Monday, October 12, 2009

SaaS Gone Wrong: Telltale Signs

It's been my experience that I learn more from failure than success. And there are some who would quip that I've certainly had ample opportunities to learn.

To gain from the experience of failure, though, requires that you recognize it when you see it.

To help software-as-a-service (SaaS) solution providers recognize their failures, I'll point out a few telltale signs that will let them know that something's gone wrong.

Customer acquisition costs are too high

When your customer acquisition costs can't be covered by the projected lifetime subscription revenues derived from customers, you have a problem. A faulty sales and marketing machine gobbles up one dollar in expenses and pays out less than one dollar in revenues. To borrow from another business axiom, if a dollar in yields less than a dollar out, you won't make it up in volume.

There could be several solutions to the problem: establishing a more efficient sales and marketing process, securing more renewals, raising the subscription fee, or articulating a more compelling value proposition, among others. But if you find that you are spending more than you're earning, first acknowledge that you have a problem.

Note that the calculation for customer acquisition costs measures annual sales and marketing expenses relative to subscription revenues earned over the lifetime of customer. SaaS companies should, in fact, expect to pay a high percentage of annual revenues on sales and marketing - often in excess of 40%. But the goal is to earn that back, and more, over the entire length of the customer's subscription. A high-functioning customer acquisition machine can gobble up one dollar of expense to win a customer, but should pay out three, four, five dollars or more over time.

Implementation costs are too high

If the cost to implement your solution is chewing up a large chunk of the subscription revenue, you may have product problem. High implementation costs and long deployment times are often a symptom of a SaaS solution that requires extensive customization.

Not only is customization an immediate problem, but it usually grows worse over time. Every upgrade to the solution may require additional implementation expenses. Even if the customer has paid for the initial implementation work separately, the vendor incurs new expenses with every new product release. There's a cost to violating the SaaS multi-tenant model.

The solution is configuration instead of customization. Better yet, configuration managed by the customer. Allow them to tailor the solution to suit their particular needs, but without altering the core of the solution.

The sales cycle is too long

If you find that sales cycles are extending too long, there's a problem. The SaaS model usually functions best at faster speed. You spend money now to make money later. Anything that delays the "make money later" part of the equation is a bad thing.

The sales cycle might be stalled by IT professionals with legitimate questions about security, performance and integration. Or perhaps, legal and procurement professionals are struggling to understand the unique SaaS terms and conditions. Multiple drafts of red-lined contract drafts pinging between vendor and customer are a sure sign that something's gone wrong.

IT, procurement and others involved in the purchase decision should be educated and won over, and earlier in the process is better than later.

The marketing and sales support material is out-of-date

If your marketing group is struggling to keep marketing and sales support material up to speed, you may have a broken product introduction process. You'll know it, for example, if your web site and product literature are out-of-date, or press announcements lag product enhancements by weeks or months.

The cause may be a product introduction process that's built for on-premise applications and 18-month enhancement cycles. It's out of sync with a SaaS development schedule that rolls out enhancements every quarter. Your marketing team is caught on the "wheel of death" and can't run fast enough.

This isn't a comprehensive list, but you should be on the lookout for each of them. They're all symptoms of your SaaS model gone wrong.

Monday, October 5, 2009

SaaS and the Value of Simplicity

"Simplify, simplify" -- Henry David Thoreau

In case you thought Walden Pond, the inspiration for Thoreau's reflections on the virtues of simplicity, was in a remote spot far from civilization, you should know that it's about 4 miles off of Route 128, "America's Technology Highway," in Concord Massachusetts. On most weekends, it's busy with picnickers, hikers and, in the summer, swimmers.

Those with an historical and literary interest can visit a replica of Thoreau's cabin. Though its location isn't precisely on the site of the original, I'm told that the structure itself is accurate, a tidy one-room building, devoid of anything but what a simple existence would require in the mid-1800s. No ostentatious entrance, no Palladium window, no three carriage garage.

Though I have no reason to think that Thoreau knew anything about software-as-a-service (SaaS), internet protocol, or SAS 70 Type II audits, as prescient an observer as he was, he does offer useful lessons for SaaS providers.

The SaaS business model craves simplicity and penalizes complexity. In general, more complexity means more time and more money. For a SaaS provider, this is true not just for the marketing function, but for development, legal, support, and operations.

Simple to Understand the Value

SaaS vendors should make it easy for the prospective customer to recognize the value of the solution. Focus on benefits and advantages: what problem does this solution solve and why does it do it better than alternatives? (See "Developing an Effective SaaS Value Proposition.") Resist the urge to show off your technical prowess with lots of technical jargon. There's surely a place for documentation on technical issues of concern to IT professionals at some stage in the sales process, but it's not your lead message.

Simple to Deploy

SaaS vendors should make the solution as simple to deploy as possible. In particular, avoid customization. For the customer, this reduces the risk of an extended and expensive process. For the vendor, it cuts the expense of implementation engineering and minimizes the delays in recognizing subscription revenue.

Simple to Purchase

SaaS vendors should make it easy for customers to purchase their solution. Simplify and standardize contracts to the extent possible and educate the customers' procurement professionals on your standard terms and conditions early in the sales process. I've used the iTunes example previously to illustrate this point. As attractive as the 99 cent price per song is to me, I wouldn't be buying many if it required 20 minutes to purchase.

A simple to purchase process should apply to renewals as well as to new customers.

Simple to Use

Minimize the complexity of using the solution. It makes it easier and less risky for the customer to deploy the solutions and less expensive for the SaaS vendor to support it.

For SaaS providers, simple is practical and profitable. I think Thoreau would have liked that.