Contract terms & conditions and why they matter to marketers

As a general rule, I try to steer clear of the corporate legal office. I usually have much more fun with the web designers, the PR folks, or even the sales reps than I do with the corporate counsel.

That said, there are a few legal issues - particularly related to contracts - where I recommend marketers should pay a visit to that office with the impressive diplomas on the wall and the library of tomes on "Contracts" and "Intellectual Property."

Warn them about square pegs and round holes. Explain that existing legal contracts, developed for on-premise applications, usually don't fit SaaS solutions.

Let me give an example: "Acceptance Testing." Contracts for on-premise applications often provide the customer an "acceptance period" during which they test the application to ensure that it works to their satisfaction. Until the customer is happy, they don't pay.

For a SaaS solution, however, this idea of "acceptance testing" usually doesn't apply. The vendor has developed a solution that works according to specifications defined by the vendor. The customer isn't buying the application; they're buying access to it. The vendor's obligation is to provide access to a service that functions according to the spec. That obligation being met, the vendor expects payment from the customer.

There is no "acceptance period" during which the customer tests the application. They cannot return the software if they're not satisfied. Because it's SaaS, no software has been delivered to the customer, so there's no software to be tested, accepted or returned.

If the service doesn't meet the specifications, or if the vendor fails to provide access to the service, the vendor is obligated to fix any problems in accordance with the service level agreement.

An unhappy customer can, of course, terminate the contract. (This heads us toward a discussion regarding length of contracts and cancellation terms, which I'll avoid for now.)

To use an analogy, I've contracted with the Boston Globe to deliver a newspaper covering local, national and international news to my house every morning. If the paper arrives at my front door everyday, I'm obligated to pay them.

I can't tell the Globe that my payment is contingent upon my reading the paper to see if it satisfies my own requirements. If I'm not happy, I can always cancel my subscription. But I need to pay for the papers that have already been delivered.

So, what does any of this have to do with SaaS marketing?

For one, allowing for an "acceptance period," or any other terms and conditions that delay payment, has significant cash flow implications. In the SaaS world, anything that slows down the revenue stream is a bad thing. It increases the cost of customer acquisition and delays the return on that investment. If marketing's goal is to build a "customer acquisition machine" that generates a lifetime revenue stream, "acceptance testing" means you get more like a trickle than a stream. (See, "Getting Deals Unstuck from Legal and Procurement.")

Second, marketing can play a constructive role in communicating contract terms and conditions to prospective customers. The customer's legal counsel may also be in the habit of reading and red-lining contracts for on-premise applications, and they may not be familiar with SaaS solutions. Marketing can help educate them to the fact that concepts like "acceptance testing" don't apply. A published FAQ, for example, can help to explain the terms & conditions to prospective customers early on in the sales process. A handbook for the sales reps that explains the contract, the rationale behind the terms and conditions, and what items are negotiable and which are not, can also be helpful. It might keep reps from making commitments that you don't want to make, and avoid round after round of contract haggling.

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.

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.

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. Salesforce.com 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 salesforce.com 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 salesforce.com 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 salesforce.com 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 salesforce.com and Concur have continued to spend substantially on customer acquisition. Saleforce.com'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.

SaaS Marketing Essentials on a Single Page

Click on the table for a large image.

You can also download a .pdf version from the SaaS Marketing Strategy Advisors website.

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.

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.