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."