Generating Leads and Cultivating Opportunities

Now in late December, the field of my neighbor's farm is bare, except for a single row of hardy, but frozen-solid Brussels sprouts stems. In a few weeks, though, my neighbor and his crew will be working inside the greenhouse with a specially-devised planting machine. They pour a large burlap bag full of seeds into the hopper and the machine carefully inserts a single seed into an individual tray compartment. Each compartment is filled with a blend of rich soil, vermiculite and fertilizer, carefully prepared to nurture each seed into a healthy seedling.

In April and May, when I get around to preparing my amateur, backyard plot, I won't bother to scatter a packetful of seeds, most of which won't germinate. Instead, I'll pick up a couple of those trays, which by then will be full of healthy lettuce, tomato and pepper seedlings.

Besides giving me something to look forward to throughout the winter, there's an idea in here that can be helpful for marketers, in particular those marketing software-as-a-service (SaaS) solutions, for whom controlling the cost of customer acquisition is especially important:

Pay attention to cultivation.

It's not enough to gather a passel of leads, like 40-pound bags of seed. You need to carefully cultivate those leads and nourish them into qualified opportunities.

Here are a few ways in which these efforts often go wrong:

1. Marketers are measured on "leads," not "qualified opportunities." In other words, they're rewarded for the wrong goal. This often happens because marketing doesn't own the entire process; they generate the leads, but they hand them over to sales for qualification. For this arrangement to work properly, marketing and sales need to share responsibility. That can be difficult.
2. The cultivation process is starved. Money is spent on search engine optimization, pay-per-click, PR, advertising, etc., all in the interests of attracting a prospect's initial attention and gathering their name and contact information - in other words, generating a lead. (Per item 1, that's what marketing is often asked to do.) The follow-on process - cultivating that lead into a qualified opportunity -often isn't given enough resource or attention.
3. The cultivation process skips a critical step. Undifferentiated leads are often handed off to sales without adequate cultivation. This is an extremely expensive way to qualify leads, particularly when the solution is sold through a direct sales force. To manage customer acquisition costs, companies need to build in a more cost-effective qualification step into the process.
4. The cultivation process is too short. The leads aren't given enough time to germinate. I heard a story recently about a SaaS provider that extended their free trial period from 30 days to 60 days. The result was a substantial increase in the number of "tryers" converting to buyers. Apparently, the extra 30 days was enough time for the prospective customers to gain enough experience and confidence to actually subscribe. Reminds me of that Supremes' standard, "You Can't Hurry Love."

Happy new year to you all and here's hoping for an early spring. I know the tomato seedlings will be ready.

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.

SaaS Requires Standardization

Does anyone else remember something that resembled a programmable typewriter?

I was volunteering at a legal aid office during the summer of 1971, and one day they rolled in a workstation outfitted with an electric typewriter, an automatic paper feeder, and a box attached to the typewriter where the typist/operator plugged in different cartridges. As I recall, each cartridge would cause the typewriter to automatically type out a standard legal document, pausing at certain points to allow the typist/operator to manually key in names, addresses and other particulars.

This precursor to the Wang word processor and MultiMate on a PC was a wonderful time-saver and served the needs of the law office as they cranked out the standard "writs of this" and "appeals of that," each legal document identical, save for the names and addresses of the parties involved.

Companies selling software-as-a-service (SaaS) solutions should strive for this kind of standardization. They should aim to prepare identical legal agreements with standard terms and conditions for all customers.

Standard = Faster

For one thing, a standard agreement accelerates the sales process. Too many of us have seen opportunities proceed smoothly through most of the sales cycle, securing approvals all along the way, until they run smack dab into the folks in procurement and legal. A quick and easy sale becomes a protracted and difficult sale. One red-lined contract draft after another gets passed back and forth between the vendor and the customer, haggling over payment terms, service level agreements, activation clauses, ad nauseam. And in the SaaS model, delaying the flow of subscription revenue by weeks or months is painful. (See "Getting Deals Unstuck from Legal and Procurement.")

Changes now can cost you later

Adhering to standard contract terms also discourages customizing the application or operations for individual customers. You can build and maintain a single application that's hosted, delivered and supported via a single, standardized set of procedures. "One-offs," whereby one customer is handled differently than others, can increase costs for development, testing, deployment, support, upgrades and operations. What may look like a small change to the contract can be costly over the entire life of the customer.

Obviously, some SaaS companies need to be more flexible than others, and a single set of terms and conditions may not be practical. Large enterprises, for example, may require particular provisions to suit their specific needs for broadly deployed, critical applications.

That said, however, SaaS companies should still aim for standardization, and they should make it clear which items are negotiable and which are not.

Anything that stops the typewriter keys from clicking automatically at 150 words per minute and forces the operator to manually type in something unique can be extremely costly.

How to Cut Customer Acquisition Costs

• How much should we spend on tradeshows?
• Should we spend more on search engine optimization, or pay-per-click?
• Are webinars worth the cost?

As a marketing adviser, I suppose I should charge a hefty fee to address these inquiries. But I'll share the answers with you right here, right now, for absolutely nothing:

I do not know.

That may not be something you often hear from an expert, but it's the best short answer I can honestly offer.

Here's a longer answer:

I don't know which specific programs will be cost-effective for your business and which ones you should eliminate, but I do know how to figure out the answer.

Articulate the goals for your particular organization

Know what you need to achieve with your sales & marketing efforts and be specific. How many deals do you need to win to hit your revenue targets? Work backwards from that number to calculate the number of opportunities you need, and then work further upstream to calculate the number of interested prospects required. (More on understanding this funnel later.)

I've actually managed marketing for a company that sold to a handful of large mobile phone makers: we didn't need to generate leads at all. Lead generation programs would have been a waste of money, so we focused exclusively on building market awareness and sales support tools.

Measure the value of each program

Track the number of leads, qualified opportunities and wins generated by each program. Then use the overall cost of the program to calculate the cost per each lead, cost per opportunity and cost per win. There are certainly flaws in this method - notably in designating a single program as the appropriate source for a particular prospect - but it's better than guessing.

A prerequisite for measurement is an agreement between sales and marketing on the precise definition of a "lead," a "qualified opportunity," and a "win." Further, they should agree on a process for moving prospects from marketing over to sales. Marketing's dumping unqualified leads onto sales is a sure way to waste money, besides creating ill will all around.

Understand the funnel

Know how many leads are required to generate one qualified opportunity, and know how many qualified opportunities are required to generate one win. Once you know these "conversion ratios," you can figure out precisely what's needed to make each stage of the sale process productive. You won't pay for leads you don't need, or sales people you can't feed.

Understanding the funnel can also help you identify where prospects are getting stuck. A low yield of leads-to-opportunities requires a different fix than a low yield of opportunities-to-wins.

It's not only about lead generation

Remember that in addition to generating leads, the marketing task typically includes two other important tasks: building visibility in the market and providing sales tools. Establishing thought leadership and winning the trust of prospects is especially important in marketing and selling SaaS solutions. (See "Lead Generation... ad nauseam.")

Cost-effective marketing is especially important for SaaS

Most SaaS companies will find that their customer acquisition costs (sales & marketing) will account for the single largest portion of their expenses. And under the SaaS business, sales and marketing expenses can often exceed one-third of subscription revenues. There is no margin for wasteful spending. (See "Hyper-Spending on Customer Acquisition: The Wile E. Coyote Effect."



Though I wish it might be otherwise, I don't believe there is an easy answer on how to cut your customer acquisition costs. Or least not an easy answer that's accurate. As H.L. Mencken put it, "There is always an easy solution to every human problem - neat, plausible and wrong."

Developing an Effective SaaS Value Proposition

Though I've spent more than 25 years in marketing, truth be told, I still don't understand what people really mean when they talk about "go-to-market strategy." I'm not quite certain what a "marketecture" is, and almost any marketing term that starts with "integrated" is likely to confuse me as well.

I confess that I fall into the same trap, using this marketing jargon when I'm not careful. However I do try to use plain English so that I know that folks know precisely what I'm talking about. Sometimes I run a draft by my dad, an architect, just to be sure.

So let me take a run at one of those marketing terms here: "value proposition." Simply put, it explains who would pay money for a product or service and why.

Which gets me to the issue of the value proposition and SaaS.

In developing an effective value proposition for their SaaS solution, marketers need to address issues that are unique to SaaS.

For marketers to explain to prospective buyers what they're buying, what problems it may solve for them, why they should spend money or time on it, and why it's better than alternatives, they will nearly always need to talk about these specific features of their offering:

Predictability

While on-premise application vendors can focus on features already included in the product, SaaS solution vendors must focus on the future as well. They need to win the trust of prospective customers and convince them that the solution will be enhanced regularly over the course of the subscription. Provide a roadmap of planned enhancements and show a consistent record of meeting past commitments.

The concept of marketing the promise, not just the product is discussed more fully in "Ten Essentials of Software-as-a-Service Solution Marketing."

Reliability

SaaS vendors should show evidence of their solution's high uptime and provide service level agreements to back-up their promises. They should establish procedures to notify customers when service will be down for scheduled maintenance and to communicate with them in the event of unplanned outages. Hint: Posting a service outage notice via the application, which the client is unable to access, isn't an option.

Security

Prospective customers will have legitimate concerns about the security of their data in the SaaS environment. SaaS marketers should address data location, segregation, encryption, access control and other concerns in order to gain the confidence of the IT professionals. And they're wise to engage with IT early in the sales cycle.

Affordability

SaaS marketers need to show the cost advantages of SaaS over on-premise applications. Their calculation should include all IT-related expenses for on-premise deployment and maintenance as well as the potential financial advantages of an operating expense vs. a capital expense.

A caution here: While the cost advantages of SaaS over on-premise might be substantial, don't build your value proposition entirely on this single element. (See "It's Not All About the Price.")

Simplicity

SaaS marketers should promote the simplicity of their solution, if it applies. For users, it's easy to use and easy to learn. For IT, it's easy to deploy, easy to configure, and easy to upgrade. (More about this at "Market the Entire Customer Experience."

Flexibility

SaaS solutions typically have the advantage of flexibility vs. on-premise applications. Tout their ability to quickly scale to meet heavy demand, without the need to carry excess capacity during periods of low usage. There's value in managing unpredictability.

Accessibility

Marketers should promote the accessibility of SaaS solutions for remote workers in dispersed locations. There's no need to install and maintain an application on each client, all users are working on the same version of the application, and all data is in sync.

There may be more elements to add to this list, but if you start here you'll be heading in the right direction. In fact, you may have developed a "high-value element" of your "integrated go-to-market strategy"... whatever that means.

SaaS: It's Not for Everyone

My family doesn't go out for pizza anymore. We bought two pizza stones and a wooden pallet, and for the last couple of years we've made it at home. Why?

Anchovies.

(Cue up the theme music from "True Confessions" here.) I like anchovies on my pizza.

Because not many others share this preference for small, salty fish on their pizza, it's very hard for me to find someone to split it with. In fact, lots of people won't even let me put anchovies just on my half, claiming that they'll somehow leach into their non-anchovy half.

Hence the "make it at home" solution. Each of us makes a personalized pizza and puts on it whatever we please. My son's in the mainstream: tomato sauce and cheese. My wife prefers the more exotic: fig spread, goat cheese, and prosciutto. For me: anchovies

I know you're looking for practical advice on SaaS marketing, so stay with me here:

Anchovy pizza would make for a very poor SaaS solution.

That is, if your application has a limited market, requires customization, and can't co-exist with other applications, SaaS might not be an appropriate model.

SaaS applications fare better in larger markets where most buyers are satisfied with the same features. You don't want to build a solution that depends on satisfying the requirements of a small, quirky market.

In fact, if you've built a solution that suits a large, mainstream market, you should consciously avoid the niche markets. Resist the temptation to customize your application to suit their needs.

It's much easier to succeed with the SaaS model if your solution is available in only a limited number of options. Configuration is OK, especially if the user can do the configuring themselves. But customizing will make you miserable and cost you lots of money - higher costs for development, testing, support, administration, sales and marketing.

Applications and data that customers don't want to share are also poor candidates for SaaS. IT people harbor legitimate concerns about SaaS in general, and you'll need to satisfy their concerns about security and integration (See "What's Under the Covers"). For certain applications, however, you'll find yourself trying to jump over impossibly high hurdles. You'll go through all kinds of contortions with your application, your network, your hosting environment, ad infinitum, and in the end you still won't get the deal.

Bottom line:

1. If you're building a SaaS solution, target it to the mainstream buyers - the traditional, tomato sauce and cheese pizza eaters.
   
2. Don't customize your solution in an effort to satisfy the unusual requirements of a niche market, like us anchovy pizzas eaters.

Don't worry: We'll just make ours at home.
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Comments are always welcome. And if you'd like to confess your own particular preferences for pizza, don't be shy.

SaaS and Indy Car Driving: Don't Lift the Accelerator

A race car driver who had just qualified for the first time for the Indianapolis 500 explained to me the most difficult part of navigating the 2.5 mile circuit: keeping the accelerator pushed to the floor. He said it's easy to do while driving down the straightaway; the tough part is when you're heading into the 90-degree turn at the end. If you lift the pedal, the car won't turn left in front of the concrete wall at turn one.

A quick lesson on race car aerodynamics. Indy Cars are designed like aircraft wings, only upside-down. In a plane, the faster it goes, the more lift is generated to carry it up into the air.

Indy Cars, by contrast, need to stay on the ground, not fly into the air. They are designed so that the faster the car goes, the more downforce is generated to hold it onto the track. Not enough speed means not enough downforce, means the car leaves the track surface, means the driver can't steer, means... you get the idea.

Marketing software-as-a-service (SaaS) solutions is a lot like driving an Indy Car.

The goal with SaaS marketing is to build a machine that generates lifetime customer revenue that exceeds customer acquisition costs. You want a process in place whereby every $1 of sales and marketing expense yields more than $1 in revenues over the life of a customer's subscription. (I discuss this in more detail at "Marketing Spend: How Much is Enough?")

Of course, those subscription revenues are recognized over the entire lifetime of the customer, often over several years. However, the sales and marketing costs are recognized immediately. You spend now to earn later. According to this formula, the faster you spend, the more short-term losses you generate.

As you're racing down this straightaway, running up big deficits, one instinct is to lift off the accelerator. Radically cut spending on sales and marketing. After all, these are probably the largest single expense items on your income statement. (I've shown how much publicly-held SaaS companies are spending at "The Risk of Spending Too Little on SaaS Marketing.") It's an instinct perhaps learned from experience with the business model for on-premise applications.

Resist the instinct to cut spending on customer acquisition

But if you've built an efficient sales and marketing machine, lifting the accelerator is exactly the wrong thing to do. If your finely-tuned customer acquisition machine is yielding $3, $4, $8 for every $1 in sales and marketing spend, keep the pedal to the floor.


If you cut back on spending, you lose visibility in the market, you can't generate prospects, and you can't support your sales efforts. The result: you can't acquire customers, and you'll fall further behind competitors until you're no longer a viable choice.

You'll lose revenue in the short term, and you'll lose revenue over the long term. Then you're unable to fund product development, customer support, and operations, so you lose your existing customers.

You may save cash by cutting expenses, but at the same time you've lost market traction. Like an under-steering Indy car heading toward turn one, the business slides into a drift, and at least figuratively, hits the wall.

Of course, keeping your foot on the sales and marketing accelerator requires enough fuel, in the form of capital, to stay in the race until the lifetime customer revenues come in over time. And it requires a well-tuned, efficient customer acquisition machine.

But it also requires courage. No doubt, the notion of accumulating big short-term losses is downright scary. Maybe not quite as scary as heading toward a reinforced concrete barrier at 220 miles-per-hour, but scary nonetheless.

It's Not All About the Price

As a graduate student in foreign affairs in the late 1970's, I took a required course on "The Balance of Strategic Forces." It was all about the strength of the nuclear arsenal of the United States relative to that of the Soviet Union.

My favorite part of the course was when officers from each of the branches of the military lectured us on the virtues of their particular contribution to mutually assured destruction. The Navy explained that they protected us on the seven-eighth's of the world's surface covered by water. The Army, with responsibility for land forces, reminded us that all of the earth's human population lived on land. And the Air Force's claim rested on the fact that 100% of the earth is surrounded by air.

Besides acquiring a passel of nifty acronyms - MiRVs, MaRVs, SLCMs, etc. - I came away with a good understanding the "nuclear triad," the combination of long-range bombers, land-based missiles, and submarines that comprised the U.S. strategic defense arsenal. Despite its terrifying capabilities, it was colloquially referred to as the "three-legged stool."

I haven't had much occasion to use the nuclear armament knowledge in my marketing career, and much of it is now out-of-date, fortunately. But at least one lesson about the strategic triad applies to marketing as much as it does to nuclear defense:

Three legs are better than one.

That is, you're better off building a value proposition that's supported by multiple legs, and there's danger in relying on a single strategic advantage over competitors.

There's a temptation to build the case for SaaS solutions that rests largely on their cost advantages over on-premise applications. Unfortunately, this one-legged case makes for a wobbly value proposition.

For several years now, analysts and vendors have been pulling at the threads of a discussion on the cost of software-as-a-service (SaaS) solutions vs. on-premise applications. Forrester Research published a report on the topic two years ago as SaaS was just gaining traction in selected markets. More recently, a Gartner analysis noted that while SaaS may offer a cost advantage over the first two years, the total cost of ownership (TCO) advantage may dissipate over five years.

In a previous post, I talked about my suspicions about TCO, and ROI calculators in particular. Their apparent precision can be used to obscure fundamental flaws in the logic. If you're encountering objections from prospective customers about TCO or ROI, and claims that your SaaS solution is actually more costly than an on-premise application, I'd suggest you carefully examine their calculator. You may well find implicit assumptions, intentional or otherwise, that will skew the results.

Besides these cautions about TCO and ROI calculators, this is a good time to remind marketing folks to be careful when presenting the value of your SaaS solution not to rely too heavily on the cost advantages. These could be elusive. As you will have learned in Marketing 101 (4 P's, etc.), price is often the easiest element for competitors to match, at least in the short run.

Don't build a one-legged stool

SaaS vendors may be able to build a more sustainable case over on-premise solutions by touting other advantages:

• Greater flexibility to meet fluctuating demand, particularly for applications that have high peaks in usage followed by relative quiet
  
• Better access to the application for remote workers
• Lower risk of a failed or delayed deployment
• Instant access to the latest product enhancements and assurance that all users are on the same version.

Dan Druker of Intacct has offered a more comprehensive checklist of SaaS advantages.

When building the value proposition for your SaaS solution, use these other advantages if they apply. Don't rely exclusively on cost advantage.

It's hard to sit on a one-legged stool.

"Message cops" are essential to SaaS success

Marketing people usually pay a lot of attention to consistency. They want to convey the same message, the same value proposition, across all marketing media: the web site, literature, presentations, press releases, etc. And now there are even more places to police: blogs, twitter, Facebook and LinkedIn.

When I've been in that role, I called myself the "message cop."

Marketing people typically focus only on consistency across marketing material. But at a recent panel on software-as-a-service (SaaS) renewals, Jim Driscoll, the CFO at Kadient, remarked that consistency needs to extend beyond marketing. SaaS companies need to be consistent through all of their interactions with customers. They need to convey the same message from the initial customer presentations, to contracts and financial terms, and through to delivery of the service and support.

He explained that when the promises, obligations, commitments, and delivery are in sync, renewals are much easier to secure.

And if there's inconsistency, it's easy to detect. Customers are dissatisfied, renewals fall, customer acquisition costs rise, and the entire SaaS business model comes under stress.

When these problems surface, some companies respond with a corporate version of the children's game "button, button, who's got the button." The problem, like the button, keeps getting passed from one group to another.

• Sales executives are promising 99.9 % uptime, but operations can only deliver 98%.

• The marketing material implies that SaaS customers have the flexibility leave at anytime, but the contract specifies a 3-year obligation.

• Sales is asking marketing for success stories, but customer support can't find any happy customers.

• Finance requires payment when the contract is signed, but operations can't deploy the service for 90 days.

• Customer training has been scaled back, but the product is still too complicated for the user to learn on their own.
  

In the SaaS world, each department's activities are intimately connected to the others. If marketing, development, legal, finance, sales, support, and operations are in sync, the company can benefit from a virtuous cycle. If not, it fails in a death spiral.

When it comes to building a successful SaaS business, there is no their problem; there's really only our problem. You can't pass the button; everybody's a "message cop."

The Recipe for a SaaS Marketing Mix

During the summer, I spend most Saturday morning's tending to my yard and garden, though my tomatoes are struggling with all this rain we've had here in New England. But in the winter, I sometimes watch the succession of cooking shows that run all day on public television.

I prefer the ones in which the host chef measures ingredients in "handfuls of this" and "dashes of that." They pay most attention to the ingredients, and give only a rough approximation of proportions.

The more precise chefs I don't enjoy nearly as much, especially those that bake. Baking is a more exact science - chemistry actually - and it requires precise measurements. Most recipes for cakes are not very forgiving... something I learned from a tragic experience with a marble cake.

My approach to the marketing mix for software-as-a-service (SaaS) companies follows this same predilection. I tend to focus first on ensuring that companies are using the right ingredients in approximately the right proportions, before they get fixated on the precise measures.

Before a marketing executive at a SaaS company delves into exactly how much to spend on the assortment of tactical marketing programs - webinars, collateral, search engine optimization, etc. - it's usually best to ensure that they first have the basic ingredients on hand.

My Recipe for Effectively Marketing SaaS Solutions to Enterprises

Ingredients:

• Several generous handfuls of activity targeting existing customers. Customer retention is essential to your business.
  

• An ample dose of messages and materials addressing the concerns of IT professionals. You'll need to satisfy their appetite for information about security, reliability, performance and integration.

• A hefty dollop of brand awareness activity to go along with your lead generation efforts. With SaaS, customers are buying into your promise, not just your product. You need to win their trust.
  

• A thick slice of product roadmap, NDA's removed. Before a customer goes along for a ride, they usually need to know where you're going to take them.

• A few shakes of education for procurement professionals. They may not be familiar with the terms and conditions of SaaS contracts, so you'll need to provide an explanation.
  

In preparing the concoction, be prepared to work quickly. The SaaS model usually involves frequent product enhancements, so marketing folks need to update programs and material quickly. Items left out too long will go bad.


And of course, the marketing mix needs to be kept within a budget that fits the SaaS business model. Customer acquisition costs can't exceed lifetime customer revenues.

So before you start measuring and calculating down to the final dollar, make sure you've got the right ingredients in the kitchen.

Bon appetit!

What Do You Mean by "Hybrid?"

Folks talking about software-as-a-service (SaaS) and cloud computing often use the label "hybrid." I understand that "hybrid" refers to something that's part "this" and part "that."

I'm just not always sure what "this" and "that" are.

Sometimes "hybrid" refers to a solution that runs partly in the cloud and partly on-premise. An email system, for example, might handle some functions on a remote server accessed via the web, but other functions might be managed on the user's desktop. Anti-virus applications often work this way as well.

Other times, "hybrid" refers to a solution that is hosted and managed by the provider, but can be extensively customized by the user. This is in contrast to the more pure, multi-tenant SaaS model in which solutions can be configured, but not customized.

In a third option, "hybrid" is used to refer to a solution that can run either on a "public cloud" or on a company's internal "private cloud," or dispersed across the two.

And in yet another variation, vendors who offer their customers a choice of SaaS, on-premise, or hosted options are described as following a "hybrid" business model.

I won't get into the wisdom of any of these options right here, except to note that each of them comes with its own set of challenges. (Elsewhere, I have addressed whether companies can offer both on-premise and SaaS options.) And as Joel York astutely points out, vendors should make a conscious and deliberate choice among these options, rather than wandering carelessly into the middle of the road.

"This is this."

My point here for marketers is this: Be careful with words.

This emerging market is already confusing enough, with terms like "SaaS,""platform-as-a-service (PaaS)," "cloud," etc. (See "War of the Words.) That confusion will delay the sales cycle or even cost you business.

Marketers should educate CEOs, CIOs, procurement professionals, end users and anyone else in the evaluation process on what these terms mean. Just because you've immersed yourself in the nuanced vocabulary of this market (and read blogs like this one), doesn't mean your buyers have done the same.

If I'm sometimes confused what people mean when they talk about "hybrid" solutions, assume that your prospective customers could be confused as well.

By the way, this dialogue from "The Deer Hunter" offers some useful insight on the need for clarity:

Michael, played by Robert DeNiro, explains, "This is this. It ain't something else. This is this."

And his hunting companion Stanley, played by John Cazale, responds," 'This is this.' What the hell is that supposed to mean? 'This is this.'"

SaaS Renewals and the Multiplier Effect

In case you've forgotten the concept of the multiplier effect from Economics 101, it's commonly used to project the impact of a change in government spending or money supply on the growth of GDP.

If, for example, we know that the government spending multiplier is 5, and the government increases spending by $10 billion, we'd project that GDP would grow by $50 billion.

In a similar fashion, renewals have a multiplier impact on SaaS companies' revenues.

The higher the renewal multiplier - that is the more times a company can renew a customer and extend its revenue-generating life - the greater the revenue accruing to the company.

Lifetime Customer Revenue

To be more precise, what we're actually referring to here is "lifetime customer revenue."

Lifetime customer revenue = recurring revenue per period * term of customer lifetime

As an example, I'll calculate the average lifetime customer revenue for salesforce.com, estimating a 3-year customer life multiplier:

$985 million in FY 2009 annual subscription revenue/55,400 customers = $17,780 average annual revenue per customer

$17,780 average annual revenue per customer * 3 year customer lifetime = $53,340 lifetime customer revenue.

Changing the renewal multiplier to a 5-year customer life, yields a more favorable result:

$17,780 average annual revenue per customer * 5 year customer lifetime = $88,900 lifetime customer revenue.

To illustrate the dramatic impact of longer customer life on lifetime revenue, I've calculated the lifetime customer revenue at several publicly-held SaaS companies, using 5-year, 3-year and 1-year renewal multipliers. As expected, a higher renewal multiplier yields substantially higher revenue.

The relationship between the renewal multiplier, lifetime customer revenue and customer acquisition cost

This calculation becomes truly useful when comparing the lifetime customer revenue to the cost of acquiring a customer, i.e. sales & marketing expenses.

Average lifetime customer revenue/average customer acquisition cost

This formula reveals how much lifetime customer revenue is generated by $1 in customer acquisition costs. (I discussed this concept at greater length in the May 2009 newsletter and in an earlier post entitled "Marketing Spend: How Much is Enough?")

According to this illustration, when salesforce.com can extend the average customer lifetime to 5 years, the company generates $2.40 in lifetime customer revenue for every $1 spent on customer acquisition. At a 3-year lifetime, $1.44 of lifetime revenue is generated. And at a 1-year customer lifetime, only 48 cents of revenue is generated for every $1 spent on sales & marketing.

Don't lose customers you've already paid for

As you can surmise, spending more than $1 to acquire a customer that yields less than $1 in lifetime revenue is not a sustainable business model.

Extending the life of the customer's subscription is critical to success. It's bad business to lose customers you've already paid for.

Measuring Renewals

Early in my career, I taught bank credit analysts-in-training how to read financial statements. During my course, they heard from me one constant refrain: "Read the notes, read the notes, read the notes." The notes to a company's financial statements often reveal critical insights behind the numbers.

The advice on how to read financial statements certainly applies to software-as-a-service (SaaS) companies, and especially to their reported customer renewal rates. SaaS companies may claim that they have renewal rates of 90% or 95%, but it's critical to look behind these numbers and understand how they're calculated.

Is a 90% renewal rate a good thing?

First, it's important to know what the company is really counting when it refers to "renewals."

• Are they referring to the number of customers, or to revenues?
• Are they counting only the customers whose contracts are up for renewal, or all customers?
  

Then, carefully examine how the renewal rate or attrition rate is calculated.

• Some companies compare the number of customers at the beginning of the period to the number of customers lost during the period. For example, if they start the year with 100 customers and lose 15 customers over the course of the year, they'd show a 15 % attrition rate or an 85% renewal rate: 15/100
• Other companies compare the number of customers at the beginning of the period plus the customers gained over that period to the number of customers lost during the period. By this alternative method of calculation, if they start the year with 100 customers, lose 15 of them over the year, but acquire 50 new customers over the year, they'd show 10 % attrition or a 90% renewal rate: 15/(100+50). Voila! An 85% renewal rate becomes 90%.
  

Finally, look carefully at the length of the subscription term.

• If the subscription term is one year, a 90% renewal rate means that the company loses 10% of its customers each year.
• If the subscription term is one month, a 90% renewal rate means that the company loses 10% of its customers each month. At that rate, it will lose its entire customer base in less than one year.

So to answer the question, "Is a 90% renewal rate a good thing," by reading the notes you may have equipped yourself to provide a definitive answer: Maybe.


Thanks to Tod Loofbourrow for his insights on this topic.

There is No Marketing Magic Bullet

Assuming that my entire readership is more than 8 years old, I'll share this adults-only secret: There is no Santa Claus, no Tooth Fairy, and definitely no Marketing Magic Bullet.

The Marketing Magic Bullet? I'm talking about that single masterful trick, the brilliant stroke of genius, the one perfect key that unlocks the door to a roomful of success... if only we marketing folks could find it.

Stop looking. You're not going to find it because there's nothing to find.

How can I say that? I can say that on the basis of 25 years in marketing. And believe me, I've been looking. In every company, someone, somewhere is absolutely convinced that a magic bullet does exist.

"But what about Apple? One brilliant Super Bowl ad put the company on the map!"

If all it took to make a successful company was a single memorable Super Bowl ad, we'd all be buying our puppy chow and flea collars at Pets.com. Instead, their cute sock puppet is the poster child for the dot.com bust.

"If we could just get a front-page press story."

Hearing that prescription for instant success, I was tempted to suggest to that person my 100% guaranteed strategy for national press coverage: "Light your hair on fire and jump off the roof... just wait until the photographers are in place." It's probably better that I had the diplomatic good sense to restrain myself.

It's a Thousand Little Things

I once worked with Penske Racing as one of their Indy Car sponsors. (For the non-motorheads among you, Penske Racing is one of the most successful organizations in motor car racing, having just won their 15th Indianapolis 500.)


In interviewing one of the senior members of the team, I once naively asked, "Is the key to winning the car or the driver?"

He patiently explained, "It's not just the car or just the driver. It's actually a thousand little things." It's the driver, the designer, the crew, each part manufacturer, and every other element involved in putting a car on the track that can go 225 miles per hour down the straightaway and turn left at the end... for 200 laps. If all of those elements perform as required, he said, we've got a chance to win.

He didn't say anything about a "magic bullet."

SaaS and the Automatic Feedback Loop

One of the more useful management development courses I've taken during my career is "Practical Product Management" from Pragmatic Marketing. True to its title, it offers a practical prescription for product managers to better understand the needs of the market: Talk with one prospect, one customer, and one evaluator every month.

Product managers are instructed to use the information gathered in these discussions to become the authority within their company on what the market needs. They equip themselves to be "prospect" experts, not just "product" experts, and use their expertise to guide product development and marketing strategy.

Product managers with on-premise solutions need to consciously establish this routine of systematically gathering market input. And the best of them do it well, diligently carving out time on their calendars to meet with customers and prospects on-site, at trade shows, and user groups.

The sales and marketing for on-premise applications is essentially a straight-line process - running from "attract & cultivate qualified prospects," to "closing deals," to "deploying and supporting the application." Gathering useful input from customers and prospects requires that product managers establish an effective feedback loop themselves.

On-premise solutions follow a straight-line process, and product managers must establish a feedback mechanism themselves

SaaS Provides an Automatic Feedback Loop

In the SaaS world, this feedback process is built right into the model. Product managers automatically get input from every single customer every single day. They can see precisely how customers are using the product, when they're using the product, and where they're running into difficulty. They have access to hundreds of useful data points from hundreds or thousands of customers.

Unlike the straight-line process of the on-premise model, under which product managers must establish the feedback mechanism themselves, the feedback loop is built right into the SaaS model. All current customers are prospects too and enhancing the solution to meet their requirements is essential to securing renewals. And SaaS companies require high renewals to succeed.



SaaS solutions provide a built-in feedback mechanism

Companies that have made the transition from on-premise to SaaS models will tell you that one of the primary advantages they've gained is their ability to better understand their customers. They use this knowledge to set smarter product development priorities and develop more effective sales and marketing strategies. (See "Taking Advantage of Customer Satisfaction Information.")

The automatic feedback loop, built into the SaaS model, gives product managers a window directly into customer and prospect behavior. They should take advantage of that window and watch what customers are doing. As Yogi Berra would explain: "You can observe a lot just by watching."

Taking Advantage of Customer Satisfaction Information

The Massachusetts Technology Leadership Council hosted a program on software-as-a-service (SaaS) sales and marketing issues last week that provided useful advice on how to use the unique qualities of a SaaS solution to enhance customer satisfaction. The program included a panel of executives who have had experience selling their solutions both under an on-premise model and via SaaS.

In the SaaS model, the provider and the customer are more closely connected. For one, the provider is responsible for delivering the solution over the life of the subscription, in contrast to the on-premise model in which the customer licenses the solution and deploys and manages it on their own.

In the SaaS model, providers and customers are also tightly coupled through the renewal mechanism, by which customers periodically renew their subscriptions. Happy customers are essential for renewals, and high renewals are essential for the provider's success.

The panelists noted several effective marketing practices that have had a positive impact on their SaaS business:

• Their companies closely monitor customer satisfaction through their on-going connection to their customers. They do this through quantitative surveys, as well as through focus groups, observing customer behavior, and close review of support calls.

• Nancie Freitas, CMO of Constant Contact, explained how the company uses customer satisfaction data to drive product enhancements. Customer support reps work closely with engineering to address user issues, and each new release, delivered every two months, is explicitly designed to address flaws identified by customers. Success is measured by gains in the "net promoter score," the number of users who are likely to recommend the product to others.

• Some companies gather aggregate data on customer usage and provide it as benchmarks to their customers. This helps customers better assess their activity and understand best practices.

• Brian Zanghi, CEO of Kadient, explained that they monitor customer usage to identify follow-on sales opportunities. Heavy usage may indicate that the customer is a prospect for additional subscriptions.

SaaS enables - in fact requires - that companies stay closer to their customers. Marketers should take advantage and leverage the insights gained from that on-going connection.

The Risks of Spending Too Little on SaaS Marketing

Though most companies worry about spending too much on sales & marketing, there are also risks in spending too little. In the interests of conserving cash in the short term, companies could be jeopardizing long term success.

I'll talk about two specific types of under-spending risks. I've labeled them 1) climbing a mountain wearing flip-flops, and 2) the Ferrari stuck in the garage.

Climbing a Mountain Wearing Flip-flops

Companies expose themselves to one type of risk by denying sales & marketing the resources they need to complete their required tasks. They're asking them to take on a steep challenge without providing them the proper equipment, like asking them to climb a mountain wearing flip-flops. The company may save money on the footwear (I just bought a pair a flip-flops from Old Navy for $2!), but it's hard to imagine them getting very far on the journey.

Think about what companies are asking from sales & marketing. Here's some of the critical tasks they've been assigned:

• Build visibility in the market
• Establish a positive reputation, market leadership, and credibility
• Generate and cultivate qualified leads
• Prepare effective and timely sales support tools
• Pursue qualified opportunities
• Close new business
• Build loyalty among existing customers
• Secure renewals.
  

Some of these challenges are unique to software-as-a-service (SaaS) companies, making the sales & marketing task particularly difficult. For example, SaaS companies generally need to attend much more closely to their existing customers in order to secure renewals. Also, SaaS companies tend to introduce product enhancements more frequently than on-premise application vendors. These enhancements require more frequent updates to marketing and sales material.

The size of the task explains why most SaaS companies provide relatively high funding for their sales & marketing organizations. For those companies for which financial data is publicly available, they spend, on average, 45% on sales & marketing relative to subscription revenue. In some instances, they spend as high as 82%. Sales & marketing expenses typically account for their single largest budget item.



This high level of spending relative to subscription revenues is inherent in the SaaS model because sales & marketing expenses are generally recognized up-front, while revenues are spread over the life of customer subscriptions.

If your company is spending below that 45% average, you may want to look at whether your sales & marketing organization has the resources it needs. You'll recognize this problem, for example, when over-loaded sales reps are unable to follow up on qualified opportunities, existing customers are unaware of product enhancements, your company is consistently overlooked by influential analysts, or marketing collateral is out-of-date or unavailable.

A Ferrari Stuck in the Garage

SaaS companies expose themselves to a second kind of risk when they under-fund a sales & marketing operation that is well-built and runs efficiently. Efficient sales & marketing operations can generate high lifetime revenues with low customer acquisition costs. (See "Marketing Spend: How Much is Enough," for an extended discussion of this "lifetime customer revenue/customer acquisition costs" ratio.) Under-spending on sales & marketing in this instance means a lost opportunity to leverage an efficient machine.

Top performing SaaS companies can generate more than $10 in lifetime customer revenue for every $1 spent on sales & marketing for customer acquisition. They've built a high-performance vehicle. But if they chose not to fill it with fuel, they'd have the equivalent of a Ferrari stuck in the garage. Their investment would be squandered. The consequences are foregone opportunities for growth and market share.

Short-term Cash Conservation or Long-term Capital Destruction?

In general, I advise that companies be careful with their sales & marketing spending. In fact, I've probably spent as much time in my marketing career poring over "opportunities yielded per program dollar," "mid-funnel conversion" ratios, and other metrics as I have pondering ad layouts or direct mail offers. Companies selling via the SaaS model have little room to spend foolishly on sales & marketing. And companies spending too aggressively on sales & marketing - the Wile E. Coyotes - can quickly get into trouble.

That said, however, companies should also recognize that under-spending exposes them to significant risks as well. Though they may conserve cash in the short term, they may be losing an opportunity to grow even faster. In a market in which 2 or 3 vendors are looking to emerge from a crowd , under-spending could cost visibility and market share. Saving a few thousand dollars in the short term could forfeit a long-term market leadership position and millions in future revenues.