Too many choices aren't necessarily a good thing

Because of the unusually warm weather here in the Northeast, my neighbor's farm has already started harvesting corn this summer. They plant different varieties throughout the season, carefully timing each planting to ensure that one or another variety is available from mid-summer into October. Earlier this month, they were harvesting a butter & sugar variety called "Temptation." This week, they started bringing in "Montauk." I don't know what's they'll bring in after that.

Whatever they're picking at the time, I buy it.

Not so with the lettuce, though. All the varieties seem to come in at the same time. Standing in front of open crates of green leaf, red leaf, oak leaf, romaine, buttercrunch, bibb, Boston, black-seeded Simpson - never mind the escarole, dandelions and other roughage - I'm stumped.

Too many choices. It's not always a good thing for farm stands... or for software-as-a-service (SaaS) providers.

Too many choices makes it more difficult to buy

SaaS is confusing enough as it is. In case you doubt this, peak into the over-heated debates about the precise definition of SaaS that erupt every few weeks on discussion boards. Adding to that confusion with lots of options doesn't help.

When prospects are confused, they usually don't buy. Or at least they don't buy until they are educated and not confused.

Collateral that explains the basics of SaaS to uninitiated procurement professionals can be very helpful. (See "Getting deals unstuck from legal and procurement.")

Better yet, keep it simple. Avoid the temptation to create a multi-page menu enumerating every possible permutation of feature, delivery mode, support option, installation method, ad nauseam.

Revenue now beats revenue later

Delayed purchases aren't good for any vendor, but they're especially harmful for SaaS providers. Under the SaaS business model, the costs of acquiring a customer are paid up-front, while the revenue comes in over the life of the subscription. The wider that gap between up-front payments and stretched-out revenues, the greater the strain on cash flow and the need for deep pockets.

Besides delaying purchases, too many options can also make it more difficult to support a SaaS application. If each customer has a unique configuration, it's more difficult and costly to maintain each customer. Upgrades, conducted one at a time, are a nightmare. The potential advantage of maintaining a standard deliverable, deployed to all customers, is squandered.

With too many options, something is likely to fall through the cracks for some number of customers. The result: customer dissatisfaction and lower renewals. Most SaaS providers can't survive low renewals. (See "SaaS Renewals and the Multiplier Effect.")

Believe me, as a marketer, I understand the appeal of "choice." Thirteen varieties of freshly-picked lettuce, displayed side-by-side, are beautiful. But I usually end up just buying the corn.

Greta Garbo would be a poor SaaS marketer

I read an article this morning about Greta Garbo, the famously taciturn actress from the 1920s and 30s. Her closely guarded privacy is so different from most of today's actors, musicians, athletes and celebrity chefs, who use Facebook and Twitter to skillfully cultivate a broad audience of "friends" and "followers," by letting the world in on their every thought.

Personally, I'm more comfortable with the Greta Garbo approach. On personal matters, I try to be careful about sharing "too much information."

This reticence doesn't really work for businesses, though, and it's especially inappropriate for most software-as-a-service (SaaS) businesses.

Quite to the contrary, SaaS providers can often benefit from more sharing. Social media can be used very effectively to communicate with customers, prospects, analysts, and even employees about the company's plans. These companies should be actively using LinkedIn discussion groups, blogs, and other communication vehicles.

These newer forms of communication are particularly useful because they allow a conversation between the company and the customer. Unlike more traditional press announcements or web site postings, which are one-way proclamations, blogs and discussion groups allow comments and interactions. The audience can talk back.

I also like the more personal nature of these conversations. The participants sound like real people, not disembodied corporate entities. They have personalities.

If you listen, you can learn something

Participating in these on-going conversations can help SaaS companies in a few ways.

For one, they can help a company establish trust with its audience. As I've written about before, in subscribing to SaaS solutions, customers aren't really buying a product; they're buying a promise. This requires that the customer trust the SaaS vendor to deliver the service reliably, protect the customer's data, provide support, and enhance the service regularly. (See "Winning customer trust.") When done openly and honestly, talking and sharing usually helps a vendor build that trust.

An open conversation can also help a SaaS company to build better products. The feedback gained from customers and prospects can be used to enhance existing services or develop new ones. Think of the conversation as a kind of electronic suggestion box. Remember, of course, that someone should actually read and respond to the suggestions.

I've heard executives who have moved their companies from a traditional on-premise model to SaaS explain that one of the most valuable and unexpected benefits has been their ability to better understand what users want and to respond more quickly and accurately.

An open and on-going conversation between the SaaS provider and its customers can also boost the likelihood of renewals. The business model for most SaaS companies depends on high renewals to recover the initial customer acquisition costs. (See "SaaS renewals and the multiplier effect.") Conversations provide a mechanism to discuss forthcoming enhancements, service changes, or other plans under consideration. It shows customers a roadmap so they can make their own plans. It can give the SaaS provider a heads-up if there's likely to be push-back on proposed changes. And by the way, don't be at all surprised to hear candid negative feedback, along with the plaudits.

I've worked with a number of SaaS companies to take advantage of these new mechanisms to open and maintain a conversation with their customers, prospects and others. They do it not because it's cool and makes them feel like celebrities. They do it because it has a measurable positive impact on their business.

Greta Garbo was a wonderful actress, but probably would have been a lousy SaaS marketer.

Product naming gets even more complicated

I used to say that the only thing more painful than product naming is root canal. But a few months ago I actually had a root canal, and with the anesthesia and painkillers, it wasn't so bad. Product naming is now back on top of my "most painful" list.

And the pain only gets worse when you're marketing both a software-as-a-service (SaaS) solution and an on-premise application.

Let's consider just one very basic question:

Should you use the same name for both the SaaS and on-premise products?

Using the same name for both does have the advantage of putting all your brand visibility efforts behind a single label. It's difficult enough to get prospective customers to remember your product name; it's even tougher to get them to remember two names.

A single product name for both the SaaS and on-premise products also works well when you're trying to be "product agnostic." That is, you market the same set of features and benefits for both solutions and let customers choose which model they prefer.

"They're the same, only different."

But here's the downside. Even though both solutions go by the same name, they don't deliver the same features, benefits and advantages.

For one, enhancements are delivered differently. The SaaS customers typically get new features more frequently and automatically. So though the SaaS and on-premise solutions may have started out the same, they grow apart over the life of the SaaS subscription.

The SaaS solution also differs from on-premise in the way it's deployed, supported, upgraded, and paid for. You might call both by the same name, but they're fundamentally different. By trying to market them as nearly identical, there's a good chance that you'll understate key benefits of your SaaS solution.

The naming strategy should fit your business strategy

I've seen companies try a few different ways to navigate through this naming challenge. Some keep the SaaS and on-premise products separate, and they use two different names. This works, for example, when the company is targeting completely different markets with the two solutions, and they don't want any confusion about who should buy what.

Other companies use a common overall product name, but they add on labels that distinguish the SaaS version from the on-premise version. For example, the SaaS solution is called "Acme Express," or "Acme Small Business Edition," while the on-premise one is called "Acme Enterprise." This scheme does have the advantage of building visibility for a single name, but it may limit the market opportunity for the SaaS product.

Yet a third version is to use identical names. This might work if you're trying to emphasize "customer choice," though you do run the risk of confusing the customer as I noted earlier. "Same name, different solution" might also be appropriate if your strategy is to migrate on-premise customers over to SaaS. That's a heavy lift, but keeping the same name may make it a little lighter.

The takeaway here is that a product name isn't something you tack on at the end of the process. It's an integral part of your overall strategy. Different naming strategies fit with different marketing and business strategies. Choose wisely.

And might I suggest you have painkillers handy.

Three deadly SaaS marketing mistakes

I'm sure there are hundreds of ways to sink a software-as-a-service (SaaS) company with poor marketing, but I want to focus on three that can be particularly effective... and not in a good way.

1. Spending money to lose money

In this money-losing scenario, the SaaS company spends more on acquiring a customer than they can earn back in revenues from that customer.

Drew Houston of Dropbox shared an example of this deadly hazard, detailing his company's experience with an Adwords campaign. Despite the common wisdom that Adwords and search engine marketing yield surefire success, careful analysis found that the campaign cost on average between $233 and $388 to attract a customer. The product sold for $99.

His succinct analysis: "Fail."

For the mathematically-inclined, the problem can be expressed as

CAC > CLV

in which CAC is customer acquisition cost (i.e. sales & marketing costs) and CLV is customer lifetime value.

Either side of the equation could be at fault. I've seen (and even participated in) some high-priced customer acquisition campaigns: clever but expensive direct mail programs, luxurious events, and expensive give-aways.

On the CLV side, a low subscription price, poor renewals, or an inability to convert free trial users into paying customers might be to blame.

In either case, the outcome is the same: You're spending $1 to earn less than $1. As the expression goes, "you won't make it up in volume."

2. Racing against the clock

This is a variation of mistake #1, and equally deadly. A company's CAC exceeds annual revenues, which means it's burning cash in the short term. But they're betting they can reduce CAC, steeply ramp up revenues, and stop burning cash... before it all runs out.

I've seen this strategy work, as in the case of SuccessFactors, where the company's CAC exceeded revenues for a period of time. CAC/annual revenue reached 112% at one point, but over time has come down to a more sustainable 53%. They out-grew the cash burn.

This strategy requires deep pockets, patient (read "fearless") investors, and lots of attention. When CAC consistently exceeds annual revenues, companies introduce more risk into their business plan. They need to rapidly accelerate revenues, and gradually taper down sales and marketing expenses, while constantly monitoring their cash. They're racing against the clock.

3. Bailing with a teacup

While mistakes #1 and #2 involve over-spending on customer acquisition, "bailing with a teacup" involves under-spending. In this scenario for failure, companies set out a huge task for sales and marketing, but then short-change them of the resources they need to do the job. Spending too little can sink a company as easily as spending too much.

Much is expected of sales and marketing: build positive visibility, generate and cultivate leads, close business, retain and re-sign customers. There's heavy lifting to be done here, and it requires adequate funding. Though there's good reason to be cautious about spending, trying to do everything on the cheap may come up short. Figure out what really works, and commit to paying for it.

SaaS companies will typically spend much more on sales and marketing as a percentage of revenues than their licensed software brethren. Concur, for example, spends 31% of its annual subscription revenues on sales and marketing, and Salesforce.com spends 54%. For nearly all companies, customer acquisition costs will be the single largest expense on the income statement.

Companies should be prepared to make the required investment to fund marketing and sales appropriately. If they don't have the resources they need, or they're unwilling to make the commitment, it may not be worth spending anything at all. Bailing with a teacup won't keep the ship afloat.

When I talk to companies about SaaS marketing, I often use the "navigation" metaphor. (By the way, that explains the "compass" logo on my website.) I explain how to recognize dangers and discuss strategies to steer around hazards. The three I talked about here - "Spending money to lose money," "Raising against the clock," and "Bailing with a teacup" - are among the most treacherous. This SaaS marketing stuff is not for the faint of heart. Be careful out there.

Agile marketing

Who knew that software developers were such athletes? My code-writing friends are all talking about "scrums," "sprints" and "extreme programming."

Though I'm sure some of these folks are spending time in the gym, I've learned that these terms actually refer to the agile development methodologies many are using to build software-as-a-service (SaaS) solutions. Agile development is "intended to allow for rapid delivery of high-quality software, and a business approach that aligns development with customer needs and company goals."

Agile Marketing

We SaaS marketers should get on this fitness kick, too. We should follow our development colleagues with our own version of a lean & mean methodology. Call it "agile marketing."

Agile marketing refers to a process for building visibility, generating leads and supporting sales that's faster and more flexible than traditional marketing processes. It is intended to deliver more effective marketing, closely align with agile development processes, and better support a company's overall business model.

Faster

In the traditional on-premise world in which applications are developed via the "waterfall" method, new versions typically come to market every 18 - 24 months. The marketing team falls into this same rhythm, gearing up for a big launch every 18-24 months. After one of these grand launches - gala unveiling event, PR blitz, new collateral, multimedia ad campaign, etc. - the marketing folks recuperate for a couple of months... and then gear up for the next big launch.

This "marathon" pace doesn't suit most SaaS applications, and certainly not those built according to an agile development process. Instead of launching a massive new release every couple of years, marketing needs to gear up for launches every couple of months. These are more like a constant series of sprints than a marathon. It requires a faster, more agile process to keep up.

More flexible: Besides more speed, agile marketing requires more flexibility. SaaS marketers need to be eager to try new things, fearlessly measure results, be willing to pursue what works and abandon what doesn't. There's no room for dogma here.

Marketing folks ask me all the time, "What marketing programs work best?" My honest, though sometimes infuriating answer: "It depends."

What works for one company in one market with one particular solution might not work for another company in another market with a different solution. Be skeptical about "best practices."

Drew Houston of Dropbox and Adam Smith of Xobni have shared some of their experiences trying, failing, and trying something else, while building their businesses. (Presentations on their experiences are available on David Skok's For Entrepreneurs site.) Certain kinds of press outreach worked for them; others didn't. Adwords worked for one, but not the other. And certain social media campaigns were very effective, though more traditional email campaigns generated positive results as well. Their advice would make for a good tag-line for the Agile Marketing tee-shirt: "Learn early, learn often."

Also be aware that what works today may not work tomorrow. I remember marketers' fleeting love affair with "dimensional mailers." These promotions involved mailing (as in U.S. Postal mailing) odd-sized boxes to well-targeted executives. The goal was to "bust through the clutter" of over-stuffed mail boxes.

As ridiculous as cluttered U.S.P.S. mailboxes sounds today, the current infatuation with "social media marketing" may look pathetically quaint someday, too. The fact is, there's no marketing magic bullet; or if there is, it keeps changing.

SaaS solutions built with an agile development process require a faster, more flexible marketing process as well. It's time for marketers to get agile.

Pricing SaaS solutions: Beyond a "lease vs. buy" analysis

From the "Ask the SaaS Marketing Guy" mailbag, here's a question on pricing from a software-as-a-service solution vendor:

"My prospective customer is asking about the "break-even"point at which their software-as-a-service subscription payments would equal their on-premise license cost. They're asking why they should select a SaaS subscription option if they plan to use the application over a long period."

If the SaaS application is truly identical to the on-premise application, the vendor or the customer can conduct a straight-forward "lease vs. buy" analysis, accounting for the time-value of money. That will allow them to identify the break-even point - measured in months or years - after which it makes more sense to buy the on-premise license vs. lease via SaaS subscription.

If the vendor or the customer do conduct this analysis, of course, they should factor in all of the costs associated with buying and running an on-premise solution. Those would include the annual maintenance fee as well as the hardware required to run the application on-premise and the people required to deploy and maintain it. In the SaaS model, those costs are borne by the SaaS solution vendor.

Beware of this potential flaw in the straight-forward "lease vs. buy" analysis. In many cases, the SaaS application is not truly identical to the on-premise application. Or the functionality of the SaaS application may diverge from the on-premise application over the life of the subscription. The two applications may have been identical at the start, but over the subscription term, the SaaS customer has gained the benefit of product enhancements that the on-premise customer has not enjoyed. In that case, the SaaS customer is getting increasingly more value from the application than the on-premise customer. The customer should expect to pay a premium for that extra value.

Further, the SaaS version may offer the customer additional benefits beyond the product features. For example, the customer may benefit from more rapid and less expensive deployment of the application, easier configuration, the ability to quickly scale up to handle peak demand, and the flexibility to stop paying for the solution if they no longer need it (according to the terms of the contract, of course). These are benefits beyond what they'd derive from an on-premise application and customers should expect to pay for them.

The point here is that the SaaS offering and the on-premise offering typically do not offer identical benefits to the customer, so that a straight-forward lease vs. buy analysis wouldn't be appropriate. SaaS marketers should clearly articulate those additional benefits when promoting their solution.

Are you sure you want to offer a SaaS solution?

Often when I'm talking to vendors about transitioning from an on-premise model to software-as-a-service (SaaS) and there's an opportunity for Q&A, I get questions that go like this:

"How do I market a SaaS solution that doesn't lure away my on-premise customers?"

Or, "Can I structure the contract for my SaaS solution to guarantee the same large up-front license fee and on-going maintenance stream that I have with my on-premise offering?"

Or, "How do I stuff this SaaS genie back in the bottle?"

OK, I'm paraphrasing that last question, but that's really what some of these vendors are asking. They're happy with their current on-premise model, thank you very much, and they'll gladly migrate to SaaS...but only if it doesn't really change their business.

I understand their concerns. They've built successful businesses that generates cash and profits. The last thing they want to do is to kill the golden goose.

Here's what I tell those folks: If you really don't need to move to SaaS, don't.

Moving from on-premise to a SaaS model is difficult. You'll need to make radical changes that will be challenging to your entire organization. It will change the way you do development, finance, operations, support, sales and marketing.

Why you might need to move to SaaS

Given these challenges, what would impel a company to move to SaaS? I've seen a few compelling reasons:

- Competitive pressures require it: Your competitors offer a SaaS solution that has significant advantages over your on-premise product.

- Customers demand it: Your existing or prospective customers expect and demand the benefits that can only be delivered via a SaaS solution.

- Investors require it: Moving to a SaaS model is a requirement to secure funding to grow your business.

- Your current on-premise model isn't really as successful as you think a SaaS model could be: There are advantages that you can gain - faster time to market, lower costs, new opportunities, etc.- only by moving to SaaS.

Don't get me wrong. The SaaS model can deliver many valuable benefits and advantages. And fortunately for me, given my line of work, there are a lot of companies that need to move to SaaS for the reasons I've referred to.

But if your company doesn't want to, or to be more accurate, doesn't need to make the transition from on-premise to SaaS, don't. Because if you think you'll navigate that change without making tough decisions and profound adjustments throughout your entire organization, think again.