How Can a SaaS ISV Drive Down Marketing & Sales Costs?
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?
Â
Links
View Technorati Links
SaaSBlogs Tags
Tagged with: ISV • Marketing • Network Effect • SaaS • Sales
(2 votes, average: 5 out of 5)
Loading ...
Sinclair: Thank you for an insightful post about leveraging social networks to drive down Cost of Sales (COS) for SaaS ISVs. This topic is one that my team and I have been thinking about for several months now. Another strategy that has been leveraged successfully by some companies in the past and requires some heavy lifting up front is to build an effective, sales focused, properly incentivised channel. Channel partners / VARs are able to do one thing that individual SaaS ISVs cannot - spread the COS dollar across several products instead of one. Although the entire SaaS eco system is still maturing, ISV - VAR relationships built on committed success will have the effect of driving down ISV COS and thereby SG&A. The host of looming SaaS IPOs will only exacerbate the high COS situation. Thank you for allowing me to comment.