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

This Week in SaaS #26

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

TWIS Events

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

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

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

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

It looks like a great conference.

TWIS#26

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

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

Understanding Sales Cycle Complexity

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

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

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That makes sense perfect sense- he goes on:

Impact of Sales Complexity on Customer Acquisition Costs (CAC)

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

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

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

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

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

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

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

Reducing CAC by reducing Sales Complexity

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

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

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

What causes Sales Complexity?

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

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

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

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

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

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

Customer Monetization (LTV) must exceed CAC

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

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

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

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

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

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

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

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A Zone System for evaluating Startup Sales Models

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

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

Conclusions

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

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

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

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

Key Takeaways

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

Brainstorming suggestions:

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

Important Final Note

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

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

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

Key Takeaways for me:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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LOL :)

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

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

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

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

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

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

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

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

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

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

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

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

A marketplace is born

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

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

So what’s the problem?

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

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

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

He went on:

Forget automation: Do everything manually

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

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

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

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

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

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

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

Happy buyers before the network effect

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

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

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

He suggests you:

Solve the seller side first

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

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

and:

Use a novel strategy for attracting buyers

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

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

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

Interesting!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hey Robin and Leena,

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

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

Mikkel

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

Nice! 😉

In other news:

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

Have a great week

Justin

jp@justinpirie.com

Also read...

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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