Monday, October 25, 2010

Customer Service: Timing is Everything

In an ideal world, you'd all be delivering software-as-a-service (SaaS) solutions so simple to learn and easy to use that customers would require no help. And you'd be so flawlessly reliable that users would never experience any service downtime or performance flaws.

The fact is, though, most of us live in the real world, not the ideal world. And in the real world, bad stuff sometimes happens: Customers get confused, a feature doesn't work, service goes down.

How you respond to these inevitable events matters especially in a SaaS business. Success depends on existing customers renewing their subscriptions. One quick way to lose existing customers is to deliver poor customer service.

When it comes to customer service, timing is everything, or at least it's really important. Two recent experiences will help illustrate my point.

Get out in front of the problem

I use an on-line service from Carbonite to back-up my files. The process happens automatically in the background, and unless I need help restoring data (not yet, fortunately), I have no reason to contact them for support.

Apparently, though, as the company upgraded its software, some customers did have reason to call, and they experienced delays in getting through to support people.

Carbonite's CEO, David Friend, addressed the issue publicly and proactively, sending this note to all customers.

Dear Peter,

In the past couple of weeks our response time to customer inquiries has been much too long. This is because a major upgrade to our software, which includes a wide array of improvements, generated much more demand than we anticipated. With that came a surge of questions that had to be fielded by our customer support team, which in turn lengthened our response times.

As the only online backup company that provides free chat, email and phone support, the quality of the support we provide is very important to us. So if you had to wait a long time for a response from us, we’re very sorry to have let you down. As of today customer support answer times have improved greatly and will soon be back to normal.

Thank you for your business, and again, we appreciate your patience and understanding.

David Friend, CEO

Carbonite, Inc.

P.S. If your Carbonite software hasn’t yet been upgraded to version 4.0, it will be upgraded automatically soon. If you have any questions or concerns, please contact us or simply reply to this email.

I'm putting lots of trust in this company to protect my vital data and to help me restore it if I have a problem. I pay them for peace of mind. This kind of note - candid, reassuring, and proactive - bolsters my confidence in them. When it's time to re-subscribe, I'll have no reason to look elsewhere.

It's not always the right time to sell something

My web site, SaaS Marketing Strategy Advisors, is hosted by Network Solutions. I selected their service because it provided a complete package, including domain names, a web site builder, web hosting, and email addresses, plus 24-hour, 800# customer support.

With my limited HTML expertise, I usually call the customer support line at least once every month for help. I'd grade the support "barely satisfactory." Their agent usually gets me through a partial solution... and then I figure out the rest through trial & error on my own.

Though I can live with the mediocre service, at least for now, what I have an especially hard time with is the pivot into "sell mode" at the end of every single customer support call. No matter whether my problem has been completed resolved, or I'm more confused and frustrated than when I started, the agent invariably pitches, "Renew your subscription now, and I can save you money."

A bit of advice: This is not always the best time to try to sell something. Confused and frustrated customers just want to fix their web site and get on to running their business. They aren't really in the mood to pull out their credit card to re-up for another year.

I know it's in the script folks, but can you please make room for some common sense?

Friday, October 8, 2010

SaaS market consolidation; Blame Wimpy

There’s been a lot of consolidation in the software-as-a-service (SaaS) market lately, and I think I know who’s to blame: Wimpy. You may remember that he’s the character in the Popeye cartoons famous for promising “I’ll gladly pay you on Tuesday for a hamburger today.” Stay with me and I’ll explain.

It’s easy for new SaaS firms to get rolling

The SaaS model makes it much easier and less expensive for companies to build new solutions. By leveraging resources available in the cloud and agile development techniques, it is usually takes much less money and less time to develop a new SaaS application than it took to build a traditional on-premise application.

Forget about spending several million dollars over two or three years. I've seen companies with a handful of clever developers bring highly-functional products to market in a few months.

It’s growing a customer base that’s difficult

But getting a functional product out the door is just the start. Once the solution is ready for market, there’s lots of difficult and expensive work still to be done - namely, acquiring and retaining customers.

Look at any of the well-established SaaS firms and you’ll see that customer acquisition expenses far exceed product development expenses. According to financial statements of nine large SaaS companies, sales and marketing expenses average 44% of annual subscription revenues. By contrast, product development expenses average only 12% of annual subscription revenues.

In customer acquisition, size matters

In the effort to acquire and retain customers, size matters. For SaaS companies, being bigger has several advantages:

1. Bigger usually means deeper pockets.

Here’s where the “Wimpy Effect” -“I will gladly pay you on Tuesday for a hamburger today” - applies.

To acquire customers, SaaS providers have relatively large expenses for sales and marketing people and programs, and most important, these expenses are incurred up-front. But the payback occurs over the life of the subscription.

Or as Wimpy might explain, "I'll gladly pay you over the next several years for lots of delicious sales and marketing today."

SaaS providers need to pay for sales and marketing now, while they’re waiting for revenue later. They need resources, notably cash, to bridge this gap.

Larger companies with greater resources can usually cover a larger gap. They can wait longer for revenue and cash flow than smaller companies.

2. There are economies of scale.

Even with effective inbound marketing and the availability of relatively low-cost vehicles like webinars, electronic newsletters, blogs and other social media outlets, marketing can be expensive. These new tools and techniques still require resources: people to set them up, develop content, assess impact, convert leads into qualified prospects into customers, etc.

But it’s usually more cost-effective for larger companies to use these tools and techniques than small companies. Why? Because the marginal cost of reaching additional prospects can be low or even zero.

The cost of preparing and sending an email newsletter to 10,000 people isn’t much higher than sending it to 100 people. Whether a business has thousands of “friends” or “followers” or only a dozen, the cost is virtually the same.

What this means is that larger providers can spread the sales and marketing costs over a large base. In effect, they have a lower average customer acquisition cost. Low average customer acquisition cost/customer lifetime value is a formula for SaaS success.

3. Credibility matters.

When customers purchase a SaaS solution, they’re not just buying a product; they’re buying a promise. They are entrusting the SaaS provider to deliver a reliable, high-value, frequently-enhanced solution over the life of the subscription.

And because buyers are committing to a long-term relationship, they are particularly scrupulous in assessing the reputation and credibility of the SaaS provider. In general, buyers are more comfortable acquiring solutions and entering relationships with larger, more established, better financed providers. It may not be fair, but that’s how it goes.

The SaaS business model favors consolidation

The economics of the SaaS business model and the advantages of size help explain the inclination toward consolidation in the SaaS market. We’ll continue to see plenty of small SaaS companies come to market, and some will get large enough, fast enough to go it alone.

But as they try to grow and finance the cost of acquiring customers, many of these companies will find that it makes more sense for them to be part of a larger company, and they’ll get bought.

Blame it on Wimpy.