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.

SaaS makes a mess of the org chart

SaaS messes up organization charts. It takes those boxes that represent separate departments and it smushes them together.

Let me give some examples.

Marketing & Sales: The marketing organization and the sales organization used to work separately, though they'd occasionally meet to cast blame back & forth. "Your leads are worthless; Your sales guys don't follow up," ad nauseam.

But the SaaS model requires an ultra-efficient customer acquisition process, and there's a penalty to pay for that kind of friction. SaaS companies can't afford to run marketing programs that generate leads that the sales force can't or won't follow up on. A disconnect means wasted leads, lost sales, squandered resources, and lots of nasty finger pointing.

Customer Support and Sales: Customer support and sales were also once considered neatly separated on the org chart. Sales brought in new customers, tossed them over to the customer support people, and moved on.

Not so in the SaaS world. Because SaaS customers can leave once their subscription expires and the company's success depends on renewals, the customer support organization is selling as well. Their ability to deliver quality support and a positive experience is critical to renewing customers and reducing churn.

There's no point in sales working hard to bring new customers in the front door only to have an inadequate customer support organization lose them out the back door. Given the high cost of customer acquisition, SaaS companies usually can't afford to win customers more than once.

User Experience and Marketing: I'll add one more example of org chart boxes getting scrunched together in the SaaS model: the user experience (UX) team and the marketing group.

Those clever and creative UX folks who make solutions usable share the same goals as the marketing team: clarity and simplicity.

The UX designers are trying to make applications easy to use. This is especially critical for broadly-deployed SaaS applications such as expense reporting or talent management.

Trying to patch over a confusing UX by providing lots of training and customer support is very expensive and doesn't fit the SaaS model well. Just a handful of long support calls might suck up whatever profit would be gained in a monthly subscription fee.

Similarly the marketing team is striving for clarity and simplicity. Confusing messages that target the wrong audiences will miss the most likely prospects. Worse, they'll bring in inappropriate prospects that won't eventually purchase your product. These bad leads cost you money; they don't make you money.

But the connection between UX and marketing goes beyond the fact that they share common goals. They actually depend on each other.

It's a waste to hide an elegant UX behind a heap of marketing mumbo-jumbo. If prospective customers are unable to quickly grasp how a solution could be helpful to them and why it's better than alternatives, they're not likely to go beyond the company's home page, brochure, or announcement to actually look at the product.

By the same token, no amount of clear messaging can save a complicated UX. If the product is hard to use, it's hard to sell... and even harder to renew.

Good UX demands good marketing and vice versa.

2011: More of the same... only worse

What's new for 2011?

Not much, really.

If you were looking for my "top ten" list of dramatically new trends for the new year, sorry to disappoint you.

What I expect is that we'll see many of the same things we've been seeing for awhile in software-as-a-service (SaaS) marketing... only more of it.

More confusion

Customers will confront more confusion about SaaS, PaaS, IaaS, cloud computing, private clouds, public clouds, hybrid clouds, etc. Much of that is a natural consequence of a still-emerging market, with every vendor, analyst, pundit, and guru trying to put their own spin on things.

For SaaS marketers that means you should continue to educate prospective customers. To put a twist on the old Sy Syms maxim, "an uneducated consumer isn't likely to be a customer at all." Help prospects to understand the basics of SaaS and you'll gain their confidence and accelerate the sales process.

More noise and distractions

It will be even more difficult to cut through the clutter this year and capture prospects' attention. Speaking from my own experience, there's ever more stuff coming at me through my email, phone, mobile device, web browser and TV screen. And at the same time, I think my attention span is getting shorter.

Marketers will need to get their messages across with laser-sharp clarity. If prospects can't figure out in less than a minute what problem you solve and why they should pay you money for it, they'll move on.

Over the course of the year, I'm planning on doing a "one-minute drill" on selected SaaS vendors' marketing messages to assess how well they articulate their benefits and advantages in under 60 seconds. Stay tuned.

More pressure on marketing costs

Companies learned a lot about cutting costs in the past couple of years, and many learned to do marketing on a shoestring. Be assured that our friends in the finance group noticed that marketing folks could do more with less. Or at least we could do something with less.

Bottom line, don't expect a huge marketing budget windfall in 2011.

If they haven't already, marketers will need to put processes in place to regularly measure the success of each program. The cardinal rule still applies: the cost of acquiring a customer can't exceed the lifetime revenues that the customer will generate.

And keep in mind that programs and tactics that worked well last year may not work so well this year.

More competition

One great thing about SaaS is that it's getting easier and less expensive for new companies to build an application. One terrible thing is that it's getting easier and less expensive for new companies to build an application.

I've seen a handful of clever developers build an application on top of Force.com in a matter of months. Easy access to outside platforms and infrastructure at "pay-as-you-go" costs makes it lots easier, cheaper and faster.

For existing SaaS solution providers, expect a continuing influx of start-up competitors who think their solution is a little bit better than yours.

Add to this that more large, on-premise application vendors won't ignore the SaaS challenge any longer, and those that have been dipping their toe in the water will likely take the full plunge soon. If they do it well, these deep-pocketed vendors can make a big splash.

For you existing SaaS vendors, prepare yourselves: sharpen your value messages, hone the customer acquisition process, and engage your existing customers.

More engagement with existing customers

With the growing use of social media, customers expect more interaction with their vendors. They want to know more about what features are available, how best to use them, and what's coming in the future. And they want an opportunity for a conversation, not a one-way outbound broadcast.

SaaS marketers should communicate regularly with customers through all appropriate channels. For SaaS businesses that rely on renewals (and that's most of you), existing customers are also prospective customers.

In addition to email, newsletters, events or whatever else has worked in the past, try out social media. Facebook and Twitter are becoming more widely used, even for business-to-business companies. Though you want to be careful not to be too casual, you may find that the more "human," less "corporate" tone of social media is refreshing.

Have a happy and prosperous new year.

3½ ways to lose customers in 2011

If you’re marketing a SaaS solution and have had enough with year-end wrap-ups, predictions for the new year, or sure-fire tips for success in 2011, here’s the antidote:

3 ½ ways to lose customers in 2011.

Ignore them

Once you’ve won a customer, consider your marketing job complete. Focus on the prospects, not the ones who are already sending in a check every month. Leave them out of the loop on product and service enhancements, and ignore their suggestions for improvements. Just remember to turn on the charm a few weeks before the end of the subscription.

A corollary to ignoring existing customers: oversell them

Pitch them on renewing and upgrading with every single interaction. That includes unresolved customer support issues. Nothing an exasperated customer wants to hear about more than a discount… if they renew their service for another 3 years.

Hide from them

If your service goes down, your communications to customers should go down as well. Keep them guessing about your system’s status, and let them rely on other uninformed customers for information. Shrug off their concerns and don’t even consider an apology.

Surprise them

Add new features and functions without warning. Better yet, remove certain features without warning. Make major changes to the user interface. These are especially effective for applications used only occasionally, such as annual performance review solutions.

OK, back to the traditional new years' self-improvement resolutions. Pardon the interruption.

Free is not a SaaS Marketing Strategy

I like free stuff as much as the next guy. Just check out my t-shirt collection - all free giveaways from technology companies. In fact, many of these t-shirts have outlived the product or company they're promoting. (Remember Lotus Improv or Prime Computer?)

I even use free software. I have free gmail and Twitter accounts, and nobody at Google sends me a bill for using the Blogger application that I'm using to write and host this blog post.

There are some good reasons that software companies use "free" as a marketing tactic. It can attract visibility and generate interest to fill the top of the sales funnel. It can help qualify leads into opportunities and covert opportunities into paying customers. Extending a subscription "free of charge," at least temporarily, can even be effective in retaining customers and reducing churn.

But beware: "Free" by itself, is not a marketing strategy.

Giving away your product, whether in the form of a "free trial," a "freemium," or plain old "free forever" can be an effective tactic, but it cannot be the sum total of the plan.

Among other things, a marketing strategy needs:

• a clearly-defined target market: people or organizations with a problem they want to solve
• a solution that meets the needs of that target market: a way to solve the problem
• a solution that's better, faster or cheaper than alternatives.

This value proposition is a required foundation of any marketing strategy. Without it, you may have an intriguing idea or a clever technology, but you don't have something on which to build a business.

In addition to the value proposition, the marketing plan needs to specify a way to acquire customers cost-effectively. You can't spend more on acquiring customers than the revenues those customers will generate over time.

Given the nature of the SaaS model, this is a particular challenge for SaaS companies. They are typically spending money up-front on sales and marketing, but earning it back over an extended period of time via subscription fees. The marketing plan will need to specify how to make that equation work.

Don't fall into the trap of thinking that "free" is the answer to all your marketing needs. An effective customer acquisition and retention plan means much more than giving away your solution through your website. "Free" doesn't relieve a company from thinking hard about its target market, value proposition, or delivery mechanisms.

What are you customers saying about you?

Have you purchased a new car lately? You can find out everything you need to know about any make or model without ever stepping foot on the lot. All data on features, colors, and accessories are available from the manufacturers' sites, and detailed pricing information is readily accessible from sites like Edmunds.com.

You can also find out about particular dealers. Better yet, that information comes from actual buyers. These folks will tell you about their entire experience buying and servicing their new cars. A simple Google search led me to these candid reviews of my local VW dealer on Yelp!

Some they should be proud of...

I went into the dealer with all these worries, and the sales guy, John, was quick to show me that there nothing to worry about there. No sales pressure whatsoever. No haggling, no tricks, and they were very nice and patient through the whole process. Brandon V.

Others not so much...

Super rip off and no customer care - this place charged me 2 hours of labor for a 0.5 hour job, and were unapologetic when I argued about it.... I talked to the service manager and he defended the 2 hours to bolt two pieces of metal to the frame. This place is worthless. I'd never go back. Ken H.

Ouch!

SaaS providers should let their customers talk to prospects, too

As you might expect, most of the customer opinions you'll find online relate to B-to-C businesses. But there's an opportunity for companies selling to enterprises to jump in here, too. In fact, for SaaS companies it might make a lot of sense.

For one, SaaS providers should be conscientiously attending to the needs of their existing customers as a on-going imperative. Renewing existing customers when their subscriptions expire is usually critical to the success of the business. If they're doing their job properly, SaaS providers should have a large pool of satisfied and well-informed customers willing to express positive opinions.

Relying on happy existing customers to help sell new customers should also help SaaS companies with another business requirement: cutting the cost of customer acquisition.

Let your prospects connect directly to existing customers. Don't ask your Sales folks to carry the entire burden of closing a prospect. SaaS providers should open their customer forums to anyone, and actively encourage their prospects to log in and ask questions. Besides the usual link to Sales - "Contact us for more information", why not add "Contact our customers for more information," and provide a direct link to the Customer Forum?

I know that can be a scary notion, and you shouldn't expect customers to shill for you. But they will tell a credible story. And if, on balance, they report that their vendor (that's you) has treated them fairly and delivered good value, you've got nothing to fear.

Proximity to market

I've heard of CEOs delivering pizzas and Jolt Cola to software developers. I know about companies that have sent flowers to developers' families, with apologies for keeping them away from home on nights and weekends. I've even seen a company treat the entire development team to a week-long Caribbean resort vacation, all-expenses-paid.

Why this largess? Believe me, it's a lot more than just an outpouring of TLC to the folks who design, write and test code.

No, it's all about time. Specifically, time-to-market. Companies see value in prodding, cajoling and rewarding development teams for shipping product and hitting a deadline. The thinking goes that faster-to-market equates to competitive advantage.

I'm not convinced that time-to-market, and specifically first-to-market, always conveys much advantage over the long term. There are plenty of examples where the second or third vendor into a market eventually walks off with the lion's share. Think Microsoft in desktop applications or Google in search.

Proximity-to-market more important that time-to-market

Time-to-market is probably even less important for software-as-a-service (SaaS) companies. What matters more for them is proximity-to-market.

"Proximity-to-market" refers to the ability of SaaS providers to stay close to customers so as to be in a position to accurately read and analyze customer needs and to respond quickly.

The SaaS model presents providers with at least two significant proximity-to-market advantages:

1. The ability to observe customer behavior closely

A hosted SaaS solution provides the vendor an opportunity to know precisely how the customer uses it. The provider can directly observe, for example which features are being used, which are neglected, and which cause customers to review the "support" FAQs? On-premise solution vendors can try to accumulate this same information by observing behavior or through customer surveys, but it's more difficult and less accurate.

2. The ability to respond quickly

SaaS providers that follow agile development methodologies typically have the ability to respond rapidly to signals from customers. They can develop new features or fix existing ones. Moreover, they have an effective mechanism to deliver these enhancements quickly and without significant disruptions. SaaS vendors typically don't face the long development cycles and upgrade issues that confront on-premise vendors.

SaaS providers should leverage these proximity-to-market advantages. Stay in touch with customers through moderated forums or social media networks, analyze customer support requests, track usage patterns, and use whatever other means you have to observe customer behavior and sentiment. Analyze and prioritize the information, and feed it to the development team. It goes well with pizza.