Thursday, November 19, 2009

If it's hard to use, it's hard to sell

Last week, I listened to a panel of IT professionals share their experience with software-as-a-service (SaaS) and cloud solutions. In part, they confirmed what I've heard from other IT executives: "We expect performance, we expect security, we expect fail-over." (See Rule 4 in the "Ten Essentials of SaaS Solution Marketing.")

I was surprised, though, to hear from these IT professionals about another concern: usability. After all, these folks have somehow managed to endure frighteningly off-putting user interfaces for quite awhile. SAP ERP screens are not for the faint of heart.

The IT folk's attention to usability is driven not so much from a new-found sensitivity to graphics and color. Instead, it derives from a greater appreciation for the needs of their users. They don't want to deploy applications that confuse, frustrate, and torture users.

Why IT now cares about usability

The IT professionals on the panel have found that the SaaS solutions they've acquired tend to be more widely deployed within their organizations. They're not confined to highly-trained, dedicated users with a high threshold for pain. Instead these solutions for expense reporting, recruiting, asset tracking, or sales compensation management, for example, are used broadly, not by experts and not on a daily basis.

What that means is that applications with inscrutable interfaces that frustrate non-experts cause problems for IT professionals. And even though the application wasn't built by the in-house IT group, it doesn't run in their data center, and they didn't have anything to do with the interface design, IT always gets the blame. It goes with the territory. As a CIO colleague explained to me once,"People never call me to say 'Thanks, Jamie, the email is running flawlessly today.' I only hear from them when something's broken. This is the worst job in the company."

Not only do the IT folks get an ear-load of grief from users who complain that "IT is deliberately wasting our time with this awful system," but they also bear the burden of supporting these end-users. Through a help desk or training, they spend money on to help users navigate through the application.

Lessons for SaaS providers

There are a few lessons in here for SaaS providers:
  • A poorly designed user experience will make it more difficult for you to market and sell your solution. Propping it up with specialized training for dedicated users isn't a workable solution for the broadly-deployed applications. The IT professionals won't let you get away with it.
  • A poor user interface will make it harder to renew customers. Even if you succeeded in getting an initial deployment into the organization, it will be difficult to retain those frustrated users, never mind adding new ones, if the product is painful to use.
  • A badly designed application is expensive to support. If it's the internal IT professionals who take on the support role, they'll be unhappy. You're costing them money and grief. If it's you, the vendor, who provides the support, it will cost you money... though the internal IT people will still get the grief.
Marketing professionals, fixated as we are on messages, lead generation and sales enablement tools, sometimes pay less attention to product features and functions than we ought to. Our success with SaaS solutions, however, will increasingly depend on an easy-to-navigate and delightful-to-work-with user experience. If IT professionals are paying attention to what a product looks like, marketing should too.

Monday, November 9, 2009

Make Renewals Easy

True story. Nearly every three weeks since the day I first signed up for a software-as-a-service (SaaS) solution for web hosting, email, and domain registration services, I've been receiving renewal notifications. I think the first notice indicated "345 days remaining on your subscription."

Last week, I saw that the subscription term was down to 34 days remaining, so I clicked on the button labeled "Renew."

In the interests of accuracy, the button should have been labeled "Remember, Re-evaluate, Resist, & then maybe Renew... But Not Without First Costing the Provider Money." Good luck to the graphic designer working on that button.

Step one of the renewal process went smoothly. Each of the domains I had originally registered was listed alongside check boxes to indicate if I wanted to renew them. So far, so good.

Steps two through eight, though, got more complicated. In the "remember stage," I was presented with a list of services, some of which I knew I had, some of which I knew I didn't have, and some of which I didn't remember anything about at all.
  • "Private or public registration?"
  • "Unix or Windows hosting server?"
  • "Paper or plastic?"
Once I went through the memory test, it was onto the "re-evaluate and resist" phase.
  • "Are you sure you don't want more storage space?"
  • "Don't you want to add new domain names?"
  • "You really should evaluate the advantages of private registration."

Here's the deal. I renew my service annually and, believe it or not, over the intervening 52 weeks, I do other things. Folks at the SaaS solution provider may be eating and breathing the nuances of their service, but unless something has gone wrong, I really don't think about it. In fact, that's one of the reasons I buy this functionality as a service. I don't want to think about it. When I log in and it works, I'm a happy guy. Period, full stop.

The same sentiment applies when it comes to renewal time. The service is doing everything I want it to do. Just keeping doing it. Here's my money. Thank you very much. See you in another 12 months.

There are lessons here for other SaaS providers:

Make renewals easy. Remember that the primary objective of the "renewal process" is to renew. Anything that impedes renewal - too many choices and too much information - is counter-productive.

Provide a "Keep Everything the Same" option. Show subscribers what they already have. You already know that information because it's a SaaS solution. If they're happy, make it easy to let them stick with what they have. Resist the urge to up-sell at every opportunity.

Don't nag. Reminders that a service is expiring is an excellent idea. And if you're selling into a corporate environment, allow extra time. Someone may need to audit the existing users or process payment through the corporate procurement process, so the process could drag on. But be careful not to send reminders too early or too frequently. That's nagging and annoying.

Educate on new features as they become available. As you enhance the product, notify the customer. Show them the value of the new feature and how it might help them. But don't conflate this education process with the renewal process. Don't wait until the final hour to remind customers of all the improvements you've made to the service over the last year... but neglected to tell them about until now. Continue to market to existing customers throughout the life of the subscription.

What does a poor renewal process cost?

In the worst case, a poor renewal process so alienates the customer that they let their subscription lapse. As I've discussed in earlier notes, and the chart illustrates, renewals are vital to SaaS success. Very few companies earn back their customer acquisition costs with only one year of subscription revenues.

More commonly, the customer will delay renewal. And in the SaaS business model, where so much depends on velocity, delayed renewal is foregone cash flow.

A poor renewal process can also cost the provider money. To get back to my story, somewhere in the midst of the "re-evaluate and resist phase," I ran short of time and patience and dropped out of the online renewal process altogether.

Instead, I picked up the telephone support line, where a very pleasant agent talked me off the ceiling, and set me up with another year of service. While the renewal over the web would have cost the SaaS provider a few cents, handling my transaction over the phone with a live agent I'm sure cost them considerably more.

If you're losing too many customers during the renewal process and need help streamlining it, these lessons may help. But if you'd prefer to stick with the more complicated "Remember, Re-evaluate, Resist, & then maybe Renew" process, I might be able to recommend a very good graphic designer.

Monday, November 2, 2009

How Much Capital is Required for SaaS Marketing?

A marketing professional asked me recently how much capital is required to successfully market a software-as-a-service (SaaS) solution.

What first popped into my head was the beautiful Irving Berlin standard, "How deep is the ocean? How high is the sky?"

Access to capital to fund customer acquisition is undoubtedly one of the more significant challenges for SaaS companies. The root of the problem is timing. You need to spend money on sales and marketing now, but the payoff is stretched over the lifetime of the customer's subscription. You need to fund that gap between current expenses and future revenues.

So how big is the gap?

I looked at the experience of two well-established publicly-held SaaS providers for insight. provides on-demand CRM and is a high-profile SaaS pioneer. Concur delivers an on-demand expense management solution and made the transition from a traditional on-premise license model to a SaaS model in the late 1990's.

I focused, in particular, on the companies' annual spending on sales & marketing relative to their annual subscription revenue. It's not a comprehensive assessment of capital requirements and it does not account for their requirements to fund development, operations, or other functions. That said, however, when sales & marketing expenses exceed subscription revenues, capital from some outside source is needed.

1. Required ingredients: an effective customer acquisition model, capital and courage

In the case of both and Concur, their sales & marketing expenses exceeded subscription revenues during their early years, sometimes by as much as 500%.

Both companies persisted however to spend aggressively, confident that they had a well-functioning customer acquisition model in place. That is, they believed that feeding one dollar into the sales & marketing machine would generate more than one dollar in revenue over the lifetime of the customer.

In addition to an efficient sales & marketing machine, both companies had substantial backing from outside investors to fund the initial spending on customer acquisition. Concur also had resources from its existing on-premise license business.

Access to capital to fund customer acquisition, in fact, represents one of the most challenging barriers to success for any vendor in the SaaS market. They should expect that sales & marketing expenses will exceed development, operations, or any other corporate expense.

In the case of and Concur, the access to deep pockets of capital was matched by a deep well of confidence. Company management and patient investors had the confidence and courage to fund early losses, and resisted the urge to "lift off the accelerator."

2. The crossover point is typically in year three

For both and Concur, annual subscription revenues first exceeded annual customer acquisition expenses during the companies' third year as a SaaS provider. At this crossover point, one dollar spent on customer acquisition yielded one dollar in subscription revenue. The companies needed adequate capital resources to fund more than two years' of feeding their sales & marketing machine before realizing a positive return.

3. Spending reaches a plateau

Once they reached the crossover point, both and Concur have continued to spend substantially on customer acquisition.'s sales & marketing expense has remained consistently above 50% of subscription revenues, and Concur consistently spends nearly 30% of revenues on customer acquisition. In other words, while development and operations costs have declined proportionately as they're spread out over a larger customer base, spending on sales & marketing remains consistently high.

There are certainly some economies of scale for sales & marketing spending: a webinar for 1000 people doesn't cost much more than a webinar for 100 people, for example. But SaaS companies should expect to continue to aggressively fund their customer acquisition efforts. Like sharks, even well-established firms need to keep moving forward or die.