How Can a SaaS ISV Drive Down Marketing & Sales Costs?

Aug 30, 2007 by Sinclair Schuller

A little over a month ago, there was a good post over at UnreasonableMen.net (with a follow up over a SmoothSpan) which highlighted egregious sales & marketing costs incurred by SaaS companies. The concerning thing is that SaaS pundits and ISVs state that subscriptions are easier to sell than perpetual licenses, yet we see these massive expenses. The two posts stated (as did I in the comments) that part of the expense is that SaaS and its ISVs need to spend to get big fast and counter the relative immaturity of the model to spearhead market penetration. While this posit is still entirely valid, I’d also propose that many SaaS ISVs are not marketing and selling as well as they could. Moreover, many ISVs are not exploiting the SaaS delivery model but instead use it as a new way to deliver Regular Old Functionality (ROF).

Think of ROF as “I have software that solves business problem X and is sold on-premise. Now I want to solve problem X, but centralize it via SaaS and offer it cheaper to my customer.” ROF is X, and now X is delivered over the web. While that’s necessary and is a good start, plenty fun of stuff can be offered as a consequence of centralization. Furthermore, this ‘fun stuff’ can drive marketing and sales costs down significantly for an ISV. This is where we can take lessons from our Web 2.0, uber social media dork, flashy JavaScript brethren. Let’s look at my favorite example: del.icio.us

del.icio.us, on the surface, offers a whole bunch of ROF. It took the functionality of bookmarking and brought it online, abstracting it away from your browser and computer. In itself, this offers a good amount of value to you, a single user, and if you like it enough, you’d probably recommend it to your friends. As ROF, the only incentive you have to refer someone to del.icio.us is that you’re a nice gal/guy and you get pleasure from helping others out. Okay, that ‘incentive’ is bound to make any sort of word of mouth (i.e. cheap marketing) campaign a relative failure. But wait, is that the only incentive? Absolutely not! The folks at del.icio.us were smart enough to ask themselves “what if we can exploit the fact that we know what all people on our system like?” And like magic, they moved from ROF online to ROF + a whole lot of value (social bookmarking). They could now show bookmarks of like minded individuals via tags, trends and recent popularity growth, giving users an edge in their browsing and discovery experience. But the part that is relevant to this post is that they drastically increased referral incentive. You now have much reason to tell people about it: the more people using it, the higher the value to you. This provides a platform for a powerful word of mouth campaign and a massive reduction in marketing and sales expense. Basically, as the number of users in a system such as del.icio.us increases, the value moves from the ROF-delivered value to one that is a property of the number of users, increasing value for each individual as well as referral propensity (of course, there is a limit somewhere). The concept is summarized in the graph below.

And now you say “But Sinclair, its social media and given away for FREE. How does this have anything to do with my SaaS business where I CHARGE?” It has plenty to do with it. Small to medium business users talk to each other all the time. They recommend things to each other on a regular basis, whether it’s at a trade show or the local coffee shop. The ISV’s duty is to build referral incentive through non-ROF value that is based on centralization, exploiting the community. A trivial example is help desk and trouble ticket software for IT departments. While good ROF is powerful and valuable, imagine aggregating statistical data across customers trouble tickets to do things like provide ratings and stats for hardware (Dell Computer X experiences 7 issues per 90 days), giving your customers the ultimate buyers guide for the reliability conscious, or providing benchmarking so they can see how they compare to the industry/sector average. Community backed functionality such as this moves SaaS out of the ROF-space and gives customers A.) a reason to see SaaS as functionally better than on-premise and B.) incentive to recruit users thereby providing the ISV market reach that would be near impossible to buy.

It’s my opinion that we have a long way to go before we see SaaS marketing and sales costs go down, but that concepts such as referral incentive are key to making them drop drastically. Do you agree or disagree? Are there other strategies that might significantly help a SaaS ISV reduce marketing and sales costs?

 

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SaaS Strategies for Existing ISVs

Aug 28, 2007 by Sinclair Schuller

One of my favorite (and most important) topics within the software industry is how can an existing, traditional ISV move into the SaaS space. For competitive reasons or new market reasons, many ISVs want to release SaaS offerings but are unsure of the approach, implementation, and risks. Let’s face it: not all SaaS offerings come from new-fangled Web 2.0 companies whose names are portmanteaux or the result of a random dictionary search and as a result (not a result of naming, but of already having an established business;-)), they are faced with multiple dillemma’s including figuring out how to retune their sales team to a shift in license model and sales methodology. In my opinion, however, the most important aspect of go-to market for an existing ISV is cannibalization. After all, your Acme Software company has managed to reach $40 million in revenue via perpetual sales and although you recognize the need for a SaaS offering, how could you justify replacing your successful product if it’s going to slash revenue and profit, and reduce your competitiveness against newcomers who don’t have to deal with these issues? There are various strategies to deal with the go-to market issues related to cannibalization. I’ll outline a few in this post. Below is a summary chart, with slightly more detailed information later in the post.

(bigger)

Full Product Replacement: Full product replacement is defined as creating a SaaS offering to replace a soon to be discontinued on-premise product. Full product replacement allows for the complete encroachment of your new SaaS offering into your existing on-premise product and market, thereby yielding the highest level of cannibalization and putting “all of your eggs in one basket.” Many of your existing customers will jump ship because they either feel abandoned or don’t believe in/need a SaaS offering. Anyone who moves from the on-premise product to the SaaS product will do so at the expense of the top line, since now it will take anywhere from 2-4 years to yield revenue that used to be acquired in a single shot. (We’ll call the time period of when an existing client will match its perpetual license top line input via SaaS licensing as the equivalent revenue yield period (ERYP)) A large ERYP and existing customer loss will mean that you’ll need a cash war chest to weather the storm. So why pursue this strategy? Well, if pulled off it can be strategically rewarding. First, it signals to the industry that you clearly support SaaS, enough so that you’ll bank everything on it. This could be good for positioning against newcomers in your space who are “SaaS only” and may be critical in convincing the SaaS choir that you’re worthy of their business. Second, most of the planning is up front. Whether things succeed or fail, once the strategy is executed and some time has passed, you’ve absorbed all of your change early allowing you to focus on your product.

Complementary Offerings: This strategy is defined as creating one or more SaaS offerings that compliment your on-premise product. For example, if you sell an on-premise logistics solution, you may opt to complement it with a SaaS offering that provides multi-installation visibility, management and data integration capabilities that boosts your customers supply chain management value. This strategy is appealing because it does not alienate your existing client base, but instead exploits cross elasticity of demand since odds are that a decrease in cost for your on-premise product should yield more physical installations, thereby increasing demand for your integration complement. Furthermore, it lets you test the waters when it comes to selling subscriptions, still leaving incentive for sales people via perpetual licenses. The downside? Well, you haven’t become a “SaaS player”: While this is a good short to mid term strategy, newcomers with pure SaaS offerings may offer cost and value advantages to your client-base forcing you into a corner with your high priced offering. Generally, if the exit costs on your on-premise offering are high, you should at least be able to “farm the base” while you figure out your next move. Just be careful because a poorly implemented complement could rub-off on your image and your existing product.

The “Lite” Version: The concept of a “lite” version of an existing product targeting a downsampled demographic is a tried and true concept that is used in various industries. We see it used in industries including the auto industry (Hummer releasing the H3, Porsche with the Boxster, Toyota with the Scion brand, etc.) and even clothing (Armani through its A|X brand) How does it play into SaaS? If you’re an existing ISV with an on-premise product, creating a “lite” offering with a subset of features that will be delivered as a service is a powerful mechanism for introducing yourself to the market. It allows you to play off of your established brand and keep your existing customers, and similar to the complementary offerings strategy, allows you to freely experiment with the SaaS model without encroaching on your base and experiencing massive cannibalization. In addition, new customers will most likely respect your existing product. What’s the danger? Strategically, you have two choices. If you still consider your on-premise model as your primary model, you’ll end up at a competitive disadvantage to pure SaaS competitors since you’re likely to use the Lite version as the start of an “upgrade path” to the more robust on-premise version of the software. This is a poor long-term strategy that reflects your company’s true intentions and position on SaaS: that its merely a new marketing tool for you rather than a new business model. If you truly want to shift your company to be a SaaS player, your focus should be parallel development that will allow the “lite” version to mature into a more accurate representation of your on-premise product, giving you revenue to work with, an avenue for your existing customers to switch to SaaS without feeling abandoned by your endeavors, and a long-term goal of migrating your company strictly to the SaaS model.

New Product Line: Relatively self-explanatory strategy. As an ISV, you may have always wanted to tackle a new (although aligned) market via a new product. One option is to create a SaaS offering to tackle this market. Personally, I feel this strategy is a tough strategy. It doesn’t attempt to blend SaaS into your existing company strategy and vision, but instead approaches it from an “offshoot” perspective. Failure of the product will most likely mean abandonment of a SaaS approach since you have little tie-in to your primary business. What’s more concerning is what does success mean for overall company strategy? If the product was successful, and your still happy with your primary on-premise product and business, do you have incentive to plan for the future and protect your primary business via a shift to SaaS? Probably not.

Has anyone executed any similar strategies, and if so, what did you experience in terms of results? Have you executed different strategies from those listed when it came to getting involved with SaaS?

 

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Is there room for a SaaS hardware play?

Aug 1, 2007 by Sinclair Schuller

I recently had a conversation with a friend regarding SaaS and hardware VARs. The topic came up because this friend noted that hardware VARs will undoubtedly feel the SaaS pinch: if enterprises start overwhelmingly subscribing to software rather than purchasing it, they buy less server-oriented hardware. Although providers will be buying the hardware to host the SaaS offering, economies ought to consolidate the amount of hardware necessary to provide the same amount of functional utility. This chews into the total market revenue. But does this have to be a “net loss” game? Absolutely not!

 SaaS, aside from all of the business driver gobbly gook, does one thing very well: it mobilizes data and functionality since by nature SaaS lives in the cloud. Hardware VARs need to exploit that. Through creativity, endpoint hardware devices that integrate with in the cloud services can become a very lucrative market. Take a logistics SaaS offering and GPS devices, or an inventory control SaaS offering and lightweight mobile laptops with integrated scanners, for example. I think traditional VARs would do themselves a favor to spread out some and into these endpoint offerings rather than focus on the “next big server sale.” It seems that diversification will be the key. Any thoughts?

 

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