApp.com. I agree that product management excellence is the most scarce resource and you have a lot to offer in this space. To any good SaaS company reading this comment: HIRE HIM!

    Reply
  19. Excellent interview and assessment from Lincoln Murphy. We risk a second dot com bubble if Freemium is the business model. And user organisations need to do a risk assessment in case an application they increasingly rely on starts to get flaky. Back-up strategy? Disaster recovery? PS. Is it just me experiencing capacity problems on Twitter this week?

    Reply
  20. Thanks for such an excellent interview!, I'm looking forward to reading the other blog posts on Freemium.

    My favourite quote: “Sure, now they have only half of the pie, but in the long run it will likely be a pie that actually gets out of the oven and makes some money!” — that one was completely priceless :-)

    Reply
  21. Great interview, important topic.

    Reflecting on this interview and the paper I sense that the 'sample set' of product startups must operate without substantial input from business end-users and buyers… Surely, the start-up's alpha and beta users can provide feedback not only on product features but also on questions of sales and marketing strategy.

    Reply
    • I agree- but I guess that's why they're buying Lincoln's talent…

      Personally, I'm a practitioner of Lean Startup and Customer Development methodologies which avert the need for these problems if done properly… If the product / market fit is good then you shouldn't have to give it away for free. Just like Marc Andressen calls it “market pull”.

      Reply
  22. Justin,

    I think you are spot on about the iPad affecting SaaS. I wrote a post about that this week http://bit.ly/doEd7x . I see the iPad and the upcoming Google Chrome OS tablet (rumored) as changing things dramatically. These device have less disk space than even a netbook and will take advantage of the cloud for applications and storage. This also helps us with all the devices we have everywhere. Why sync things, when you can just point to the cloud. This way you can use the device you need, when you need it. I forsee a lot of cool applications being served up through SaaS for these new tablets.

    Reply
    • Ron- great post!

      I wasn't aware of the Android tablet- thanks for giving me the heads up on that one…

      Talked about here: http://bit.ly/cINbU9

      Killed off??? :http://bit.ly/a9ZNki

      As I've said before, open beats closed every time and I can't wait for Google to bring out a tablet, especially if there as obsessed with the detail like they were on the nexus one. This brings the best of both worlds- attention to detail in the device and an open platform for innovation.

      It Makes No Business Sense Unless You Are Google: Oh wait! Google simply makes more money when more people go online, thanks to adsense. Whoa, what a coincidence! The only thing a web tablet would do is get people online.

      http://bit.ly/bKJrrS

      Thoughts?

      Reply
  23. I agree the “vision” of the iPad is in the right direction for device usability – but… This is first generation and we are missing a few things. First, it doesn't multitask – at all. Y0u can't receive email and takes notes during a meeting at the same time. Yes, there is push notification, but that isn't going to solve the basic problem that for most “knowledge workers” this is the equivalent of being disconnected – one app, one SaaS, one thing at a time.

    Second – as good as I expect the device “user experience” to be – I really don't believe most SaaS vendors have themselves reached an understanding of what an excellent online user experience means and what this type of device itself will enable. As we all know, this is just the tip of the iceburg – Goggle's aim is to enable their Chrome OS in tablets. In a lot of ways, Chrome OS is better suited to the types of tasks this environment will find a home in. I don't expect Apple to sit on its hands in this regard, but right now, the iPhone platform has some limitations that make it somewhat limited as a target device for SaaS. Limitations aren't bad though, as we all know, limitations spawn innovations quite well.

    Reply
    • Fundamentally I agree Mike- but what it represents is a major step forward for situational devices, just as the iPhone was for phones. Yes it lacks “critical” features, but yet I still love my iPhone and it does a better job for me than any phone EVER!

      I think we need to forget about it's shortcomings and focus on the value it'll be able to deliver to mobile workers and as a situational device. I certainly want one, if only to read blogs!

      JP

      Reply
    • Marc –

      I don't know exactly how much Plex is charging their customers, but it's not trivial. The basic idea is that if a customer wants a specific feature or function, Plex gives them a quote for it and then they decide if they want to pay for it or not. The interesting thing is that once the feature is done, it's available to all of their other customers as well (for no additional charge).

      It's a great model if you can get your customers to buy into it, and Plex clearly has. I don't think it would work in a broader market, but it does appear to work in their tight vertical and I can see why.

      Robert

      Reply
      • So to clarify- I think it clearly depends on your vertical, but it's a clever way to add functionality for no cost or a profit, while not forking your codebase (key to SaaS).

        By definition, not forking the code means the feature can be available to everyone if you so choose.

        There are however some pitfalls with this approach- it could feel like you're in the custom software business and lose focus on product / market fit if you're not careful.

        But if you're a small SaaS company, working in a tight vertical, design the new functionality carefully so to enhance your product/market fit, there is little downside to this approach, especially as the customer is tied in even more to your system…

        Reply
  24. Hi. This is Rick Chapman of Softletter, and I just thought I'd chime in here with a couple of observations.

    First, I'd like to thank Robert for his kind comments about SaaS University; we work hard to put on a very content filled event. Also, I'd like to remind readers of this blog that our early bird pricing for our events is $795; also, at every event, we give away to all the attendees a free copy of one our research reports and we charge for these. At Chicago every attendee received a copy of our massive SaaS Marketing Report, which breaks out 22 separate marketing activities as carried out by SaaS firms. We charge $449 for it. At Dallas, we gave away our direct sales compensation guide, which has a $400 price tag. These items are not loss leaders and are sold on a regular basis. Our events are designed to be very content rich and we think we're offering excellent value for the money.

    Also, we videotape the entire proceedings and make them available online to the attendees, so, for example while Robert wasn't able to see all of Ted's channel discussion at the event, he will be able to when the video is posted online.

    Now, as the issue of customer service. We have had speakers at past events discuss, specifically, SaaS customer service issues. For example, at Chicago, we had Matthew Gonnering of Widen address this topic specifically and in Atlanta and Boston Tom Appleton of DreamFactory.

    rick chapman
    http://www.softletter.com
    http://www.saasuniversity.com

    However, at Dallas, we decided to focus on the topic of understanding that your SaaS customer base needs to be thought of as a community of users based on the inherent nature of the SaaS model. Patrick's presentation went way beyond the issue of having customers pay for new features and discussed the community of users concept in greater detail.

    Once you understand the power of this concept (and implement it), you should also begin to think about how you provide customer support in different ways. For example, Patrick discussed how the Plex community has “taken over” the management of Plex's documentation and FAQs. Ultimately, your community becomes a highly self supporting, and self managing entity that a SaaS company truly “reports” to.

    Reply
  25. @justinpirie – correction – Citrix Online acquired Paglo and not Cisco.
    The blog post by Marc Benioff is an exact transcription of his Dreamforce speech – almost to the word. Chatter is an interesting spin. My personal belief – Professional collaboration is going to be more social, but I do not think feeds like Twitter are going to make much sense. But there is a tremendous opportunity for SaaS to be part of the professional conversations. How it evolves remains to be seen.
    Btw, Chatter is not a good name to use for professional conversations 😉

    Reply
    • Again- you're totally right and I'll correct it right away.

      I agree with you about chatter- I guess my point was Salesforce is the leader- and it's leading with network effects, so we should take note.

      Plus you're right- it's a rubbish name- almost as bad as the iPad 😉

      Reply
  26. I don't necessarily agree that you have to be able to sell direct over the web. If you look at the majority of the public SaaS companies that sell B2B, they enable you to have a free 30 day demo account but in order to buy they want you to talk with someone live. The web site serves as a critical lead gen engine to fuel direct sales motion.

    With that said, I agree with a lot in this post, especially the compensation issue. If you want channels to participate, I believe you need to give them a cut of the subscription business, not just in the first year but in subsequent years as well.

    Reply
    • You're right- and as I wrote that I wondered whether I'd be called out on that one… My example was a little bit wonky but I think the point remains valid for most people- public SaaS companies get away with it because they led the transition from Enterprise to SaaS and they had to have the salespeople. Now, they're tied into public company reporting and they can't possibly change those processes. I think the next generation of public SaaS companies will be different.

      Thinking about that point- what about Amazon and Google???

      As I said before, I think the public SaaS companies have trained some bad habits into everyone, just because they were able to spend so much money. They in particular are responsible for the “low TCO client-server application shoved through a browser” issues that instigated the change to SaaS but no longer works.

      Reply
  27. To pile on Lincoln's comment – a service-based channel that embeds the SaaS app in what they deliver is really a match made in heaven for a SaaS company. It takes real thinking to make it happen – but when that works, it becomes a leveraged model. The channel is then incented to both sell the SaaS application and to feed back what would make it even more beneficial to their service offering and their customers.

    On the other side, a pure sales channel play is very hard to make work. The incremental cash in a SaaS sale just doesn't have a lot of pull for a sales channel. Netsuite is trying to solve that problem by rewarding their SaaS sales channel in much the same way they do their normal licenses – but the problem comes with insuring the total lifetime value doesn't exceed the customer acquistion cost or you're bleeding cash everytime you acquire a cusstomer (as you point out). This can happen if the channel is selling but not to a profile that will actually get enough value to keep their subscription over the long run.

    Reply
    • Spot on Mike!

      I saw the Netsuite announcement after I posted this… That's a really interesting approach- my guess is that they're Customer Life Time Value is about 5 years and they win over the long term but are cash positive after about 14 months. Possibly worth a post on it's own…

      Reply
  28. disagree. People wrongly seems to put all SaaS offerings into the same bucket just because they are delivered from the cloud vs. purchased and installed on in-house servers. The truth is, all SaaS apps are NOT the same. some require professional services (integration, migration, customization, etc) and some don't. Those that do are particularly interesting to the channel. if its interesting, they'll invest in skills development and be proficient in selling it. Also, if that SaaS app integrates with an on-prem app that this VAR is also selling, you've got a winning Channel opportunity. Their differentiation in these cases is their professional services expertise.

    You compare the web with the channel as sales vehicles. I don't know why you'd do that. One has a salesperson and the other doesn't. You ask “How can we expect a channel to sell it when we can't get it sold on the Web?” I disagree with the premise of that question. Hence, the answer is simple. You can expect different results from the channels because they have salespeople, and the web doesn't.

    Reply
    • Kent

      You're right- some apps do require professional services, and for that there will always need to be people. But the newer, better designed apps require less and less of this- they automate and make intuitive what used to be delivered by pro services and only deliver high value adding pro services now.

      The problem I have with your assertion is that you work at an established vendor with a very established channel- which is not the case for most of the readers… You might be able to get this model to work but I can tell you from experience that most SaaS companies cant… SaaS companies shouldn't be told that they can move into that sort of position either… that's your competitive advantage and you're not going to give it up easily!

      On-prem / SaaS integration is less of an issue at the low end as it is at the high. In the middle the water is muddy at the moment but I think that will change as more apps get migrated to the cloud. Channel partners have to shift their focus from installing/ integrating/migrating to adding value. Focusing on that keeps them at the bottom of the value chain where they will die.

      So in answer to your last question- the web is the primary channel for 99% of SaaS companies. Because you were part of the first wave, selling low TCO software delivered through the browser, you've got used to selling like enterprise software and now you're owned by a public company, you're tied to their reporting and revenue expectations. This is not what the majority of SaaS companies can and should expect- most often their problem is having poor product/market fit and then expecting the channel to cover up their mistakes…

      Reply
      • Justin, There are a couple different areas of value-add oppty for partners. One is indeed integration/migration/customization. That may be limited with SaaS, agreed. I'm happy to report that at Cisco, our SaaS apps will require that hands-on work. Enterprise I/M, Email, to name a couple.
        The other value-add is in adding expertise to facilitate the business processes change that the app creates. This is the business consultant work rather than the Engineer work, and I think this is where we have agreement if I'm reading your comments correctly. I also think that this work is the most lucrative. As Technologies become more capable of drastic process change– and collaboration technologies do this– there will be growing opportunities to channel partners who can add the consultants to accelerate these changes. This is a huge step for the traditional channel partner.

        Its ALL about business outcomes. Those who can facilitate it– manufacturers and channel partners alike– will be the winners.

        Reply
        • I think we're definitely on the same page there- those who can transition away from being commodity providers to business value adders will win.

          I have to say I'm somewhat disappointed that you happily report your SaaS apps require that sort of work, as I think that'll put you and your partners at a disadvantage in the future, when this sort of function is automated.

          Reply
  29. Yep, SaaS is tough. Yep, building it thru the channel is a real challenge. However, the SaaS wave is too big to ignore and think that suddenly all of this software is going to be sold and supported by the developer of the app.
    At end of the day, contracts are messy. With SaaS, there's not a sku in sight– its all contracts, which means customization at the deal level….a mess as compared to a buy-for-9-sell-for-10-add-the-services-get-on-down-the-road model that comes with on premise, sku-based apps.

    The way I look at it, Service Providers have had channels forever, right? They might not be SaaS providers, but their XaaS offer is similar enough to take a page out of their channel playbook, which is primarily the page with the word “AGENCY” at the top. There are other ways to do it, mostly dependent on IT support mechanisms that nobody has built yet. IT development cycles, however, are long, and companies are assessing if channels will work, and hence if the IT investment is one worth making.
    SaaS and channels will work, because it has to. Last one to the finish line is a rotten egg.

    Reply
  30. I think Justin is dead on in these comments and they mirror our own experience at LeveragePoint. Of course mschvimmer is also correct, the lead is generated from the web but the sale is closed personnally. The comment by Michael Dunham about servies and SaaS being a good match also mirrors our experience, but with a twist. We believe in using our SaaS application as a channel to deliver services – the services flow through the application rather than being wrapped around it. In our case this means that service providers that build customer value models or who provide the data that drives them do so through our SaaS application. I feel that in the long-term this is the most powerful model.

    Reply
    • Yes and it's non-traditional channels that are benefiting most from that approach, not the VAR's and SI's who traditionally installed, migrated, customised and maintained. That value is disappearing and new channel partners who benefit from the core value of your product will help SaaS vendors win big.

      Reply
  31. Justin… great stuff, as always.

    I just wanted to comment on the excerpt from Sachin's post on “Scale Pricing with Customer Success.”

    Since B2B (Enterprise & SMB) SaaS is our specialty at Sixteen Ventures, we have a lot of experience in versioning, bundling, etc.. First, we work with our clients to ensure that they are solving a business problem for their target market. By doing that, we also help our clients realize that when they solve a real business problem, there is a real value put on that by the clients. This means it is very unlikely that SaaS vendors we work with are going to be in the game of competing on price… we don't want them to be the low-price leader.

    One of the main things we always tell our clients in an effort to ensure they are positioned in the minds of their target market correctly is to do what Sachin suggests; reward their growth and success. The SaaS vendor doesn't want to punish the client's growth. They don't want to give the client any reason not to continue to use the product as their business grows. In fact, by showing the client that they understand their business and the increasing complexities as they grow, the SaaS vendor further cements in the client's mind that they are the subject matter experts.

    So, while I agree in principal with what he said, we go a step further and that is to have our clients differentiate the pricing bundles or versions based on value-added features, services, etc. and to avoid “commodity” items like storage, CPU, or even users. Sometimes, for example, users are the key metric that is most aligned with the needs of the client, so it would be foolish to not use that, but often, metrics with little perceived value are used.

    By aligning the “step-up” between bundles or versions with the value perceived by the client, the SaaS vendor is in a great position and the client feels great about moving up. They don't feel forced or bullied which could cause them to churn out and churn is the bitter enemy of revenue. Also, being value-based allows vendors to charge more in many circumstances.

    Great stuff Justin…

    – Lincoln

    Reply
  32. Just had a great chat with Thomas, one of the founders of Onelogin- I'm really impressed with him and what he's achieved in such a short space of time. I was delighted to hear that they're well aware of the issues raised and they're firmly on the roadmap.

    Reply
  33. For an early stage enterprise SaaS company starting their channel strat early is important to build up sales and marketing capacity and insight into customer needs and value proposition.

    That's assuming that partnering with one or two companies early on can be called starting your channel strat. I think it can as it gives you the experience of working with partners, their expectations, necessary processes and responsibilities.

    And we partner with companies who are the trusted advisors of the clients. Accountants and lawyers in our case. As so many aspects of doing business is changing due to increased regulations (E.g. climate change) and better use of technology in typical business processes (E.g. RFID) businesses purchasing SaaS solutions in these spaces require the inclusion of prof services simply because they don't have the expertise in-house.

    Reply
  34. Justin,

    Great write up! It'll be interesting to see which legacy players will still be standing by 2020.

    In a piece I wrote on, “The End of IT 1.0 As We Know It Has Begun”, I arrived at similar conclusions. Lets see if they play out over this decade.

    For those with the resources, this is a great time to launch a new business using this paradigm shift. The legacy companies have been caught flat footed and they're still out to lunch!

    Keep up the good work!

    Reply
  35. Hey Justin, great reporting on the Google Marketplace. It is an interesting move and like Salesforce.com will help promote SaaS and further the mission of the cloud.

    As a B2B SaaS provider, the tough question I have is what size businesses are buying Google Apps? We target the Middle Market and I am not seeing much traction for the current cloud offerings from Google…I am not sure this marketplace will reach that audience.

    Don't you think it is targeted more at the SMB market?

    Jeff

    Reply
  36. Well done! And you´ve been picky. Great choice. I´ve been in Mimecast´s space before and they are clearly setting the pace. BTW, we´ve just launched a Q&A site dedicated to business apps, Cloud and SaaS: http://answers.getapp.com/. No doubt you´ll soon become an expert there 😉
    Very happy for you.
    Christophe

    Reply
  37. 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.

    Reply
  38. 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

    Reply
    • 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

      Reply
  39. 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

    Reply
    • 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

      Reply
  40. 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!

    Reply
  41. 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!

    Reply
  42. 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

    Reply
    • 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”…

      Reply
  43. 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.

    Reply
    • 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”…

      Reply
  44. 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.

    Reply

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