Friday, August 21, 2009

SaaS: It's Not for Everyone

My family doesn't go out for pizza anymore. We bought two pizza stones and a wooden pallet, and for the last couple of years we've made it at home. Why?


(Cue up the theme music from "True Confessions" here.) I like anchovies on my pizza.

Because not many others share this preference for small, salty fish on their pizza, it's very hard for me to find someone to split it with. In fact, lots of people won't even let me put anchovies just on my half, claiming that they'll somehow leach into their non-anchovy half.

Hence the "make it at home" solution. Each of us makes a personalized pizza and puts on it whatever we please. My son's in the mainstream: tomato sauce and cheese. My wife prefers the more exotic: fig spread, goat cheese, and prosciutto. For me: anchovies

I know you're looking for practical advice on SaaS marketing, so stay with me here:

Anchovy pizza would make for a very poor SaaS solution.

That is, if your application has a limited market, requires customization, and can't co-exist with other applications, SaaS might not be an appropriate model.

SaaS applications fare better in larger markets where most buyers are satisfied with the same features. You don't want to build a solution that depends on satisfying the requirements of a small, quirky market.

In fact, if you've built a solution that suits a large, mainstream market, you should consciously avoid the niche markets. Resist the temptation to customize your application to suit their needs.

It's much easier to succeed with the SaaS model if your solution is available in only a limited number of options. Configuration is OK, especially if the user can do the configuring themselves. But customizing will make you miserable and cost you lots of money - higher costs for development, testing, support, administration, sales and marketing.

Applications and data that customers don't want to share are also poor candidates for SaaS. IT people harbor legitimate concerns about SaaS in general, and you'll need to satisfy their concerns about security and integration (See "What's Under the Covers"). For certain applications, however, you'll find yourself trying to jump over impossibly high hurdles. You'll go through all kinds of contortions with your application, your network, your hosting environment, ad infinitum, and in the end you still won't get the deal.

Bottom line:
  1. If you're building a SaaS solution, target it to the mainstream buyers - the traditional, tomato sauce and cheese pizza eaters.
  2. Don't customize your solution in an effort to satisfy the unusual requirements of a niche market, like us anchovy pizzas eaters.
Don't worry: We'll just make ours at home.
Comments are always welcome. And if you'd like to confess your own particular preferences for pizza, don't be shy.

Tuesday, August 11, 2009

SaaS and Indy Car Driving: Don't Lift the Accelerator

A race car driver who had just qualified for the first time for the Indianapolis 500 explained to me the most difficult part of navigating the 2.5 mile circuit: keeping the accelerator pushed to the floor. He said it's easy to do while driving down the straightaway; the tough part is when you're heading into the 90-degree turn at the end. If you lift the pedal, the car won't turn left in front of the concrete wall at turn one.

A quick lesson on race car aerodynamics. Indy Cars are designed like aircraft wings, only upside-down. In a plane, the faster it goes, the more lift is generated to carry it up into the air.

Indy Cars, by contrast, need to stay on the ground, not fly into the air. They are designed so that the faster the car goes, the more downforce is generated to hold it onto the track. Not enough speed means not enough downforce, means the car leaves the track surface, means the driver can't steer, means... you get the idea.

Marketing software-as-a-service (SaaS) solutions is a lot like driving an Indy Car.

The goal with SaaS marketing is to build a machine that generates lifetime customer revenue that exceeds customer acquisition costs. You want a process in place whereby every $1 of sales and marketing expense yields more than $1 in revenues over the life of a customer's subscription. (I discuss this in more detail at "Marketing Spend: How Much is Enough?")

Of course, those subscription revenues are recognized over the entire lifetime of the customer, often over several years. However, the sales and marketing costs are recognized immediately. You spend now to earn later. According to this formula, the faster you spend, the more short-term losses you generate.

As you're racing down this straightaway, running up big deficits, one instinct is to lift off the accelerator. Radically cut spending on sales and marketing. After all, these are probably the largest single expense items on your income statement. (I've shown how much publicly-held SaaS companies are spending at "The Risk of Spending Too Little on SaaS Marketing.") It's an instinct perhaps learned from experience with the business model for on-premise applications.

Resist the instinct to cut spending on customer acquisition

But if you've built an efficient sales and marketing machine, lifting the accelerator is exactly the wrong thing to do. If your finely-tuned customer acquisition machine is yielding $3, $4, $8 for every $1 in sales and marketing spend, keep the pedal to the floor.

If you cut back on spending, you lose visibility in the market, you can't generate prospects, and you can't support your sales efforts. The result: you can't acquire customers, and you'll fall further behind competitors until you're no longer a viable choice.

You'll lose revenue in the short term, and you'll lose revenue over the long term. Then you're unable to fund product development, customer support, and operations, so you lose your existing customers.

You may save cash by cutting expenses, but at the same time you've lost market traction. Like an under-steering Indy car heading toward turn one, the business slides into a drift, and at least figuratively, hits the wall.

Of course, keeping your foot on the sales and marketing accelerator requires enough fuel, in the form of capital, to stay in the race until the lifetime customer revenues come in over time. And it requires a well-tuned, efficient customer acquisition machine.

But it also requires courage. No doubt, the notion of accumulating big short-term losses is downright scary. Maybe not quite as scary as heading toward a reinforced concrete barrier at 220 miles-per-hour, but scary nonetheless.

Monday, August 3, 2009

It's Not All About the Price

As a graduate student in foreign affairs in the late 1970's, I took a required course on "The Balance of Strategic Forces." It was all about the strength of the nuclear arsenal of the United States relative to that of the Soviet Union.

My favorite part of the course was when officers from each of the branches of the military lectured us on the virtues of their particular contribution to mutually assured destruction. The Navy explained that they protected us on the seven-eighth's of the world's surface covered by water. The Army, with responsibility for land forces, reminded us that all of the earth's human population lived on land. And the Air Force's claim rested on the fact that 100% of the earth is surrounded by air.

Besides acquiring a passel of nifty acronyms - MiRVs, MaRVs, SLCMs, etc. - I came away with a good understanding the "nuclear triad," the combination of long-range bombers, land-based missiles, and submarines that comprised the U.S. strategic defense arsenal. Despite its terrifying capabilities, it was colloquially referred to as the "three-legged stool."

I haven't had much occasion to use the nuclear armament knowledge in my marketing career, and much of it is now out-of-date, fortunately. But at least one lesson about the strategic triad applies to marketing as much as it does to nuclear defense:

Three legs are better than one.

That is, you're better off building a value proposition that's supported by multiple legs, and there's danger in relying on a single strategic advantage over competitors.

There's a temptation to build the case for SaaS solutions that rests largely on their cost advantages over on-premise applications. Unfortunately, this one-legged case makes for a wobbly value proposition.

For several years now, analysts and vendors have been pulling at the threads of a discussion on the cost of software-as-a-service (SaaS) solutions vs. on-premise applications. Forrester Research published a report on the topic two years ago as SaaS was just gaining traction in selected markets. More recently, a Gartner analysis noted that while SaaS may offer a cost advantage over the first two years, the total cost of ownership (TCO) advantage may dissipate over five years.

In a previous post, I talked about my suspicions about TCO, and ROI calculators in particular. Their apparent precision can be used to obscure fundamental flaws in the logic. If you're encountering objections from prospective customers about TCO or ROI, and claims that your SaaS solution is actually more costly than an on-premise application, I'd suggest you carefully examine their calculator. You may well find implicit assumptions, intentional or otherwise, that will skew the results.

Besides these cautions about TCO and ROI calculators, this is a good time to remind marketing folks to be careful when presenting the value of your SaaS solution not to rely too heavily on the cost advantages. These could be elusive. As you will have learned in Marketing 101 (4 P's, etc.), price is often the easiest element for competitors to match, at least in the short run.

Don't build a one-legged stool

SaaS vendors may be able to build a more sustainable case over on-premise solutions by touting other advantages:
  • Greater flexibility to meet fluctuating demand, particularly for applications that have high peaks in usage followed by relative quiet
  • Better access to the application for remote workers
  • Lower risk of a failed or delayed deployment
  • Instant access to the latest product enhancements and assurance that all users are on the same version.
Dan Druker of Intacct has offered a more comprehensive checklist of SaaS advantages.

When building the value proposition for your SaaS solution, use these other advantages if they apply. Don't rely exclusively on cost advantage.

It's hard to sit on a one-legged stool.