Thursday, February 24, 2011

Social media is a good fit for SaaS

NPR's Fresh Air host, Terry Gross, recently interviewed Biz Stone, the co-founder of Twitter. She asked him, once the founders created Twitter, how did it catch on.

Stone's candid answer, "Well, it didn't at first."

He explained that for the first nine months of the product's existence, the only people using it were friends and family. Most people they talked to about it decided that "Twitter is not useful" and "it's the most ridiculous thing we've ever heard of."

Now that the small group of "family and friends" has grown to about 200 million user accounts , it appears that somebody somewhere has found something useful to do with Twitter after all.

Besides letting followers know that you've just ordered pepperoni and pineapple on your pizza, your flight from SFO to Logan is stuck on the tarmac, or that you're heading to Tahrir Square to protest against the government, Twitter and the other social media networks can be useful for businesses as well.

And they're an especially good fit for software-as-a-service (SaaS) businesses.

Social media allows back & forth and side-to-side

For one, social media is interactive. Unlike more traditional outbound broadcasts, it allows conversations that go back & forth, and side-to-side. Companies can talk to customers, customers can talk back to companies, and customers can talk to other customers. In fact, it's possible that customers can talk to prospective customers.

This fits the SaaS model, which benefits from close proximity to customers. When companies stay close to customers, they're better partners: more responsive, more engaged, and better able to deliver what the customers want. This is essential to the long-term relationship and high renewal rates that are required for most SaaS businesses to be profitable.


Social media communications tend to sound more human, less corporate. That's usually good for a long-term relationship. If customers sense that they're dealing with real people, not an anonymous corporate entity, they're probably more likely to renew. Even though you're marketing a business-to-business solution, you're still communicating person-to-person.

Let current customers help acquire new customers

Social media's viral nature is also a good match for SaaS companies. At its best, social media lets current users "sell" the service to prospective customers. One user loves your product and tells ten other Facebook friends, Twitter followers or LinkedIn connections. They in turn tell their friends, followers and connections. All of this holds down your customer acquisition costs and accelerates your sales cycle... both very important to the SaaS business model.

It's not just about technology

If you've not already adopted some of these social media tools to help market your SaaS solution, pick one and give it a try. You can find lots of resources about how to use these tools.

But don't just adopt the tools. Adopt the attitude. To engage with customers, nurture a long term relationship, and act and sound like a real person isn't just about technology; it's a state of mind.


Photo of the week

I know some folks liked the photo from my neighbor's farm taken over the summer. Here's what it looks like in February.

Monday, February 7, 2011

How not to calculate a SaaS marketing budget

I hear this question often from software-as-a-service (SaaS) providers: "How much should we spend on marketing?"

If these marketers have experience working in the traditional, on-premise licensed software world, they're usually familiar measuring marketing spend as a percentage of annual revenue.

That metric is often used to allocate and track marketing budgets for licensed software companies, and they typically spend somewhere between 5 and 8 percent of annual revenues on marketing.

Unfortunately, in most cases neither that metric nor that benchmark are very useful for SaaS providers.

SaaS marketers are usually better off with a metric more appropriate to the unique SaaS business model: marketing spend as a percentage of the lifetime value of the customer.

That measure better accounts for the fact that revenues extend over the life of the subscription, and they aren't recognized in a large up-front license fee. (I've written extensively on this topic and the impact on marketing. See, for example, "Three deadly SaaS marketing mistakes.")

But what if you choose to stick with the old standard marketing as a percentage of annual revenue? What are the consequences of using the wrong metrics and benchmarks? A few bad outcomes are possible:
  • Under-funding: A business fixated on measuring marketing as a percentage of annual revenue is likely to under-fund marketing and choke off the fuel for customer acquisition.
  • Over-pricing: To bump up annual revenues to better cover customer acquisition expenses, the company may over-price their solution relative to the value perceived by the customer.
  • Over-promising: A business plan that shows artificially low spending on marketing relative to annual revenues may be attractive to investors on paper, but disappointing in reality.
  • Under-funding: A plan that expects an unrealistically rapid return on marketing spend is likely to be under-funded and unable to sustain marketing activity over an extended period of time.
  • Inadequate attention to renewals: A SaaS company focused on annual revenues vs. lifetime revenues may be ignoring existing customers and securing renewals in favor of attracting new customers.
  • Swinging for the fences: A focus on high short-term returns may lead companies toward magic bullet, quick-fix marketing solutions and spending a burst of money on programs that will likely flop.
Bottom line: If you measure the wrong thing, you'll probably do the wrong thing.