TWIS#15 Salesforce on SaaS Network Effects and Ecosystem

TWIS EVENTS

We’ve got some Conference passes to give away for TWIS readers to the upcoming London Cloud Computing Congress.

It’s taking place on the 15/16 March at Olympia and there are some fantastic speakers attending- a lot from the “real world” so it’ll be a good opportunity to gather real data from real users. I’m particularly excited about meeting Dion Hinchliffe- esteemed blogger.

The passes are worth £195.00 each but the conference also has a free workshop track– so if you don’t win one of the passes you can still attend part.

As always, priority will be given to those that can actually attend- so please make that clear on your entry- emailjp@justinpirie.com with the subject “CCCL Draw” to be entered.

TWIS#15

Sometimes I think we need a re-boot, a reminder of why we’re in SaaS and reinforce to ourselves why we’re not. It’s too hard to be successful not to think this about it sometimes.

Marc Benioff’s post this week on Techcrunch was one such reminder.

I quit my job at Oracle in 1999 because I couldn’t stop thinking about a simple question: “Why isn’t all enterprise software like Amazon.com?” Why couldn’t applications be run from a simple website, without software or hardware to install, and pricy consultants to hire? Why couldn’t we just compute in the Internet, or the cloud, and get away from the data center and all its complexity. Simply put, I wanted to simplify the enterprise. It was a pretty straight-forward idea, but from the confines in which I sat, there wasn’t anything close to a straight-forward solution.

That vision led to the founding of salesforce.com. But the enterprise world wasn’t ready for Amazon.com, or eBay, or Yahoo, or any of the innovative services that were changing the way consumers bought, sold, or communicated.

That was eleven years ago and most of us don’t have the luxury of burning through $13m a year for five years until you can file an IPO. Even if we did, the world has changed- Marc continues:

But it’s no longer Amazon that frames the questions or gives us the answers.

In this decade, I’ve become obsessed with a new simple question: “Why isn’t all enterprise software like Facebook?” As we were focused on bringing enterprise computing into the modern age, Facebook redefined the values of consumer computing and helped ignite the social phenomenon. The compelling aspect of feeds, profiles, and groups, amplify the service’s stickiness. So does its functionality on a mobile device like an iphone—necessary to secure a service’s status as a “killer app.” Facebook is where I start my day to find out what my friends and family are doing. It’s where I go to see the important events in my social life. Everything I care about and need to know is pushed to me—and it requires no work on my part.

Yet often I see companies that are focusing on the obvious benefits of SaaS highlighted in TWIS#12. Marc is reinforcing the shift away from purely functional SaaS software to SaaS that relies on Network Effects and Ecosystems to succeed.

Without Network Effects, none of this vision could happen, so he’s basically saying network effects are what Salesforce are concentrating on to differentiate themselves and get ahead of the competition, since they’ve already got probably the best ecosystem in the world: Appexchange.

Anyway- Salesforce’s new social product:

I was reading the results of the Mimecast cloud adoption survey and something struck me- 46% of people surveyed were not moving to the cloud because of security.

This is bonkers! Just because it’s behind your firewall does not make it secure.

Reuven sum’s it up really well:

To understand security, you must first understand the psychology of how [cloud] security itself is marketed and bought. It’s marketing based on fear, uncertainty and most certainly doubt (FUD). Fear that your data will be unwittingly exposed, uncertainty of who you can trust and doubt that there is any truly secure remote environments. At first glance these are all logical, rational concerns, hosting your data in someone else’s environment means that you are giving away partial control and oversight to some third party. This is a fact. So in the most basic sense if you want to micro-manage your data, you’ll never have a more secure environment than your own data center. Complete with bio-metric entry, gun toting guards and trust worthy employees. But I think we all know that “your own” data center also suffers from it’s own issues. Is that guard with the gun actually trust worthy? (Among others)

Recently it occurred to me that the problem with cloud security is a cogitative one. In a typical enterprise development environment security is mostly an after thought, if a thought at all. The general consensus is it’s behind our firewall, or our security team will look at it later, or it’s just not my job. For all practical purposes most programmers just don’t think about security. What’s interesting about cloud computing is all the FUD that’s been spread has had an interesting consequence, programmers are actually now thinking about security before they start to develop & deploy their cloud applications and cloud providers are going out of their way to provide increased security (Amazon’s VPC for example). This is a major shift, pro-active security planning is something that as far I can tell has never really happened before. Security is typically viewed as a sunk cost (sunk costs are retrospective past costs which have already been incurred and cannot be recovered). But the new reality is that cloud computing is in a lot of ways more secure simply because people are actually spending time looking at the potential problems beforehand. Some call it foresight, I call it completely and totally rational.

I guess the survey highlights the progress we need to make as an industry to prove to IT decision makers that SaaS is secure. Hard when the on-premises vendors have the power to spread so much FUD but great when high profile attacks are sustained by the likes of Google and serious breaches within corporate networks are discovered the time.

I also wonder how much SaaS they’ve got running in their organisation today without them knowing about it?

I was working on the “4 states of SaaS” last week for a client:

  1. Embraced- IT embraces SaaS and cloud technologies
  2. Managed- IT manages the businesses use of SaaS and Cloud
  3. Don’t Ask- Don’t Tell- IT ignores the presence and risks
  4. Banned- IT actively tries to stop SaaS and Cloud initiatives

Thoughts?

I saw a really cool SaaS login vendor this week- Onelogin. I’ve given them a test-drive and I was really impressed- it’s by far the best implemented and most affordable multi-vendor SaaS login manager I’ve seen, plus it does two factor authentication too. Definitely worth a look if you haven’t seen it already.

We haven’t talked about pricing for a few weeks and Sachin Rekhi wrote an excellent post on SaaS pricing segmentation:

One variant of capacity-limited freemium tiering that is particularly effective for products targeted at the SMB market is to scale pricing with customer success. What I mean by this is providing various premium tiers of your product that will become appropriate for your customer as they are more successful in their own business. Typically this means tying the tiers with capacity-limits that either directly reflect or proxy the customer’s growth in their own user base or revenue.  (Emphasis- Ed.)

What’s nice about this model is that it appropriately segments your potential customers into pricing buckets by ability and often willingness to pay. Businesses that are just getting started, pre-revenue, or early in finding productmarket fit can often leverage your product as part of the free tier or low priced tiers. This provides few barriers to adoption and get’s them quickly onto your product. And as their business scales, they’ll think twice about switching since they’ve already been successfully using your solution. On the other hand, larger businesses will pay against a higher tier appropriate for their level of success.

Genius! I actually don’t think this should be specifically tied to freemium, but where possible to all SaaS pricing- Scale price with Customer success. That aligns value much more closely to price and will reduce barriers to adoption and Customer Acquisition Cost (CAC).

Thinking about CAC- FreeAgent blogged about their updated referral program this week. They’re giving their Users 10% of  anything you refer to them, for life, as a commission- and you don’t have to be a reseller or anything special like that, just a user.

In fact what they’re saying is: you are special, because you’re a user and we’re going to reward you for that.

Once you’ve referred 10 people- you can then become an Evangelist and get 20%- rewarding loyal referrers.

It’s a really smart move because SaaS businesses that can acquire customers for less than one year’s revenue are fundable, scalable and eventually profitable. They’re giving away 10-20% when most companies have to give 30-50% to the channel- their competitor Kashflow is giving an estimated 65%. Not only that, FreeAgent are rewarding their customers for their loyalty and recommendations.

I bet this helps customer satisfaction and retention too.

Thinking about retention- I seem to be having loads of conversations about the “megavendors” these last few weeks- maybe because of all the SAP stuff happening. Anyway- I thought this slide was an interesting take on where the megavendors strategy is going:

from: How Oracle gets customers to keep paying

I suspect they’ll continue to spew out FUD against SaaS until the time comes when they can sell SaaS without cannibalising their existing businesses i.e. they struggle to land new business but have fantastic maintenance revenue. Then they can acquire SaaS vendors for mostly shares, swap maintenance revenue out slowly for SaaS revenue, and viola, they’re back in the game.

It’s incredibly important for SaaS because M&A is the single most likely exit in the current environment. 3Tera, a cloud platform provider got their payday today by being bought by CA.

But more importantly than that, the megavendors can’t expect to charge maintenance forever- especially as most organisations can’t upgrade thanks to their “customisations”, that they typically paid 2x the software to implement…

from: Software buyers must preserve 3PM rights

It can’t go on forever…

In other news

Have a great weekend.

Justin

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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