What is SaaS? We seem to need to ask this question every couple of years, because the answer is a bit of a moving target. It was simple enough when SaaS was merely software applications pushed through a Web browser, but now we have to contend with the cloud, mobile and even social. Recently, Scott Maxwell of OpenView partners sparked an interesting debate on the topic on LinkedIn that got me pondering it again. I’ve weighed in on the “What is SaaS?” question before, however, every time I encounter this debate, I can’t help feeling that it skirts the more important issue: Why SaaS?

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When trying to create a successful SaaS business model, being SaaS is interesting, but doing SaaS is essential. It’s far less important that your SaaS business model meet the exact definition of SaaS, than it is that your SaaS business model creates sustainable competitive advantage through SaaS. Why be SaaS in the first place? Why not just be software? At any rate, this recent debate got me to re-reading some of my old blog posts on the topic and I realized that they were very text heavy and could use an upgrade. So, in this post I revisit the topic of “Why SaaS?” with a short visual tour of SaaS business model basics.

SaaS Business Model Economics

At the risk of repeating myself, I will repeat myself. The only difference between software and software-as-a-service is that SaaS is delivered over a standards-based network called the Internet. Therefore, all new economic value and competitive advantage must flow from this difference.

The SaaS business model creates competitive advantage in two Internet enabled flavors:

1. Lower costs from…
   • Network automation of labor-intensive services and business processes
   • Economies-of-scale from aggregating customers via the network onto a uniform infrastructure
2. Differentiation from…
   • Reengineering business processes and service delivery through network automation
   • Network effects enabled by customer-customer interaction

Yes, it’s a mouthful. So let’s look at some pictures.

Competitive advantage in the SaaS business model comes from leveraging the customer-vendor network connection to reengineer business processes and service delivery, while building a large customer base to create economies-of-scale and network effects.

Network Automation in the SaaS Business Model

SaaS begins and ends with the Internet. The first impact the Internet has in SaaS is to connect the customer to the SaaS business through the product. Let’s think about that for a minute. How many products do we use everyday that can make this claim? One. SaaS. More and more, we are seeing other products, such as automobiles, security systems, and even clothing incorporate SaaS, but it is always the software communicating over the Internet that makes the connection between the customer and the vendor.

The SaaS business model connects the customer to the SaaS vendor through the product, disrupting the value chain by automating and shifting work between the customer and the SaaS business.

Network automation disrupts the value chain by automating and shifting work
between the customer and the SaaS business over the network. Self-service customers do work previously done by the software vendor. Managed service customers outsource unwanted tasks to the vendor over the network. And, smart SaaS business models aim to automate it all. The most obvious example is the work of deploying and maintaining the software itself. Whereas maintaining on-premise software is labor-intensive for customers and vendors alike, the best SaaS products are deployed instantly and maintained invisibly using a high degree of network-enabled automation.

Scale in the SaaS Business Model

The network connection between the customer and the SaaS vendor creates huge economic value, but it pales in comparison to the value created when the SaaS business model scales to hundreds, thousands or even millions of customers. Lower total cost of ownership (TCO) in the SaaS business model arises from the combination of network automation and economies-of-scale. Network automation enables the SaaS vendor to service not just one customer, but many customers from a single infrastructure. With each new customer added, the average cost of operating that infrastructure is reduced for all. When you ask “What is SaaS?”, it is easy to get hung up on things like multi-tenancy, virtualization, and so forth. When you ask “Why is SaaS?”, there are no such concerns. What matters is uniform, automated infrastructure and scale.

Unlike on-premise software, the SaaS business model creates huge economies-of-scale by servicing many customers from a single, integrated infrastructure.

The final piece of the SaaS business model puzzle falls into place when we look beyond the customer-vendor connection and consider the potential of customer-customer connections: network effects. Sharing, collaboration, crowdsourcing, and benchmarking offer unique differentiation over on-premise software in the SaaS business model. They simply cannot be done without the Internet.

The connection between customers enabled by the SaaS business model offers unique opportunities for differentiation.

The technological “what” of SaaS is a moving target, but the economic “why” is enduring. The cloud, social and mobile have not displaced SaaS. The cloud has expanded the opportunity for SaaS competitive advantage through economies-of-scale. Cloud computing enables entirely new technical architectures that deliver as much or more savings as multi-tenant databases. In turn, social and mobile have expanded the opportunity for SaaS competitive advantage through network effects by creating that many more opportunities for customers to interact with other customers. Understanding “What is SaaS?” may help you explain your business to the analysts, but understanding “Why SaaS?” will ensure you leverage the SaaS business model for all its worth, today and tomorrow.

A few months back, Gartner placed big data at the peak of its hype cycle for cloud computing, meaning most big data products are solutions looking for a problem. I always find this bad entrepreneurial habit to be one of the most frustrating of our industry. Having recently joined Meltwater as head of marketing and product (BTW Meltwater is hiring marketing and product managers!), I think a lot about big data and how to unleash it’s value to solve important business problems, because that is our business. How does big data go from “so what” to “must have”?

The Big Data Challenge

Big data is a by-product of the Internet and the ever increasing power of computers. Kind of like petroleum sludge. We know there must be great value buried within this vast, raw resource, but the challenge lies in figuring out how to turn it into something useful like plastic, or the other thousands of petroleum products that we produce from the 20% of crude oil that can’t be turned into fuel.

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This is no small feat. I can confidently predict that there will be no shortage of well-intentioned, well-funded start-ups that fail to live up to this challenge, producing varying versions of gift-wrapped sludge that never quite deliver on the promises of their pitches. Overcoming the hype and producing real value from big data requires much more than data-processing infrastructure. It requires a laser-like focus on creating order-of-magnitude improvements to how we work and live.

Reengineering Across the Firewall

More than a year ago, McKinsey and Company predicted that big data would be “The Next Frontier of Innovation, Competition and Productivity.” Now, I’m not generally one to argue with the likes of McKinsey, especially in this case as I happen to agree with it. If you have the time, I highly recommend checking out the report. At 156 pages, however, it can be a little hard to digest, so I thought I’d fearlessly attempt to boil it down to a blog post by sharinig a little of how we think about the Big Data Challenge @Meltwater.

Big data implies a shift in real-time access to valuable information outside the firewall.
It offers the opportunity to reengineer business processes that cross the firewall
and that benefit greatly from this information, such as competitive strategy,
sales, customer support, vendor management, employee recruiting, etc.

Cloud-based businesses create value in one of two ways: lowering TCO (cost advantage) and network-enabled innovation (differentiation). Most early-entry, enterprise SaaS applications like Salesforce.com are really not that different from their on-premise counterparts in feature and function. They rely on lower TCO as the primary driver of adoption, and while they expand the market through lower prices to SMBs, they are locked into a replacement battle against on-premise software leaders like Oracle, SAP and Microsoft. However, there are a handful of truly innovative enterprise SaaS and cloud categories that mine the Internet for all it’s worth and have no on-premise equivalent, such as search, media monitoring, marketing automation, Web analytics, social media marketing, human capital management, and cloud integration. These categories all have one thing in common, they reengineer business processes that cross the firewall by leveraging data outside the firewall.

Reengineering is a business term that gained popularity in the early nineties as client-server washed away mainframe applications en masse. The idea was to leverage the new technology to redesign business processes for dramatic gains in productivity, as opposed to just upgrading legacy systems. Fast-forward 20 years and we find ourselves in a similar situation. We’ve spent billions of dollars on ERP, CRM, BI and countless other software acronyms to automate every last internal business process. Inside the firewall, there is very little left to do.

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The vision of big data should not be an upgrade, like the next generation of enterprise business intelligence, only bigger. Big data is a fundamental shift in real-time access to valuable information outside the firewall. It offers the opportunity to reengineer business processes that cross the firewall and that benefit greatly from this information, such as competitive strategy, sales, customer support, vendor management, employee recruiting, etc. For example, it is one of the great ironies of enterprise software that in most companies customers never touch the customer relationship management system.

Social Business and Big Data

If any emerging category can claim more hype than big data, it is social business. This is no accident. Social business and big data are inexorably linked. Big social data empowers social business. Take the case of the social community manager, a new and evolving social business role. The social community manager must engage in a dialog with community members that is personal and relevant. Yet at the same time, the social community manager must sift through millions of online conversations to zero in on specific opportunities for personalized social engagement. Enter big data. Let’s redraw the above diagram for the social community manager.

The social community manager needs a social mission control panel
to digest the vast amounts of big social data and zero in on
the conversations, channels, and community members that require immediate attention.
(At Meltwater, we like to call this Meltwater Buzz 3.0 which launched today! )

The social community manager is engaged in the business process of building a social community. To accomplish this daunting task, the social community manager must reach across the firewall to crunch a lot of big data and engage community members in in real-time. The process goes something like this:

1. Gather big data outside the firewall about the social community
2. Develop a social campaign strategy informed by insights from the data
3. Create a social campaign plan of execution
4. Reach across the firewall to engage the social community
5. Rinse and repeat in real-time

I think social community management is a lot like air traffic control, including the potential for social media disasters when information, systems or social community managers are not up to the task. The social community manager must digest vast amounts of big data to find the one conversation or one community member that requires immediate attention. The social community manager doesn’t need raw big data. The social community manager needs a social mission control panel to digest the vast amounts of big social data and zero in on the conversations, channels, and community members that require immediate attention.

Big Data and The Cloud | A Match Made in Heaven

The fact that big data originates largely as a by product of the Internet, and the fact that it is, well, big, lead to the natural conclusion that like big data itself, big data-based solutions are best situated in the cloud. It will be the rare global 500 company that is both big enough and motivated enough to house and sift through the mountains of data available out there to build on-premise big data analytics and automation. Economies-of-scale will rule in the aggregation, enrichment and processing of big data with most businesses interested in paying only for results, i.e., insights that can be used to reengineer business processes across the firewall for order-of-magnitude improvements in productivity and service.

Sales professionals are some of the earliest adopters and most annoying users of social networking. The problem is that most sales reps treat LinkedIn like a prospecting database for cold calling. It’s just too enticing when all your target prospects are out there showing off their company names, titles, areas of expertise, blogs, and opinions. You can use LinkedIn as a prospecting database, but it is probably the weakest and most professionally irritating use of the technology. To succeed at social sales, you must have something to offer beyond your product. You must be someone your customers want to know.

This is the fourth post in a series on social business designed to help B2B sales and marketing professionals make better use of social media by thinking in terms of social networking. This installment provides ten social sales lead–ership tips that will turn social media into a lead generation machine for your business by following the B2B Social Business Bill of Rights.

Social Sales Lead–ership Tip #1 | Activate Your Social Sales Network

B2B businesses still have rather spotty usage of social networking. Most B2B sales reps are on LinkedIn, but far fewer have active Twitter accounts. Depending on the industry, B2B prospects and customers are even less likely to be active social networkers. Social Business Right #1 says you must expand your social sales network, so take the lead and give your sales reps, prospects and customers a reason to get more social. Use social channels like blogs, forums, Twitter, Facebook, and LinkedIn to communicate with your customers and prospects. Encourage website registration using social networking accounts. And, create promotions and contests that require participation in social networks. Activate your company’s social business network by motivating its members to follow your company’s lead.

Social Sales Lead–ership Tip #2 | Capture Social Sales Contact Profiles

Upgrade your CRM to capture Twitter handles, LinkedIn profiles, blog URLs and Facebook pages in addition to the standard phone, email and fax. Does anyone still fax? Add these items to lead capture forms on your website and use data appending services to augment them. Your sales team can’t link up without the right social contact information any more than they can cold call without phone numbers.

Social Sales Lead–ership Tip #3 | Train Sales in the Art of Referrals

The most common social sales mistake is treating social media like a prospecting tool; it is a networking tool. Stick to direct cold calls and email for prospecting. The reason most sales reps struggle at networking is that they fail to understand the critical role of referrals in the art of networking. Sales reps are trained to hunt. Account managers are trained to farm. Networking is about gathering. Gathering contacts. Gathering useful tidbits of information. Gathering opportunities. Gathering things that you can share.

Social Business Right #2 advises that you build your social sales community by being helpful. Sharing referrals are not selfless acts of kindness, because reciprocity creates social networking karma. Smart networkers look for opportunities to provide referrals to those people from whom they would like to receive referrals. They know who they want to meet and what those people care about. They identify opportunities that can be referred and opportunities to refer them. Networking requires a gathering sales discipline. It’s not something you go out and do once a month. It’s something you incorporate into your daily routine, because opportunity waits for no one.

Social Sales Lead–ership Tip #4 | Train Sales on Social Networking Tools

If your sales team masters the art of networking through referrals, then your social network training will become an entirely different experience. Approaching LinkedIn with the mindset of gathering contacts that you might do business with or might introduce you to someone you might do business with someday and looking for ways to share information, introductions and business opportunities will generate many creative ideas. This proper use of social networking contrasts sharply with the more typical sales prospecting default of searching on title and trying to link up with a product pitch.

Each social networking tool from LinkedIn to Twitter to a personal blog offers different networking capabilities and opportunities. Sales reps should select the ones that fit their respective business needs and professional styles. However, mastering the ins and outs of the features, functions and formalities of each tool is essential. For example, if you choose to write a blog, you probably need to know WordPress and SEO. If you choose Twitter, you need to know how to use handles and hashtags. If you use LinkedIn, you need to understand groups and updates. Despite all your good intentions of being a helpful business colleague, it’s a competition for attention out there and mastering social networking tools is essential to social sales success.

Social Sales Lead–ership Tip #5 | Prepackage Useful, Share-able Content

Social Business Right #3 asks that you should accelerate information sharing within your social sales network. Maintaining a library of incredibly useful, industry-specific tidbits of information in easy-to-share packages like like PDFs, PPTs, Web links, and so forth can be a big time-saver, because when opportunity knocks to share some useful information, you need to answer quickly and concisely. Marketing departments can help sales reps in a big way by making sure sales is plugged into the content marketing pipeline for both original and curated content.

Social Sales Lead–ership Tip #6 | Invest in Digital Media Monitoring

The timeliness of shared information directly impacts its usefulness. Therefore, it’s important to stay on top of what’s being said in your industry everywhere from Twitter to traditional news. Staying on top of industry buzz has become impossible to do manually by reading your favorite trade publications. Strong media monitoring tools not only keep you informed, but they can become a competitive weapon for the social sales professional, because people gravitate to those who are always in the know.

Social Sales Lead–ership Tip #7 | Launch a Referral Reward Program

Operationalizing referrals throughout your social sales organization is no easy task. It requires new knowledge and new habits. By introducing a simple referral rewards program, you provide a vehicle to reinforce the habit of asking for customer referrals. It is a great misconception of customer referral programs that they drive referrals through monetary incentives and discounts to your customers. They do not. When a customer provides a referral, she is doing it in order to help her friend, not the salesperson or the company. If a customer is not happy with your service, she will not refer her friend regardless of the incentive, because it will make her look bad. The best referral programs provide a small reward to your customer (reciprocity, not an incentive) and an incentive to the prospect (which allows your customer to do her friend an even bigger favor).

The most important ingredient in driving customer referrals is never a reward or incentive. It is timing. You must ask for a referral when your customer is most willing to provide it. When she is happy with your service and feeling the reciprocity vibe of your social sales karma. While there are modern marketing tricks that can triangulate on the right time and place to ask for a referral through some online call-to-action, there is no tactic stronger than the sales rep asking for a referral directly after being told by your customer just how fantastically happy she is with your product and service.

Social Sales Lead–ership Tip #8| Increase Social Sales Productivity

Staying on top of every prospect’s and every customer’s social activity across multiple social netorks is an impossible task for most busy sales professionals. Therefore, it is essential to start investing in systems that boost their social sales productivity. Twenty years ago most sales managers would have scoffed at the idea of maintaining a pipeline of opportunities and simultaneous conversations with hundreds of prospects. Today it is routine due to the productivity impact of enterprise CRM systems. The social CRM systems of tomorrow will allow sales reps to hear and participate in thousands of conversations going on inside their social sales network, but outside of today’s enterprise CRM systems on the other side of the firewall.

Social Sales Lead–ership Tip #9 | Create Online Networking Opportunities

Now that you have your social sales reps all linked and followed, why not give them more opporunities to engage? Don’t let them just sit around waiting for that great article to share or contact to introduce. Create opportunities for your social sales reps to social network. Start a LinkedIn Group. Launch a community industry blog or forum. Create social networking events by integrating online networking into offline events. Or, just create social networking events, such as tweet-ups and contests. However you do it, give your social sales reps more online networking opportunities. More opportunities for online engagement mean more opportunities to strengthen online relationships.

Social Sales Lead–ership Tip #10 | Create Offline Networking Opportunities

Social Business Right #5 asks that you consistently work to convert weak ties to strong ties within your social sales network, so sooner or later you’ve got to take it offline. All the tweets in the world are still no substitute for thirty minutes over coffee. Help your social sales reps develop stronger business relationships by providing offline networking opportunities with prospects, customers and industry influencers. These can be as simple as a meetup at the local bar or as complex as a global annual user conference. As industry trade shows shrink in the wake of modern Internet marketing, there is a growing vaccuum that must be filled to satisfy the fundamental need of B2B professionals for face-to-face networking. Don’t forget to mind the gap.

Since publishing the original SaaS metics blog series and subsequent SaaS Metrics Guide to SaaS Financial Performance, I’ve received numerous inquiries on various details and hidden gotchas in SaaS metrics implementation. This new series of SaaS Metrics FAQs explores some of these finer SaaS metrics points in a simple Q&A format. In this second post, I examine SaaS MRR churn, a SaaS metric that extends from SaaS customer churn which was covered in the first installment.

SaaS Metrics FAQ #4 | What is MRR Churn?

SaaS MRR churn measures the erosion of SaaS monthly recurring revenue (MRR). Mathematically, the SaaS MRR churn rate is an extension of the SaaS customer churn rate calculated by substituting monthly recurring revenue in place of the number of customers. For example, if your SaaS business has 100 customers representing an MRR base of $1M at the beginning of the year, and 5 customers cancel a total of $100K in MRR during the year, then your annual MRR churn rate is 10%, while your annual customer churn rate is only 5%. The general formula for for SaaS MRR churn can be stated as the amount of MRR cancelled (ΔMRR) per time interval (Δt) divided by the total MRR at the beginning of the interval (MRR_total).

In the formula above, the Δ is a common math symbol that means change or interval.

SaaS Metrics FAQ #5 | Why Measure MRR Churn?

The simple answer to this question is money. SaaS customer churn rate is important, particularly if you run a B2C SaaS business where revenue is generated by monetizing users through advertising or such. However, B2B SaaS companies generate revenue from direct subscription sales. SaaS customer churn is an interesting operations metric, but SaaS MRR churn is a critical financial metric. SaaS CFO’s always prefer MRR metrics.

The slightly more complex answer is that MRR metrics highlight two very important SaaS revenue drivers that customer metrics do not: upgrades and downgrades. SaaS MRR churn also tells you if SaaS customer churn is leaning more toward larger customers or smaller customers. In the example above, the MRR churn rate was double the customer churn rate, indicating that larger customers are churning. This quality of the SaaS MRR churn rate becomes more apparent when we expand the above formula to show off its individual components.

MRR_total = C₁ x MRR₁ + C₂ x MRR₂ + … + C_N-1 x MRR_N-1 + C_N x MRR_N

In the expanded formula above, C_N indicates the number of customers with a subscription value of MRR_N. For example, if there are 100 customers with $10,000 MRR subscriptions and 10 customers with $100,000 subscriptions, then total MRR can be calcualated using the above formula as follows.

MRR_total = $2M = 100 x $10,000 + 10 x $100,000

To this way of thinking, SaaS MRR churn can be viewed as recurring revenue weighted customer churn.

SaaS Metrics FAQ #6 | How Do I Analyze SaaS MRR Churn?

You can conduct all the same analyses on SaaS MRR churn that you do on SaaS customer churn from simple annual MRR churn rate calculations to complicated MRR churn cohort analysis. The main difference is in the interpretation of the results as recurring revenue weighted versions of the originals. Most importantly, MRR metrics provide the ability to separate the impact of downgrades and upgrades on changes to MRR from the impact of customer churn and growth, respectively.

SaaS MRR churn and growth analysis allows you to separate
the MRR impact of customer churn and new customer growth
from the MRR impact of downgrades and upgrades, repectively.
(A shout out to the Meltwater finance team for turning me on to
this nice MRR churn visual. Thanks Rik, Till and Ludwig!!)

SaaS Metrics FAQ #7 | How Do I Calculate MRR Churn in Practice?

SaaS MRR churn is calculated by substituting MRR for the number of customers uniformly in all your SaaS customer churn formulas. For this reason, SaaS MRR churn is subject to all the same measurement problems of SaaS customer churn arising from low churn rates, high churn rates, variable contract lengths, and so forth. If you have any of these issues, you should refer to the previous post in this series which provides a number of SaaS churn calculation tips to mitigate them. If you decide to go measure MRR churn using only contracts up for renewal (Tip #3), then be sure to use the MRR weighted average contract renewal period.

In the formula above, the denominator only counts MRR from contracts up for renewal in the month and the numerator counts MRR of contracts up for renewal in the month that cancel or downgrade.

It’s also worth noting that there is zero difference between SaaS MRR churn and SaaS ARR churn, because all the formulas are percentages (monthly recurring revenue churn vs. annual recurring revenue churn, not monthly churn vs. annual churn). To convert any of the SaaS MRR churn formulas above so SaaS ARR, you simply multiply both the numerator and denominator by 12, cancelling the conversion out of the calculation. I could search and replace ARR for MRR throughout this entire blog post and it would still be 100% correct.

Which is more important in B2B social media, social or media? For way too many B2B marketers, the answer is media. In the B2B marketing community, content marketing has eclipsed blogging, engagement is measured in click-throughs, and gamification is sexier than conversation. Too many B2B professionals see social media as just another marketing communication channel. It is not!

This is the third post in a series designed to help B2B professionals create better social business strategies by thinking in terms of B2B social networking over B2B social media. This post builds on the concepts introduced in the previous installment on professional social networking using B2B social media to explore the opportunities for social business at the company and industry levels. You won’t find tips and tricks for LinkedIn, Twitter or Facebook here, because the foundations of social business transcend the tools. I promise that later posts in the series will get to the tips and tricks, but social business is first and foremost about people, not technology.

Unlike a B2C brand, revenue at a B2B business is driven by the firm’s underlying professional network, because the social business network of B2B professionals includes their customers. By definition, every B2B business is selling to other businesses, as opposed to a consumer. As such, the professional ties between company and customer are very strong. They go far beyond brand image and brand loyalty to include serious business goals, significant professional relationships and personal career success. Moreover, the professional ties between B2B customers can also be very strong, creating an ecosystem that extends beyond the company to include the entire industry. While having a strong industry network is also important for B2C professionals, that network generally excludes their customers for all but the highest end luxury or durable goods, such as yachts and real estate. Not so in B2B. Successful B2B professionals are connected, and those connections include their customers.

The B2B Social Business Network

A B2B business has only one social business network, company and customer, offline and online. This singular fact should always remain top of mind when crafting a B2B social business strategy. While B2C marketers must struggle for brand engagement and must avoid unnatural intrusion by their brands into the personal social networks of consumers, B2B marketers, sales reps, service agents, executives and potentially all employees in a B2B social business are an integral part of their customers’ industry network and should seek to expand and strengthen that network through B2B social media.

Imagine for a minute that everyone in your industry is on LinkedIn, and everyone is linked to everyone else they know in the industry (this is what LinkedIn imagines ). Now imagine a map of that network with all your company’s employees at the center and your company’s customers on the next circle out, then your company’s prospects and partners, and finally your industry’s consultants, analysts, press, competitors, associations and so forth to create the complete social network of your industry’s ecosystem. That is your company’s B2B social business network.

The B2B social business network extends out from the company to include every professional in the industry ecosystem. Most importantly, a B2B company’s social business network includes its customers, because unlike consumers, B2B professionals are there to do business.

Unfortunately, your company’s social business network is not all on LinkedIn, but it could be. It could be on Twitter. It could be commenting on your forum and your blog. When you clearly imagine your company’s social business network and beyond that to your entire industry’s social business network, the full potential of B2B social media to drive B2B social networking unfolds before you. B2B social media is a tool that automates and accelerates B2B social networking, it is not simply a marketing platform. There is a reason why LinkedIn is profitable largely through paid subscriptions, while Facebook struggles to monetize through ads. Unlike consumers, businesses are willing to pay for the value of B2B social networking. Advertising is just gravy for LinkedIn.

B2B Social Business Bill of Rights| We the People

Social media connects and energizes the B2B social business network, but it is still only a tool. It is not the network. The B2B social business network is composed of real people with real relationships that drive business throughout an industry. In the first post in this series, I proposed that the fundamental purpose of B2B social media is to increase the frequency, velocity, and quality of business referrals, a referral being broadly defined as a trusted relationship and the sharing of some useful information that facilitates a business opportunity. The second post went on to claim that reciprocity is the cornerstone of good professional networking. Just being helpful builds trust and transforms weak ties into strong ties. So let’s put aside the content strategy, engagement, gamification, and other buzzwords for a moment and talk about the right way to use B2B social media: as a technology enabler of B2B networking. Here is the B2B social business bill of rights. Don’t get it wrong!

B2B Social Business Right #1 | Expand the Company Network

The first goal of any B2B social business program should be to get every target prospect, customer, and influencer connected to the relevant sales, service, marketing, executive, and other employees within your company. In short, expand the company network, online and offline. If your industry is not very active in B2B social media, then your social business programs should encourage it. Start a LinkedIn Group and invite others to join. Write a blog and encourage comments. Help your offline social business network link up online. Getting your offline social business network online, linked, liked, followed, and subscribed is the foundation of success for all your B2B social media programs.

B2B Social Business Right #2 | Build Community by Being Helpful

Being helpful builds community within your social business network, because it is reciprocity that enables information to flow and strengthens bonds within your social business network. You may produce killer content for every buyer persona at every stage of the buying process, but when prospects are not ready to buy right now, it is reciprocity that keeps them from opting out of your nurturing queue. You must offer helpful information to keep them coming back for more.

Helpful can mean many things to many people within your social business network: opportunity, education, support, entertainment, unique, simple, and so forth. What is helpful to your customers is different from what is helpful to your prospects, your partners and your industry influencers. Whatever helpful means in your industry, it is essential to energizing your social business network, driving referrals, and enabling viral word-of-mouth, because at the center of every viral social media program is a helpful gem of information.

B2B Social Business Right #3 | Accelerate Information Sharing

If you’ve done a good job of building community within your social business network and you’re offering lots of helpful information, then the next link in the B2B social media chain is to facilitate and accelerate the sharing of that helpful information throughout your social business network. Getting your content shared online is the B2B social media equivalent of word-of-mouth marketing. Word-of-mouth marketing is not only the most effective marketing communication channel; it is also the cheapest.

Consistent sharing calls-to-action should be available for all your content. Beyond this, sharing helpful information from other sources builds reciprocity and sets an example for other members of your social business network. For example, content curation may already be a part of your B2B social media strategy, but do you see it as a way to fill in content gaps or a way to build relationships with the authors who create it and a way to encourage them to share your content in return. Lastly, sharing helpful information isn’t just about content. It’s about communication between real people. It’s about opportunity. Your B2B social media strategy should go beyond simple content sharing to driving business referrals throughout your social business network.

B2B Social Business Right #4 | Drive Business Referrals

The be-all, end-all accomplishment of B2B marketing is a customer referral. When your customers consistently tell their colleagues that they should buy from you, it’s time for vacation, because you’ve earned it, and demand for your products will continue without you. Your B2B social media strategy should definitely encourage customer referrals. However, why not take it one step further and promote referrals throughout your social business network? That’s all fine and good Joel, you say, but my company is in the business of making money. How are we going to make money by altruistically driving referrals?

Within that circle of your social business network that represents your firm, everyone is aligned behind the same business goals (hopefully). Once you cross the line into areas of your social business network occupied by your customers, prospects, partners and the like, your goals are no longer aligned. The practice of driving referrals through your social business network forces you to align your goals with their goals. Do your case studies help your customers as much as they help you? Do your partnerships with industry experts promote their services as strongly as your own? Do you create opportunities within your social business network, or do you just sell to it? In B2B social media, what goes around online comes around online, and offline. If you want customers, partners and industry influencers supporting your business, then you have to give something in return. Driving referrals builds reciprocity, and reciprocity turns weak ties into strong ones.

B2B Social Business Right #5 | Convert Weak Ties to Strong Ties

B2B marketers would call this right the “influencer marketing” right or “customer reference” right. I frequently use these terms myself. The problem is that these selfish words obscure the means to their own end. They’re all about us. Do we really want to market to the influencer, so the influencer can influence our prospects? Or, do we want to expand our social business network by providing useful information, referrals and business opportunities to our industry influencers in order to build a relationship founded on reciprocity? Every good salesperson knows that asking a customer for a referral is the last thing you do, not the first, because it is the trust and early deposits in the reciprocity bank that make it possible.

Some products and services are so emotionally charged that they engender advocates just by doing what they do. These are usually consumer products, because we as consumers sometimes define ourselves by the products we buy and use. They say something about who we are. B2B customers define themselves by their company and industry relationships. B2B brand loyalties are a function of the B2B social business network as much as the product. B2B social media can help turn prospects into customers and turn customers into champions, but not by running an ad on Facebook. B2B social media turns weak ties into strong ties and customers into advocates by energizing the B2B social business network.

In the articles to come, I’ll provide well grounded social business tactics for specific B2B marketing programs based on the B2B Social Business Bill of Rights presented here, including the following.

• Social Media for B2B Lead Generation
• Social Networking for B2B Public Relations
• Social Networking for B2B Sales Enablement
• B2B Influencer Marketing with Social Media

Taking the social networking-centric view, these posts will explore specific ways to improve your B2B social business strategies and tactics. Please stay tuned!

I believe many B2B professionals struggle in their adoption of social media for professional use, because they see it as a marketing platform as opposed to a professional networking tool. Those who do see it purely as a marketing tool and use it as such, clog up a valuable business resource with spam. I have colleagues that are very active on Facebook for personal use, but can’t seem to get their heads around LinkedIn. CEOs and CMOs don’t have time for Twitter, let alone time to blog. Sales professionals are too busy chasing after prospects, so when they squeeze in the time for B2B social media, they make the mistake of using it for intrusive prospecting instead of professional networking. However, I think if these B2B professionals really understood the purpose and value of B2B social networking, then they would make more time for it and better use of it.

The is the second post in a series designed to help B2B professionals create better social strategies by thinking in terms of B2B social networking over B2B social media. This second installment explores the opportunity of building a stellar B2B professional network through social media and lays the foundation for the following more advanced topics to come.

• The B2B Company Social Netork
• Social Media for B2B Demand Generation
• Social Networking for B2B Public Relations
• Social Networking for B2B Sales Enablement

It is not another top ten list on how to tweet. So many poor efforts at B2B social networking result from trying to master how to do it without truly understanding what it is. Using social media to build your professional network is a very personal endeavor, and my hope is that this second post in the series will provide a few very personal “aha moments” that help clarify your professional social networking strategy.

Professional Social Networking Aha #1 | Just Be Helpful

Imagine for a moment the consummate professional networker before the Internet age. Perhaps the best networker you’ve ever met. You know the one I am talking about. He or she is probably an entrepreneur, salesperson, executive or maybe just the life of every conference. I still have colleagues like this, offline only networkers. Some have networks so strong they frankly don’t need the Internet. They are also a) rich, b) retired or c) about to retire. If you don’t fall into one of these three categories, then I highly recommend building your professional networking skills online as well as off.

Now can you recall what made that person great at B2B professional networking? A litany of personal characterstics probably comes to mind: extroverted, energetic, fun, interesting, powerful, charismatic, attentive, and even athletic or attractive. These are all great qualities to have for building your professional network, unfortunately some of them are genetic and others may simply not be you. But, there is one thing we can all be and it is the cornerstone of B2B professional networking: helpful, because all professional networking is based on reciprocity and that is simply human. Everyone can be helpful if they set their mind to it. Building your professional network online is simple; be helpful online. In fact, every rule that applies for successful offline networking applies online. It’s not like we stop being human when we go online. The purpose of social networks is to help us socialize as humans, more broadly, more frequently and more efficiently.

Professional Social Networking Aha #2 | Make it Personal

Now imagine your consummate offline networker and think about the relationship between that person’s professional life and personal life. The best, the very best, never stop working. Their business life is seamlessly integrated into their personal life. Their business connections are frequently their friends. They socialize for business. For them, professional networking IS socializing. Again, unfortunately, that doesn’t work for the vast majority of us. However, what it does mean is that whatever you do decide to do in the way of professional social networking, you must be inescapably yourself. B2B professionals don’t follow or like logos, they follow and like colleagues. You can’t be superficial. Reciprocity demands that you be trusted, and trust demands that you be authentic.

One of the great things about professional social networking is that you actually have the opportunity to compensate for whatever weaknesses you have offline, because you don’t have to get on a plane, go to a meeting, or be the master of small talk to do it. You can stay in your comfort zone. For example, if you are a regular Chaotic Flow reader, it should be completely obvious by now that I am no master of small talk (and by the way, thank you for reading and don’t hesitate to comment or contact me). With social media, you get to choose where, when and how your professional persona appears online. How cool is that?! When you go to an offline networking event, client meeting or job interview, how much control do you have over whom you meet, your first impressions, and the flow of conversation. Online, you have immense control over all these things, because you design your Twitter page, you choose who to follow, and you decide when and where to join the conversation.

Professional Social Networking Aha #3 | Choose Your Battles

If like most people, you are not willing or able to be the always-on professional networker with complete integration of business and personal life, social media can help you compensate and augment your professional networking. For busy B2B professionals who want to accelerate their networking, but also want a personal life, I say choose your battles wisely. Despite what the top ten lists say, you don’t have to be on every social network.

In fact, trying to be on too manage every social network is probably a really bad idea for most people. Most of us simply don’t have the time. When you spread yourself too thin, your professional social networking quickly becomes spotty and superficial, leading to poor results and poor motivation. What you should do is pick a few B2B social media outlets that fit your personality and your lifestyle. You are better off with a active Flickr site with pictures of your business travels and vacations, than you are with an abandoned blog or Twitter account. You might just be surprised at the number of professional colleagues you meet who have been where you’ve been and are happy to swap stories, because that leads to the next most important aspect of building your professional network online.

Professional Social Networking Aha #4 | Build Your Network Offline

Just as the consummate offline professional networker seamlessly blends business and personal life, the consummate online professional networker seamlessly blends online and off. There is just no substitute for face-to-face interaction for building trust and exploring opportunities to be helpful. When someone connects with, comments on, retweets, links, likes or messages you online, check that person out and see if it makes sense to set up a call or a meeting. Combining online professional networking with offline professional networking creates a feedback loop that accelerates the expansion of your network and increases the velocity and efficiency of your communications within your network. The end result is a bigger professional network than either offline or online alone can provide, and you develop stronger, more valuable relationships within your network.

For example, I can’t count the number of great professional relationships I’ve made through Chaotic Flow. Sometimes I run into a colleague who asks for advice on “how to blog and develop an online personal brand” or I get a stuffy note from a LinkedIn group moderator rejecting one of my posts as “self-promotion” in a vigilant effort to battle social spam, and I think to myself that they just don’t get it yet. Chaotic Flow is not about self-promotion. It’s about being helpful by sharing ideas that I (humbly) feel might interest my peers in order to meet them and develop professional relationships. I put some serious time and energy into it, so I don’t take kindly to it being misinterpreted as superficial self-promotion. Chaotic Flow is an professional social networking endeavor, and my greatest reward from it is always the new relationships I establish and extend offline.

Professional Social Networking Aha #5 | It’s One Network

In the end, there is no distinction between your online professional network and your offline professional network; they should both be composed of same set of colleagues that you have met or would like to meet. Professionals whom you can help and who can help you. You may have fifty-thousand followers on Twitter, but if they aren’t people you either know or want to know, then where is value in B2B? Perhaps you can “monetize their eyeballs,” but that would be B2C. Alternatively, if you only accept invitations on LinkedIn from people you have already met, then you may as well stick to a Rolodex.

Your success or failure at professional social networking is not measured by the quantity of your followers but by the quantity and quality of the referrals, references, and business opportunities you reap above and beyond what you could achieve through offline networking alone. This particular point will come up again and again in the coming posts in this series, because when we extend the concept of B2B social networking from building your professional network to building your company’s network, it will again be one network. B2B social media marketing should strive to connect online the same network of prospects, customers, experts, invluencers, consultants, investors, executives, and employees that drive referrals, references and revenue offline.

Professional Social Networking Aha #6 | No Where to Hide

There is one important difference between networking online versus networking offline: you are out in the open, all the time. When you network offline, the visibility of your actions and comments are limited to those colleagues in your vicinity. When you network online, your actions and comments are often visible to the whole world. Moreover, there are search engines, share buttons and rss feeds whose only purpose is to spread your actions and comments all over the Internet. And, those links can last a long time

This is the double-edged sword of professional social networking. On the one hand, the publicity helps you expand your network. On the other hand, you have nowhere to hide. So, be careful what you say and be careful who your friends are, but not so careful that you miss out on important opportunities. Good luck and good networking!

I frequently find myself thinking that the dumbest thing we Internet marketers ever did in social networking was to rename it social media.  In the early days of Web 2.0, there was no such thing as social media. Everyone was just working to make software more social, whatever that meant. Then for a while, the terms “social networking” and “social media” were used almost interchangeably.  Today, it’s all social media, the Web 2.0 heir apparent of Web 1.0 new media. Social networking is largely reserved for describing the purest of social networks like Faceook and LinkedIn, or the more technical discussions about social graphs and the like.  Personally, I strongly prefer the term “B2B social networking”; because once you recognize that the smart way to use B2B social media is to drive B2B social networking, your fundamental understanding of the potential opportunity shifts.  Just for fun, I did a quick Google trend analysis on the terms to visualize the issue.

As it has grown in popularity, the term “social media”
has clouded our thinking about social networking with advertising concepts.

So, what’s the big deal Joel?  After all, it’s just a kind of new media, only social, right? The problem is that the term “social media” clouds our thinking about social networking with advertising concepts.  In particular, when it comes to B2B social networking, the term “B2B social media” misses the mark entirely.  It makes me cringe when I hear statements from B2B marketers and salespeople such as these:

• “Social media is more relevant to B2C than B2B.”
• “B2B customers aren’t on Twitter, so we don’t see the relevance of B2B social media.”
• “I started a blog, but no one followed it and I really didn’t have the time to keep it up.”
• “LinkedIn is full of unemployed job seekers, not business buyers.”

B2B social networking is not the descendant of new media, like a banner ad, only social. B2B social networking is the new technological enabler of face-to-face meetings, industry events, phone calls, email, sales calls, field marketing and public relations, because it’s the networking, not the media that counts!  Would you ever expect a B2B marketer or salesperson to make statements such as these?

• “Networking is more relevant to B2C than B2B.”
• “B2B customers don’t network, so we don’t see the relevance of networking.”
• “I started building my network, but no one would meet and I really didn’t have time.”
• “My network is full of unemployed job seekers, not business buyers.”

Cast in this light, these statements are obviously and completely ridiculous. The fundamental purpose of B2B social networking technology is to facilitate B2B networking through automation. In plain English, the purpose of B2B social networking is to increase the frequency, velocity, and quality of business referrals and references.  When applied to sales and marketing, this translates into accelerating the B2B purchase process and driving viral revenue growth within an industry.  At the core of a referral are two things: a positive, trusted relationship and useful information. Now that sounds just a little bit like sharing a blog post or a comment on LinkedIn.  At a minimum, B2B sales and marketing professionals should be using B2B social networking to increase the frequency and velocity of referrals throughout the sales process.  At a maximum, B2B social networking can be combined with search, Website marketing and marketing automation to completely automate the B2B purchase process of the new breed of B2B buyer.

Business referrals are the mature B2B cousin of B2C word of mouth marketing.  Much of what I propose here in regard to B2B social networking also applies to B2C social networking with the one caveat that B2B social networkers are there to do business, whereas consumers use social networks for personal reasons, so B2C brands must tread carefully on their social turf.  In the case of B2C, the term “social media” may serve as a useful reminder to B2C marketers that consumers on social networks are not there in the service of their brands.  On the contrary, B2B marketers should find B2B social networking more relevant and more straightforward than B2C, provided they view it as networking and not advertising.

I also did an experimental search on Google for the term “B2B social networking” and Google decided what I really meant was “B2B social media.”  It’s really incredible how Google handles synonyms. Thanks for nothing Google!

Even Google treats B2B social networking and B2C social media as synonyms

The is the first post in a series designed to help B2B marketers create better B2B social strategies by thinking in terms of “networking” over “media.”  Future posts will tackle the following increasingly complex B2B social networking challenges.

• Professional networking with B2B social media
• Social Networking for B2B Sales Enablement
• Leveraging Social Media for B2B Demand Generation
• Social Networking for B2B Public Relations

So, stay tuned for more!

A little over two years ago, I published a series of well received articles on SaaS metrics that culminated in the SaaS Metrics Guide to SaaS Financial Performance. Since then, I’ve received numerous inquiries regarding the many practical quirks encountered in day-to-day SaaS metrics implementation. In response, I’ve decided to revisit the SaaS metrics topic with this series of SaaS Metrics FAQs where I’ll elaborate on some of these finer SaaS metrics details in a simple Q&A format. This first SaaS Metrics FAQs installment tackles the many problems associated with measuring SaaS churn, so if you have a Q, please feel free to submit it in the comments and I’ll do my best to provide an A.

SaaS Metrics FAQ #1 | What is Churn?

SaaS churn is the percentage rate at which SaaS customers cancel their recurring revenue subscriptions. It is a key SaaS metric of historical SaaS business performance and an important parameter in revenue forecasting. When used in forecasting, SaaS churn can be interpreted as the probability rate at which customers will cancel their subscriptions. In it’s simplest form, SaaS churn can be stated as the number of customers cancelling (ΔC) per time interval (Δt) divided by the number of customers at the beginning of the interval (C).

In the formula above, the Δ is a common math symbol that means change or interval.

That’s the simple answer. In practice, SaaS churn can be both difficult to define and difficult to measure. For example, it is very common to define SaaS churn rates at the customer level (customer churn), subscription level (product churn), and recurring revenue level (MRR or ARR weighted churn). Moreover, measuring SaaS churn can be complicated by low churn rates, high churn rates, high growth rates, variety of customer types, variety of subscription contract renewal periods, variety of contract MRR values, and changes in the SaaS churn rate itself over time. In it’s most complicated form, SaaS churn is the result of a Poisson process which statisticians would employ survival analysis in place of the simple formulas we generally use to calculate churn rates. So, if you get confused when you attempt to turn theory into practice, don’t worry, you are not alone. In the SaaS Metrics FAQ #3 below, I’ll provide some shortcuts for calculating accurate SaaS churn rates, while keeping the math to a minumum (really!).

SaaS Metrics FAQ #2 | Why is churn such an important SaaS metric?

The reason the SaaS churn rate dominates over virtually all other SaaS metrics is that SaaS churn is in direct opposition to growth; the primary objective of most SaaS businesses. As the limiting factor to growth, the SaaS churn rate has a very negative impact on both SaaS profitability and SaaS company valuation. Moreover, SaaS churn increases with the size of the customer base, so it is essentially negative virality, and as such is incredibly difficult to overcome. Graphically, SaaS churn tends to follow what is called a negative exponential distribution (shown below, it is the opposite of the positive exponential distribution associated with viral growth).

SaaS churn tends to follow a distribution where the bulk of customers
fall off within one customer lifetime, but some customers hang around for a very long time.

In plain English, you spend an awful lot of money, time and energy acquiring customers in SaaS. You recover this investment over time, so you want your customers to stick around as long as possible. The longer they stay, the stronger your business. This is why the value of one divided by the SaaS churn rate is often quoted as the average customer lifetime; lower SaaS churn equals longer customer lifetimes equals larger customer lifetime value.

SaaS Metrics FAQ #3 | How do I calculate churn in practice?

Well, it depends. In order to calculate churn accurately, you should make some attempt to achieve the following ideal SaaS churn calculation requirements.

1. Uniform Customer Population: Calculate churn across a uniform population of customers; uniform meaning they all have the same probability of cancelling during the measurement interval.
2. Matched Customer Population: Calculate churn by matching the population of customers that actually do cancel (ΔC) to the original population of customers that might possibly cancel (C).
3. The Right Measurement Interval: Calculate churn using a time measurement interval (Δt) that isn’t so short that you don’t get enough cancellations, or so long that you get too many. Otherwise, simple churn calculation formulas can yield statistically insignificant, biased, and random results.
4. MRR Uncorrelated to Churn: If MRR gets mixed up with churn, such as big customers cancelling more frequently than small ones, then revenue churn may differ dramatically from customer churn, and in the end, it’s revenue that counts!
5. Stable Business Process: Most SaaS businesses are constantly tinkering with their business processes to improve them. A SaaS startup may not have achieved a stable business model or recurring revenue stream. Measuring SaaS churn across dramatic business process changes will yield poor results. Ideally, you will measure SaaS churn before and after important changes in your business to understand their impact on churn.

What does this mean in practice? Most people begin to calculate churn by subtracting the number of customers remaining at the end of a month from the number of customers at the beginning of a month and divide by the number of customers at the beginning of the month.

And, then they multiply the monthly churn rate by twelve to get the annual churn rate.

Annual Churn Rate Calculation = Monthly Churn Rate x 12

(note: C_end is number of customers remaining at the end of the month that were in the original C_begin. It is not the total number of customers at the end of the month, which might include new customer acquisition. New customer acquisition during the measurement interval should always be excluded from your churn calculation. Thanks to Peter Cohen for pointing out this lack of clarity in the comments below.)

This is OK, provided you don’t have any of the following common churn calculation problems.

• a small number of customers (measurement interval too short)
• a very low monthly churn rate (measurement interval too short)
• a very high monthly churn rate (measurement interval too long)
• a high monthly growth rate (population not matched)
• contract renewal periods longer than one month (population not matched)
• mixed contract renewal periods (population not uniform)
• distinctly different customer types and behaviors (population not uniform)
• high early dropout rates leaving behind loyal customers (population not uniform)
• a wide variety of MRR per contract (population not uniform)
• upgrades or downgrades (MRR correlated to churn)
• changing contract renewal periods (MRR correlated to churn)

Just to name a few! The careful observer will note that each of the above situations creates problems by violating the respective ideal churn calculation assumption identified in parenthesis. Here are some SaaS churn calculation tips that will help you avoid many of the SaaS churn calculation pitfalls above without calling in a statistician or overly complicating your churn calculations.

SaaS Churn Calculation Tip #1 | Choose a measurement interval with churn < 1%-10%

When the churn rate is small, so many math things work out better for SaaS churn rate calculation accuracy, as well as in your SaaS business! However, even if your churn rate is large, you can improve the accuracy of your SaaS churn rate calculation by choosing a measurement interval where the total churn within the interval is small. Consider a SaaS business with 25% monthly churn and 100 customers. At the end of months 1, 2, and 3 there will be 75 = 100 * .75, 56 = 75*.75, 42 = 56 * .75 customers respectively. If you use a measurement interval of one quarter, you will likely calculate a churn rate of 19% = (100 – 42)/3 instead of 25%. When churn within the measurement interval is too high, your churn calculation will consistently underestimate the true churn rate.

SaaS Churn Calculation Tip #2 | Use a measurement interval close to the average contract renewal period

Your customers can’t churn unless their contracts are up. If you use annual contracts, only 1 in 12 of your customers can cancel in any given month. On the other hand, for those 1 in 12 that can cancel, you are actually measuring the annual churn rate, because they’ve been around for a full year already. If you customer population is super duper big and uniform and you have zero growth, these two biases will cancel each other out. But, a safer bet is simply to choose a measurement interval that is close to your average contract renewal period. One frequent source of churn calculation frustration comes from reconciling Tip #1 above which entails a shorter churn measurement interval with Tip #2 which usually entails a longer churn measurement interval. The solution to this problem requires a little more complex math and is given in Tip #7 below.

SaaS Churn Calculation Tip #3 | Only look at contracts that are up for renewal

If you can’t seem to find a happy medium between a low churn rate in your measurement interval (Tip #1) and a measurement interval equal to your average contract renewal period (Tip #2), then your best bet is to stop aggregating over the measurement time interval and base your SaaS churn rate calculation only on contracts that are up for renewal. The trick here is that since you are selectively only looking at contracts up for renewal and they may have many different renewal periods, the correct measurement interval to use in your SaaS churn rate calculation is the average contract renewal period of all the contracts in your renewal sample for the month.

When only looking at contracts up for renewal, the correct measurement interval
to use in your SaaS churn rate calculation is the average contract renewal period.

The formula is the same, but the denominator only counts the number of contracts up for renewal in the month and the numerator counts the number of contracts up for renewal in the month that cancel.

This is one of the most accurate ways to calculate churn provided you have enough contracts up for renewal each month. It is also the only approach that completely disentangles churn from growth, so it is particularly relevant in high growth situations.

SaaS Churn Calculation Tip #4 | Separate different customers into churn cohorts

Too much aggregation over non-uniform customer populations can distort your SaaS churn rate calculation. Whereas separating different types of customers into churn cohorts and calculating churn separately for each churn cohort can identify important levers you can push to improve your business.

Aggregating over customers with dramatically different churn rates
can hide problems and untapped opportunities for improvement in your SaaS business.

Churn among customers frequently varies by contract MRR, renewal period, tire kickers vs. loyalists, and a host of customer attributes that you are already collecting in your CRM system that are just waiting to be analyzed.

SaaS Churn Calculation Tip #5 | Measure recurring revenue churn

Recurring revenue churn is calculated by substituting monthly recurring revenue or annual recurring revenue (MRR or ARR) into the standard customer churn calculation. It is essentially a recurring revenue weighted version of simple customer churn, i.e., big customers count more than smaller ones.

The customer churn calculation can hide significant financial problems, such as downgrades or higher churn rates among larger customers. Conversely, it might make things look worse than they really are from a business viability point of view. Routinely measuring and comparing customer churn and MRR churn will help you detect nuances within your customer base that have a direct financial impact on your SaaS business.

SaaS Churn Calculation Tip #6 | Segment MRR churn into upgrades, downgrades and cancels

Perhaps the most useful aspect of MRR churn is the insight it provides into upgrades and downgrades, two important financial metrics that are not measured by the simple customer churn calculation. The calculation is essentially similar to calculating churn cohorts, one need merely identify those subscriptions that increased, decreased or disappeared altogether during the measurement interval and calculate MRR churn (MRR growth in the case of upgrades) separately for each category.

SaaS Churn Calculation Tip #7 | In high churn situations, use accurate conversion formulas

OK, the math will get a little harder here, but keep in mind that your next step is to call in a statistician. It turns out that the annual churn rate is only approximately equal to 12X the monthly churn rate, and this approximation fails for large churn scenarios. The true relationship between the annual churn rate and monthly churn rate is given by the following formula:

Annual Churn Rate = 1 – (1 – Monthly Churn Rate)^12

Or, if you find that monthly churn fluctuates a lot from month to month, then you can calculate annual churn as follows:

Annual Churn Rate = 1 – (1 – m₁) x (1 – m₂) x … x (1 – m₁₁) x (1 – m₁₂)

Where m_i is the monthly churn rate for month i. The reason this is the true formula is that the number of customers hanging around at the end of 12 months is calculated thus.

C_end = C_begin x (1 – m₁) x (1 – m₂) x … x (1 – m₁₁) x (1 – m₁₂)

For example, suppose your monthly churn rate measurement comes out to be 10%. Multiplying by 12 would give an annual churn rate of 120%!? Which is clearly not possible, as a churn rate cannot exceed 100%. The correct answer is 72% = 1 – ( 1 – .1 )^12.

The reason you can often simply multiply by 12 to convert the monthly churn rate into the annual churn rate is that is just so happens that for time intervals less than about 10% of the average customer lifetime (or total churn in interval < 10%) the following approximation applies.

(1 – Monthly Churn Rate)^12 ≈ 1 – Monthly Churn Rate x 12

Unfortunately, this approximation can really mess up your numbers in high churn situations. I say 10% because 2 x 10% = 20% whereas the exact formula gives 19% = 1 – ( 1 – 10% )^2, which is more accurate than most businesses care about or the SaaS churn model in the first place. More than 10%, however, and calculations become pretty inaccurate. The inverse of this formula is also useful.

Monthly Churn Rate = 1 – (1 – Annual Churn Rate)^(1/12)

Recall the example from Tip #1 above, where a quarterly measurement interval caused us to miscalculate the monthly churn rate as 19% instead of 25%. In this example, we had 100 customers to start and only 42 left at the end of a quarter. Had we used the correct formula to calculate monthly churn from quarterly in this example we would have done the following.

Monthly Churn Rate = 25% = 1 – ( 42 / 100 )^(1/3)

If you are willing to do the math above, then you can use longer measurement intervals even when churn is high and there is no need to follow Tip #1.

Scaling a startup from zero to $100M is 10% strategy and 90% execution. You’d never know that from reading the Web, because the advice you’ll find online is 90% related to strategy and 10% related to execution. This is the second post in a series that explores the challenges of scaling a startup through rapid growth and presents some tips and tricks I’ve learned over the years to smooth out what is an inherently bumpy ride. The first post in this series entitled Startup Business Growing Pains | Staying Focused examined the challenge of maintaining strategic focus amongst the chaos of scaling a startup. This second post leaves the 10% of strategy behind to explore five key startup scaling challenges commonly encountered in the softer, messier 90% of execution.

Startup Scaling Challenge #1: Passing the Hat

A while back, I published this article entitled Startup Musing | One Hat is Not Enough where I make the case that startup executives need to be prepared to wear more than one functional hat to be successful. As you scale your startup, however, you must carefully oversee the process of passing those hats to new executives and managers that join the team. This looks easy on paper (just draw up the new org chart), but it can prove extremely challenging in practice. While it is easy to pass the hat in form, it may not be easy to pass the hat in substance when the on-boarding of the new hat owner is arduous, i.e., big learning curve, lot’s of important internal relationships, and so forth.

As long as the old hat-owner offers greater knowledge and effectiveness in the relevant functional area, everyone in the organization will gravitate to her for decisions and support, regardless of what the new org chart says. The problem can be further exacerbated if the old hat owner isn’t all that willing to pass the hat in the first place or if the old hat owner is too willing and runs away from the responsibility faster than the new executive can get up to speed. Poor hat passing can result in confusion, frustration, conflict, executive turnover and ultimately poor business performance.

Hat passing is tricky business that requires the buy-in all of all those affected, a solid foundation of respect between the two hat-passers, and a thoughtful approach to managing the transition. Without these fundamentals in place as you are scaling your startup, you may find that you are dropping more hats than you are passing.

Startup Scaling Challenge #2: The Solution of an Unknown Function

A corollary to the challenge of passing the hat is the introduction of a new business function whose role is unknown to those who must work with it. For example, most B2B SaaS startups begin with a CEO and a bunch of engineers, then they add sales and marketing to take the product to market, then technical support and accounting as they gain customers and need to react to their needs, then product management, customer success and QA to develop a more proactive approach to steering the business. Depending on the business model, there may be other functions along the way like business development, partner marketing, channel management, etc. It all sounds very logical and straightforward to the seasoned startup executive. However, it can come as quite a surprise to less experienced staff who have never seen, heard or worked with this new function.

If you’re a junior engineer who has never worked with a product manager before and you’re used to taking instruction directly from the CTO, you will have all kinds of questions and concerns about this new species of coworker. It can even be quite confusing to the new product manager as the product management role at this startup differs from past experience. I’ve scaled multiple sales, marketing, support, and product development organizations and I can say for a fact that they were all the same in some respects, and they were all very different in others. In every case, the specific organizational roles and processes had to be tailored to the unique business strategy and environment of the startup at hand.

When you introduce a new function, don’t assume everyone understands what you are doing and why. Don’t even assume that everyone knows what it is. Some may think they know from past experience, but they still may not know what it is at your startup. Every new function should come with clearly defined roles and responsibilities and these should be broadly and consistently communicated to everyone in the new function and everyone who must work with it to make the transition a success.

Startup Scaling Challenge #3: Moving from People to Process

Passing of hats and the introduction of new business functions are natural consequences of growth and the increasing division of labor required to manage a larger organization. The result is that work that used to be done by individuals and small teams must now be done by cross-functional groups. In my experience, this is one of the most subtle and treacherous startup scaling challenges. Subtle because it sneaks up on you. Treacherous because the problem and it’s potentially damaging results are always underestimated. You design your org chart, hire your new people, get the new team together and quickly discover that they have no clue how to work together effectively.

Take the simple process of creating a single Web page that describes your product. Whereas before a multiple-hat-wearing marketing director might write the content, create the design and even mock up the HTML before sending it over to your only Web engineer for implementation, your scaled up startup now has a product manager internally communicating the value of features and functions, a product marketer producing content for external consumption, a designer creating Web graphics, a Web team manager receiving these requirements, and a team of Web engineers from which to chose to assign the task, all of which are new and don’t fully know the code base yet. Just for fun, let’s say this transformation occurs over a one month period. See the point?

Moving from many individual contributors to cross-functional teams is an essential aspect of scaling a startup. Teams produce more for less when they are working to a well-defined, well-understood process. You can’t just throw a bunch of new people in a room and hope that they will figure it out, no matter how talented they may be. And, you can’t define new processes and make them stick overnight. Define maybe, make them stick no way. This is an essential difference between good startup managers and managers in more stable businesses. It is one skill to oversee the efficient operation of an existing team or process. It is quite another skill to consistently create new teams and processes out of nothing.

Here is my cheat sheet of how to quickly go from people to process…

• Communicate strategic goals
• Establish process owners
• Define roles, responsibilities and workflows
• Make a schedule
• Focus on group deliverables over individual tasks
• Control the hand-offs
• Educate, educate, educate

What startup scaling rules of thumb have helped you go from people to process?

Startup Scaling Challenge #4: Tribal Knowledge

Underscoring all the startup scaling challenges above is the problem of tribal knowledge: those things that are sitting inside the heads of earlier employees that must be communicated to new employees in order for them to do their jobs. Tribal knowledge is traditionally communicated verbally through stories. Unfortunately, this method of communication is notoriously unreliable leading to misinterpretation, reality distortion, and group memory loss. At some point, effective startup scaling means writing stuff down where everyone can find it and making sure new people are trained on the essential accumulated knowledge of your business.

Personally, I like to take a minimalist approach to documentation. At most startups, folks are too busy to write anything down for future consumption and training, let alone read it. However, it’s essential if you want to avoid the frustration of watching your newest employees waste time reinventing things that you thought your business was good at already. I won’t attempt to define what you should document, as it tends to vary widely based on each startup’s specific strategic goals, stage of evolution, and operational challenges. I’m just going to say that no matter how Silicon Valley cool you are, no matter how agile you want your culture to remain, sooner or later you will reach the limit of tribal communication and you’re going to have to start writing things down to scale your business from startup to firm.

Startup Scaling Challenge #5: To Every Thing There is a Season

You can’t do it all at once, so you must choose very carefully what you will do today. In my opinion, this is by far the most difficult startup scaling challenge of all. As you scale your startup, you will find that you have a cornucopia of organization models, job roles, programs, processes, policies, best practices, templates, and so forth to chose from. The question is always: “Which one, right now?”

The flip side of this principle is that just because you are not doing something now, not following that “standard industry best practice” does not mean you are doing something wrong or that you have a problem. It may just not be the season. It’s a common startup scaling practice to hire experienced executives who have been there, done that at bigger companies to help you scale to the next level. And, it’s a common startup failure scenario when an experienced large company executive with little or no startup experience assumes that her job is to remake your startup in the image of her former company overnight. The proverbial hammer looking for nails. It requires both talent and discipline to scale a startup. Talent to choose the right thing to do next. Discipline to get it done and not get distracted by the thousands of other things whose seasons have not yet come.

B2B buyer behavior has evolved in adaptation to the Internet. A new B2B buyer species has arisen that is more connected, more impatient, more elusive, more impulsive, and more informed than its pre-millennium ancestors. Just as the new B2B buyer has evolved in adaptation to the Internet, B2B sales and marketing professionals must adapt their strategies and tactics to the expectations of the new B2B buyer for online independence and instant gratification. For each new behavioral trait that differentiates the new B2B buyer species from its pre-millennium ancestors, there is a new rule of engagement that complements that behavior to maximize B2B sales and marketing effectiveness.

This eBook consolidates and expands on my popular New Breed of B2B Buyer series. It defines 6 behavioral traits of the new B2B buyer and explores how they lead to 6 new rules of sales and marketing engagement. It also introduces the concept of the “fuzzy funnel” and includes tactical highlights such as the evolving roles self-service, search, marketing automation and B2B sales in new B2B buyer engagement. Share and enjoy!

SaaS branding has some unique challenges that aren’t covered in the average MBA program. As a new communication channel, the Internet has altered the rules of branding for almost every category of product. However, cloud brands that owe their very existence to the Internet often find that the message, the medium and the merchandise are a confusing tangle of clicks, words, sounds, images and experiences that is difficult to describe.

I’m not going to re-hash branding 101, there are plenty of resources available for that. I’m also not going to provide a fool proof recipe for creating killer cloud brands. Anyone who says they have that is lying. What I will do is provide some SaaS branding food for thought by exploring 6 key questions you need to ask before committing to your SaaS branding strategy. Because once you commit, it’s not easy to change. All brands, not just cloud brands, are ultimately owned by their buyers, not their sellers. Once you put yourself out there, the evolution and results of your SaaS branding strategy are no longer your own. Your first impression may also be your last, so you should strive to get it right.

Are You in a Category unto Yourself?

With respect to cloud brands, everyone wants to own the category. It’s where the big, BIG money is. Moreover, the combination of network effects and switching costs common on the Internet often demand that you attempt to own the category, as everyone else is destined to be an “also ran.” Consider the status of the direct competitors of Salesforce.com, Google, and Facebook.

I like Al and Laura Ries description of the relationship between categories and brands.

“The mind is like a sorting rack at the post office, which has a slot or ‘pigeonhole’ for every name on the letter carrier’s route. Every piece of mail is put into the hole corresponding to the name on the mail. If there’s no hole for a new piece of mail, it’s set aside in a pile called ‘undeliverables.’ So too with brands. The mind has a slot or pigeon hole for every category. If the pigeonhole is named ‘safe cars,’ this is the hole for a brand called Volvo.”

When you are creating a new brand, your challenge is to shove your way to the top of the slot by focusing on your unique and valued qualities over the competition. Building a new category is 3X more difficult, as you must first clarify and create a new pigeonhole where none currently exists, second promote the unique and valued qualities of the fuzzy new category relative to unclear alternatives, and third hold on to the top of the slot by outpacing the competition (which will come eventually if the category is real).

If you find yourself in the enviable position of being a BIG category unto yourself and the nature of that category demands that you own it, then your SaaS branding strategy should focus on crystallizing that confusing tangle into a simple, easily describable position that is unlike any other. No easy task as we all have very big, complex post office racks. Fail and your brand becomes “undeliverable.” If you find yourself in a crowded category where you must fight your way to the top, then focus on your unique differentiation to pull away from the crowd. In either case, realize that positioning alone will not win the battle of the cloud brands; you must also deliver.

Are You Experienced?

Cloud brands are the most experiential of service brands. What you see and hear isn’t always what you get. You can’t taste them. You can’t smell them. You can’t touch them. You can only do them. Cloud brands must be experienced to be truly understood. In addition, most cloud brands follow a recurring revenue subscription model which precludes any ongoing discrepancy between your message and your service. Your SaaS branding strategy must be tempered by reality, such that your service absolutely delivers on the promises made in the name of your brand.

The experiential nature of cloud brands is one of the myriad reasons behind the free trial imperative of SaaS. If you are tired of explaining and explaining and explaining your cool new category or you can’t quite come up with the perfect words to describe your difference, any car salesperson will tell you that there is no better way to seal the deal with an uncertain buyer than a test drive. With cloud brands, doing is believing.

The cloud brand experience does not begin or end with your product. Prospects begin to experience your brand based on what they hear and see online and off. A recommendation on LinkedIn may lead to a white paper posted to a community site, which leads to a free trial and discussions with your sales and support teams, and finally to a purchase that after time results in an upgrade and another online recommendation, and so forth. Where does your SaaS branding strategy begin and where does it end?

What’s in A Name?

Some folks will tell you that brand names simply don’t matter, particularly for B2B brands. Other’s will tell you that they matter a lot. I say, “it depends.” One reason brand names don’t always matter is their experiential nature, which we know is extreme for cloud brands. You can attach any name, acronym or logo you like to an experience after the fact. You just need a letter to stick in the mail slot. The main argument against the relevance of names in B2B brands is that the buying process is too rational, and good brand names are chosen to reinforce the emotional connection of the buyer to a brand’s essential quality, e.g., an iPad is mine, a Red Bull is full on energy, etc.

These are strong arguments and it’s easy to come up with countless examples of brands where the names are simply arbitrary, not just in B2B but B2C as well, e.g., IBM, Oracle, Xerox, Louis Vuitton, BMW etc. Outside of consumer packaged goods, it’s difficult to make the case that brand names matter at all. How many descriptive, metaphorical and emotional names can you find in the top 100 corporate brands? Not many. Your agency is likely to tell you to play it safe either way. After all, it’s easy enough to come up with a decent name–for a price–so, why take the chance?

Let me tell you when and why I think names do matter for cloud brands. Most examples of successful brands with arbitrary names are exactly that, successful brands. They are not startups. They are not fuzzy, unknown categories. Cloud brands matter most when you are creating the category and you intend to own it. The reason for this is that category names cannot be arbitrary, they are descriptive, and cloud categories can be very hard to describe. If you’re signing up for 3X the work to create that mail slot, then you darn sure want to put your name on the address bar. The best way to do that is to co-opt the category name, e.g., Salesforce.com, Facebook, Box.net, etc. A descriptive, but not quite generic, trademark not only facilitates building a new category by reinforcing clarity of message, but as you capture the market it all but ensures your brand will be synonymous with it.

Can You Play Variations on Your Theme?

If SaaS branding is all about the experience and names only matter so much, then how do you guide the cloud brand experience? Craft a compelling story and publish it deep and wide. SaaS branding must adhere to the new paradigm of the new breed of B2B buyer. It is no longer sufficient to come up with a name, logo, positioning statement and core message and call it quits. Developing your cloud brand image requires telling your whole story by publishing tailored variations on these primary themes that increase their relevance for prospects and make them easier to find through search and social media.

The Internet is an organic, networked communication channel and your SaaS product sits right in the middle of it, merged with it, evolving with it, part of it. It is not a broadcast medium like television or radio. Prospects decide for themselves what they will see, hear and do. You can offer up experiences, but your prospects choose, which means you must consistently offer up new and varied experiences to cover their diverse range of interests and virtual locations in relation to your offering. One prospect may care about costs and find you on Google, whereas another may care about improving customer service and find you on an industry portal, and a third may not know what she cares about, but hear about you from a recommendation on LinkedIn. Killer cloud brands are everywhere their prospects are with every story they want to hear.

Are You Under The Influence?

I’m not asking if you’re smoking dope (Although I’ve seen my share of business plans where the management team clearly was!), I’m asking if your cloud brand is “under-influenced.” While your content strategy should cover all your buyer personas, problems, benefits, media, channels, keywords and the like by exploiting the myriad variations on your story, it’s important to keep in mind that not all listeners are created equal. Finding and leveraging influencers in your community accelerates online and offline word-of-mouth and increases the credibility of your cloud brand.

Influencers come in lots of shapes and sizes today from online friends, bloggers and recommenders to traditional mainstays like customers, press, analysts and old-school industry experts that like to sit on panels and publish white papers. Whoever they are, you want them backing your brand and your message. Your SaaS branding strategy should lay out your plan to win over the influencers in your space. My advice here is to go beyond telling them your story and make them part of your story. Don’t go it alone. Friend your brand’s friends, blog with influential bloggers, tell your customer’s stories, help the press dazzle their readers, analyze with the analysts, and organize panels for those old-school experts. In the end, they will own your brand more than you. Great cloud brands facilitate ownership.

Can You Be Trusted?

The underlying goal of all branding is trust. Trust so thorough that prospects and customers no longer need to think through a purchase, they just buy on trust. There are many elements that impact trust, but honesty, reliability, and risk are right at the top of the list. Cloud brands must live up to very stringent trust standards, because of the ongoing 24/7 relationship inherent in the SaaS model. There is no room for anything less than 100% honesty when your customers can always see for themselves. Any discrepancy between service expectations and service delivery is immediately apparent. And, risk cannot be transferred when a customer can cancel anytime.

Great cloud brands say what they mean, and mean what they say. They don’t promise anything they can’t deliver. One of the great cloud ironies is that beyond the fear, uncertainty and doubt of putting sensitive data and applications on the cloud, cloud brands must by their very nature live up to greater standards of trust than their software equivalents. I can’t count the number of stories I’ve read about shelf-ware and failed enterprise software implementations. In comparison, major outages and security breaches at SaaS providers, while highly publicized, have been few and brief. Cloud brands that fail to engender and deliver on trust go out of business, fast, because they tend to fail for all their customers at once, not just one at a time.

]]> http://chaotic-flow.com/saas-branding-6-challenges-of-killer-cloud-brands/feed/ 9 http://chaotic-flow.com/cloudflare-crowdsourcing-web-traffic-control/ http://chaotic-flow.com/cloudflare-crowdsourcing-web-traffic-control/?show=comments#comments Wed, 18 Apr 2012 16:04:33 +0000 Joel York http://chaotic-flow.com/?p=5473 Tweet Me!

Like most small website owners, I have a very limited view of what really goes on under the covers at Chaotic Flow. I know my own source code and I have Google Analytics and basic Web logs, but without a fleet of operations and security IT staff, I really have no clue who is coming to my website beyond the browser types, IP addresses and keywords they use. I routinely have to battle comment spam and I’ve definitely fended off a couple of real attempts to hack my site. It’s amazing when you consider just how small a part of the Internet Chaotic Flow represents, yet the bad guys have sufficient time and processing power to spend it on little old me. Pretty scary.

Since email spam and desktop virus protection are proven, large markets, you’d think that by now someone would have cracked the nut of protecting websites. There are security options out there, particularly if you are a large site and can afford them. Most provide a combination of site scanning for detection with locally installed security software and hardware for prevention, but to my knowledge no one really provides attack detection and prevention for the Web with the kind of SaaS simplicity and effectiveness of email and desktop equivalents. Until CloudFlare.

CloudFlare is a creative and rapidly growing SaaS startup that wants to eliminate website spam the way Postini did for email, only more, a lot more. So much more that the two year old Cloudflare is already rumored to be valued in excess of $1B. I recently sat down with Matthew Prince, CEO of CloudFlare, to talk about what makes CloudFlare unique. He had no shortage of answers.

This is the first article in a new “Cloud Disrupters” interview-based series that will highlight recently launched SaaS companies and products that have the potential to be real game changers. In keeping with the long standing Chaotic Flow theme, the purpose of this series is not news and friendly buzz, but an exploration of the Internet strategies and technologies that make these companies unique and disruptive. And, maybe a little unsolicited advice.

CloudFlare’s Secret Sauce

The simple, game-changing element of CloudFlare is its approach to the website protection problem at the network transaction level, rather than the Web application level. CloudFlare asks nothing more than that you redirect all your Web traffic through CloudFlare, and CloudFlare will make sure only the good guys get through to your website. Technically, it’s completely analogous to Postini, except as opposed to swapping out MX records, you change your DNS settings.

Cloudflare attacks the website security problem at the network layer,
making sure only the good guys get through to your website.
However, access to all website traffic
opens up myriad business opportunities beyond security.

This approach has the double whammy of being incredibly simple for customers to adopt, while empowering CloudFlare with the maximum amount of community knowledge, business opportunity and network effects to become a truly valuable service and formidable competitive force on the Internet. More on this later.

Community Leverage Lies at the Heart of The CloudFlare Strategy

Growing out of Project Honeypot, an open community-driven experiment to identify and quash website spam, CloudFlare has been community-centric since day one, and the company has reaped the benefits. Prince has a great story about how CloudFlare’s first pre-funding servers were donated by its community. The real competitive advantage of the CloudFlare community is the pooled knowledge of all that web traffic. In Princes own words below.

“Traditionally security is a very siloed market…and if you try to get Yahoo to share security information they won’t for lots and lots of reasons..it’s very isolated….From the beginning the [CloudFlare] idea was how do you create a community that gets stronger as it gets bigger…as data flows through our network, knowledge about that traffic is captured and we can then provide a better and better and better service for everyone.”

Unlike a lot of Internet companies where network effects are fuzzy at best, the network effect at CloudFlare is unusually tangible. CloudFlare’s freemium customers may not pay in cash, but they do pay in knowledge. Knowledge that according to Prince outweighs their costs, alleviating one of the biggest roadblocks to freemium success.

CloudFlare Adoption Costs, Velocity and Scale

I don’t think I’ve ever seen a better demonstration of the inverse relationship between organic growth velocity and adoption costs than CloudFlare. In the ideal CloudFlare world, 100% of Internet traffic will some day flow through its network. “We’re rebuilding the Web,” says Prince. Are you listening Google? While that vision may be a tad bit aggressive, after only 15 months in production, 450 million users pass through CloudFlare’s network every day and their website adoption rate is in the thousands per day (I am not quoting a specific number as it is increasing faster than I can write).

Had CloudFlare taken a less bold approach than the one-click traffic redirection to their “Web proxy cloud,” then its entire business model would fall apart like a house of cards. Too much complexity would produce lower adoption volume, inexorably leading to higher prices and weak network effects. While CloudFlare has zero salespeople and has done only very limited launch marketing like participating in the TechCrunch 50, it’s adoption rate is still through the roof.

C’mon CloudFlare, Show Me the Money

Unlike virtually every other B2B SaaS CEO I’ve met, Matthew Prince is not worried about money. He’s worried about scale. In a fashion more common to B2C startups, the reasoning goes that if CloudFlare reaches it’s natural scale, monetization will not be difficult. Strangely enough, I agree. The reason I agree is that by attacking the website security problem at the network layer, CloudFlare is essentially nominating itself as Web Traffic Control for the Internet. While the original premise might have been to filter the baddies out of incoming traffic, the result is that the CloudFlare cloud has access to ALL traffic, good, bad and otherwise, coming AND going. Generically, CloudFlare is a value-added channel that can augment, cleanse, filter or expedite any website interaction and is only limited in what it can accomplish in the tight window of opportunity between request and response.

In the short time since it’s launch, Cloudflare has gone beyond security to offer itself as a CDN that can speed up your content delivery, a content optimization tool to speed page loads, a website analytics dashboard that goes beyond Google Analystics to give deeper insight into your traffic, and an app marketplace with one-click features that can be easily added to your site. “Security is just a feature. CDN is a feature. Apps are a feature.”, according to Prince, “but they don’t fully describe the product.” Prince recognizes that CloudFlare faces a cloud category branding challenge. For now he’s thinking of what they do as network “operations-as-a-service,” something that only the big guys like Google, Amazon, and Facebook can afford to do for themselves and have whole sections of the org chart dedicated to it. Everyone else can only get that scale through a SaaS community such as CloudFlare.

CloudFlare Competitive Threats

Thus far it may sound like I’m on the CloudFlare payroll, but I’m not. I do think CloudFlare is attempting something very disruptive, interesting and ambitious. Which means I also expect the space will heat up fast. Here are some gotcha’s that I think could trip CloudFlare up along the way if they are not cautious.

• Do No Harm
  Tampering with Internet packets is risky business. There is at least as much opportunity to screw things up as there is to improve them. Conventional website security products strive to eliminate every significant threat. It will get complicated and with more complexity will come more opportunity to break stuff, especially since CloudFlare is also overlaying all those other value added services. Given it’s super low adoption costs and gigantic target market (pretty much every website), I’d suggest that it’s more important to not break stuff than it is to fix stuff. So what if CloudFlare doesn’t do everything, as long as it does enough to make you push the button to enable it for free, and then upgrade to a couple of paid services, then it’s done enough. Alternatively, accidentally bringing down your site or cutting off your ad revenue in the interest of security will not play well with most Web publishers.
• Get Sticky Fast
  While CloudFlare has a decent lead on the competition, particularly from the Project Honeypot connection, there are some established players with big pockets that might want part of this action. It only takes a second to adopt CloudFlare. By the same token it will only take a second to switch to a competitor. Services that are difficult to duplicate, but more importantly that increase in value the more they are used like site analytics should get priority on the CloudFlare product roadmap.
• Make the Intagible Tangible
  After you enable CloudFlare, you’ll find that you are hard pressed to tell if it is making a significant improvement, particularly if you are a small site with limited traffic and analytics as a baseline for comparison. Much of what CloudFlare offers happens behind the scenes and on the security side, you’re counting negatives, i.e., I didn’t get attacked again this week. Making what CloudFlare does tangible to customers is an important marketing challenge. The analytics package is essential to this, but I also think more investment in the CloudFlare community, empowering CloudFlare customers to share their success stories and detailed technical knowledge of CloudFlare optimization and troubleshooting would go a long way here.
• No FailFlare
  Let’s face it, when Twitter goes down (and it still does occasionally), no one really gets hurt all that much. Maybe a few advertisers and Twitter ecosystem apps. Not like it brings down your website, your business and your cash flow with it. More than anything, CloudFlare has to work. If the startup achieves anything near its ambitions, I give it one, two, maybe three real outages and then it’s all over. CloudFlare is built on the premise of high value at a low cost, but the price you pay is not the true cost, especially if you are paying nothing. It’s the risk. Downtime risk is the hidden adoption cost of CloudFlare and just like the more visible adoption costs, Cloudflare needs to reduce it to zero.

Best of luck to CloudFlare, Matthew and the rest of the team!
JY

One of the most difficult SaaS challenges is choosing and evolving the right SaaS sales model for your business. While the most common SaaS sales model is characterized by a transactional inside sales organization, frequently split into new business focused sales reps and retention focused account managers, this is by no means the only SaaS sales model, and may NOT be the best SaaS sales model for your business. SaaS businesses come in many flavors from consumer-ish freemium services like Box.net and Cloudflare to high-end enterprise solutions like Workday and BazzarVoice. Choosing the right SaaS sales model is often a bet-the-company decision, as second chances are rare in the fast moving world of the Internet. Plus, as your SaaS product offering and customer base grows, you are likely to find yourself supporting several distinct and varied SaaS sales models. How to choose?

Click the image or link to download the complete SaaS Sales Model eBook

A compilation of some of the most popular articles at Chaotic Flow, this new eBook provides a a simple, powerful strategic framework for choosing the right SaaS sales model for your business and gaining wisdom beyond the conventional for matching the right the SaaS sales organization options to your specific operational challenges. Share and enjoy!

B2B startup marketing is tough. It used to be that you could polish off a high level message and a slide deck and let the salesperson handle it from there. Today, online marketing is the primary driver of revenue at the typical B2B startup. The new breed of B2B buyer expects your online content to be engaging, valuable and deep, and is unlikely to engage your salesperson if you don’t deliver. However, B2B content can be excruciatingly difficult to produce. It’s technical, complex, dry and requires deep subject matter expertise to be truly valuable. Plus, it usually must be done on a shoestring budget, yesterday.

The B2B Startup Marketing Blog Imperative

Every B2B startup marketing professional knows that they need a blog, but not everyone recognizes it’s central importance in getting the B2B startup marketing effort off the ground. After all, its just a corporate blog, and who reads corporate blogs right? Wrong! Perhaps it’s the terminology that is getting in the way. Your corporate blog should a) not be corporate and b) not be a blog, as in a Web log of what’s going on at your company. What it should be is a publishing platform for creating engaging, valuable and deep content for the new breed of B2B buyer by following the Top Ten Be’s of the Best B2B Blogs. But, that’s just the beginning. A successful blog should provide enormous leverage to your B2B startup marketing effort and enable you to generate leads faster, cheaper and more effectively.

The Shortest Path to Deep Content

Creativity is a process, not a plan. Turning technical, complex, dry B2B marketing content into something interesting, engaging and compelling doesn’t just happen because you set a date to complete a new video or whitepaper. You need time to think it over. Free your creative juices. Then, hone your ideas into something really cool. In the meantime, you can blog.

Your B2B startup marketing blog should be a crucible of creativity. You can try out your ideas piecemeal, one post at a time, until they converge into that fantastic whitepaper, webinar or video series. Regular readers of Chaotic Flow (thank you!) will recognize that this is an integral aspect of how I develop this blog. The Top Ten Do’s and Don’ts of SaaS Success didn’t just spring into my mind all at once: one, two three…ten. They are a result of ideas I played out one post at a time. This is the case for all the whitepapers you see over on the right. Most often, I will outline a series of blog posts with the intent that if they turn out good enough, I can quickly and easily reshape them into a whitepaper.

Get Instant Results Through SEO and Social Media

On the Web, the medium is quite literally the message. As you hone your great ideas one post at a time on your B2B startup marketing blog, you immediately open online channels for demand generation. Instead of waiting three months for results as you write and rewrite that magnum opus whitepaper or produce that expensive viral video, you can be generating leads today through SEO and social media with the half-baked ideas on your B2B startup marketing blog. And leads, today not tomorrow, are uniformly the number one priority of every B2B startup marketing plan. You have to master some technical online marketing tricks to do this, but they are not difficult. Just start every blog post with a keyword in mind, and SEO as you write. Then, make sure to spread your posts through RSS, LinkedIn, Twitter, etc., building back links along the way. That’s about all there is to it. Really.

Integrate Blog Content Into the Buying Experience

Don’t let your blog hang off the side of your website. If you follow the two tips above to leverage your B2B startup marketing blog as a publishing platform, then you should have lot’s of great stuff you want your prospects and customers to read. You can re-purpose your blog content into presentations, brochures, videos, and whitepapers, but you can also use it pretty much as is throughout your website, marketing campaigns and newsletters. In fact, the RSS feed from your B2B startup marketing blog can be used to accomplish this automatically as you publish new content.

Capture Your Prospects

If you treat your B2B startup marketing blog as a corporate blog, your prospects will probably ignore it, so you probably won’t be thinking about lead capture. However, if you follow the Top Ten Be’s of the Best B2B Blogs and you buy into the publishing platform recipe above, then your prospects will be flocking to your B2B startup marketing blog in droves. You should be thinking about lead capture. Be sure to encourage your readers to subscribe to your RSS feed, follow you on Twitter, and wherever else you publish your blog content. That will keep them coming back to read and engage, if not yet to buy. If you have a free trial, make sure your readers know it. And, there is no harm in mixing the occasional product announcement or highlight into your otherwise unbiased, useful, engaging blog posts. You’ve worked hard to make your B2B startup marketing blog useful for your prospects; make sure you capture your leads.

There are a few good things in life that you can never have too much of, and at a startup business that good thing is growth. However, we all know there is always a price to pay for overindulgence. To my way of thinking, the key to being a glutton is to balance your consumption with an equal amount of discipline. If you eat a lot, you gotta exercise a lot. This is the first post in a series that will explore some of the more common startup business growing pains and present strategies and tactics to manage them for maximum success.

A startup business is all about capitalizing on opportunity. When you’re growing, opportunities abound. The challenge is to focus on the right opportunities without getting distracted by all those other shiny objects. The challenge of focus pervades the entire startup business from the big strategic choices of product development and org design to everyday decision making and productivity. Moreover, focus must be balanced with flexibility, because startup businesses generally compete in rapidly evolving markets. Too narrow a focus for too long a time can be just as deadly as no focus at all.

Here are nine battle-tested tips for keeping your startup business focused and on the path to success.

Startup Business Focus Tip #1: Choose to Do a Few Things Very Well

It is the very heart of focus that you should strive to be great at few things, not mediocre at many. This principle is universal, applying to your core competitive advantage, your high level strategic goals, your tactical plans, your everyday priorities and your enduring cultural values. Complexity is the enemy of startup business success. The ability to crystallize the chaos into clear, simple goals and action plans is the essence of focus.

Startup Business Focus Tip #2: Align the Organization to Strategic Goals

There are many complex, competing concerns that go into designing an effective organization for a startup business: markets, products, processes, functions, geography, skill sets, and even personalities. But, the number one criteria is executive accountability for strategic goals.

Startup organizations with strong strategic alignment ensure accountability and focus.
Organizations with poor strategic alignment require lots of coordination on the part of the CEO
and encourage bureaucracy, finger-pointing and politics.

Those few things you choose to do at the highest level must get done cleanly and quickly, without excuses. There is no forgiveness for bureaucracy or finger-pointing in a startup business; you simply fail. Look at your strategic goals and look at your key executives and ask yourself this simple question: is there a single executive accountable for each strategic goal AND is that executive responsible for the essential resources required to deliver it? Save the competing organizational concerns for the next level down.

Startup Business Focus Tip #3: Over-communicate the Strategy

Startup business executives spend hours and hours talking strategy. They think about it on the way to work, in the shower, and when they should be listening to their spouses. Unfortunately, it is easy to forget that most of your team doesn’t. Most of your team members don’t even have the whole picture of what’s going on, because their job’s are only pieces of the larger puzzle. It’s very difficult to over-communicate your strategy, goals and plans and very easy to under-communicate them. Whatever your method, whatever your culture, you should over-communicate the larger goals. Without the big picture, your team won’t know a bad decision from a good one or a distraction from a real problem. A pervasive understanding of your strategy creates leverage, because the more your team understands the larger goals, the more independent and self-motivated they will be.

Startup Business Focus Tip #4: Look for Everyday Reinforcements

Any good trainer will tell you that classroom learning doesn’t stick without practice. If you want your team to stay focused on an everyday basis and recognize distractions that aren’t worth their time, then look for opportunities to point out how everyday activities and progress relate to the larger strategy. When you congratulate your team for launching that new website, remind them how important it is for demand generation and making your revenue goals. When you fix a record number of bugs, remind your team how it contributes to reducing churn.

Startup Business Focus Tip #5: Make Simple, Concrete Plans

Keep your plans simple. Plan only things you will do and avoid over-planning things you won’t do. Wasting time planning things you simply don’t have the bandwidth to get done is a waste of time, but more importantly it creates distractions. Keep your plans concrete. While your strategy may be lofty and difficult to tie to anything short of revenue or costs, your plans should be concrete with very specific deliverables that can be clearly marked done or not done to facilitate execution.

Startup Business Focus Tip #6: Link Plans to Strategic Goals

It’s common to create high level strategic goals at the top, then create plans and budgets from the bottom up, even if it is the CEO personally creating all three. Bottom up plans tend to be framed in terms of activities, e.g., upgrade product UI, create webinar, expand ppc campaign, etc. and budgets tend to be framed in terms of expense line items, e.g., web development, travel, advertising, etc., neither of which are clearly tied to your strategic goals. Make an effort to tie each concrete deliverable in your plan to at least one strategic goal. Separate out deliverables that do not produce immediate results, but are preparatory, infrastructure or long term in nature, and look for the right balance between immediate progress toward strategic goals and longer term investments.

Startup Business Focus Tip #7: Concentrate on Bottlenecks

These tips are all great in theory, but achieving them in practice is incredibly difficult for every startup business given the natural imbalance between the huge number of opportunities and problems on the one hand and the excruciatingly limited number of resources on the other. You will not do them all well. So, how do you decide what to do? Concentrate on the bottlenecks.

Improvements in areas that are not bottlenecks do not impact final results
anymore than enlarging the bulb of an hourglass or adding more sand increases the flow.

It’s a waste of time to create requirements for a product enhancement that engineering has no time to build. It’s a waste of time to reduce sales cycles when there aren’t enough leads for reps to make quota. Look across your startup business and continually ask yourself this question: what are the primary constraints to achieving our strategic goals? Then, concentrate on removing those bottlenecks like a laser beam to the exclusion of all those other nagging opportunities and problems.

Startup Business Focus Tip #8: Measure Progress against Strategic Goals

Startups are busy places. Good startups exhibit a constant sense of urgency to get things done: to get anything and everything done. Hence the focus growing pain. Aligning your organization and plans against goals is only half the battle, because you must test theory against reality. Are your plans actually achieving your strategic goals? Are your sales reps achieving their quotas? Are your marketing campaigns producing the expected number of leads? Are your new products generating the expected revenue? If you don’t measure it, you won’t know. If you don’t know, you can’t adapt your plan to address the problems. On the flip-side, if you don’t plan to do anything about it, then it’s a waste of time to measure it. Concentrate your measures on your strategic goals and the bottlenecks that are keeping you from achieving them.

Startup Business Focus Tip #9: Filter Distractions, Don’t Create Them

One of the biggest mistakes executives make is to communicate every request and great new idea they have to their subordinates without context or priority. Then of course, the politically savvy subordinate moves the boss’s request straight to the top of the list, regardless of its relative impact on achieving strategic goals or removing bottlenecks. Never underestimate your own ability to create distractions by inserting non-critical projects, when you may be more effective encouraging your staff to focus more exclusively on the most critical ones. When you make a request or share an idea with your staff, be sure to consider the context. Is it more important than current projects? Is it urgent? Or is it just your latest good, but not critical idea?

Keeping a rapidly growing startup business on track in a changing market is hard work. What tips, tricks and words of wisdom have worked for you?
Cheers,
JY

When not moonlighting at Chaotic Flow and Cloud Ave, I’ve been toiling away at Xignite for the better part of the last three years, and I’m happy to announce that the company has successfully closed $10 million in B round funding. The round was led by of Starvest Partners‘ Deborah Farrington who is #77 on the Forbes Midas List and was the lead VC for Netsuite, and John L. “Launny” Steffens, former vice chairman of Merrill Lynch. Previous investors Altos Ventures, Startup Capital Ventures and Peter Caswell, CEO of Netbase and former CEO of Advent Software, also participated.

While most of the public Silicon Valley buzz in recent years has gone to B2C startups like Facebook, Twitter, Zynga, and the like, I believe we’re at the beginning of a B2B renaissance led by a prominent list of rapidly growing cloud plays like Xignite. B2C startups tend to happen very fast or not at all, and consumers will often forgive their growing pains, even if they’re posting the fail whale on a daily basis. Not so in B2B. B2B startups spend their A rounds very carefully to make sure their offerings are rock solid before they scale. When I joined back in 2008, Xignite had about 150 clients. Today it has more than 900 customers in 47 countries.

The Financial Market Data Cloud

Market data is the life blood of the financial markets and is essential to every financial technology from algorithmic trading to iPad portfolio apps. Unfortunately, every year the financial markets create more of it. A lot more. In fact, the amount of data spewed off by financial markets has increased 10,000% in just the last 5 years. Plus, redistributing that data globally is getting harder with the increasing number of applications, particularly mobile apps. Xignite relieves that burden by pushing all that big data and associated infrastructure to to the cloud. The Xignite market data cloud platform transforms financial market data infrastructure into a utility just like electricity, allowing companies to build financial applications on top of enterprise-class cloud APIs. No fail whale allowed!!

Democratization of Financial Market Data

Before the cloud, only the largest firms could afford enterprise-class applications. Today, anyone can sign up for Salesforce.com and get the same application used by Dell, Prudential Financial and Sprint. Just as SaaS democratizes access to applications, the Xignite platform democratizes access to financial market data. This isn’t just great for the little guys. Big banks, hedge funds and money managers can significantly lower their costs by eliminating on-premise infrastructure. Exchanges and trading venues that put their market data onto the Xignite private-label cloud platform, such as NASDAQ OMX and CME Group, achieve immediate, global distribution through new online channels and superior market transparency as demanded by many of the new regulations resulting from the recent financial crisis.

The funding will be invested in sales and marketing to continue Xignite’s strong growth trajectory and to accelerate the addition of more data and more private label partners onto the Xignite platform. In particular, the company will be opening offices in New York City and Chicago and will be significantly expanding it’s Silicon Valley and China operations. So, Xignite is hiring!!

It seems a little late in the game for me to be asking a question like “What is SaaS?” But, I’ve always harbored a few embarrassing little secrets on the subject and I think it’s time I came clean.

There is a classic Harvard Business School case study called Marketing Myopia by Theodore Levitt that is familiar to every MBA student since the 60′s–the moral of which is not to define your business too narrowly lest you become obsolete. Well I don’t think software is going away any time soon and neither is service, but what about software-as-a-service? Between the rise of the cloud and the fall of the browser, SaaS seems so passe’.

What is SaaS?

Is SaaS software delivered as a service? As in renting, not owning the software. Or, is SaaS a service layered over software? As in a complete solution, not a tool. SaaS is both.

Software delivered as a service means on-demand. It means eliminating the feed and caring of the software itself through automation. Notice that I say eliminating, not obscuring or outsourcing. Automated deployment. Automated maintenance. The software simply arrives and runs as needed in a fashion that is all but invisible to the customer, so the customer realizes the benefit of the service without incurring the headaches of managing the technology.

Service layered over software means the software solves a problem without creating new problems of its own. Not only is the customer freed from managing the technology, but the customer is freed from understanding the technology. A service doesn’t require the customer to master a bunch of technical mumbo jumbo in order to use it.

Software-as-a-Service Myopia

One of my embarrassing little SaaS secrets is that I’ve always harbored a fondness for desktop anti-virus and security software. It doesn’t run in a browser. It has a huge client footprint. Yet the best desktop security software I’ve used takes care of itself without any help from me. It updates the virus definitions everyday. It updates the client. It cleans my computer in the background. It maintains a firewall and figures out what applications should get through. And, it keeps intruders from co-opting its own processes. Yes, I have to click OK here and there, maybe turn it off to install OTHER software, but by and large it runs and runs without interruption. I have always viewed it as SaaS. It certainly requires less deployment, maintenance and technical know-how than a lot of enterprise SaaS solutions.

Now along come mobile apps. Yes, you have to click OK once in a while, but this is largely about permission and privacy. The seamless-ness of the process is what counts. The more service I get and the less software I have to understand, the more SaaSy it is.

SaaS is software transformed into service, regardless of the technical architecture.

Whether it comes through a browser, a smart phone, or a tablet does not matter as long as the software remains invisible and the service is valuable. Restricting the definition of SaaS to software applications delivered through a Web browser is marketing myopia. As Internet bandwidth expands and mobile clients evolve, the distinction between client and server will continue to blur. The software flows effortlessly throughout the network. What matters is the service it delivers.

SaaS succeeds when software IS service.

Blogging is one of the easiest, cheapest and most effective ways to engage the New Breed of B2B Buyer, yet so many B2B blogs miss the mark. Here are ten “be’s” of the best b2b blogs. It isn’t the first top ten list of best B2B blog secrets, and no doubt it will not be the last. But, it is mine and it’s what I personally strive for Chaotic Flow to be.

B2B Blog Be #1 : Be Interesting

You would think that making your B2B blog interesting would go without saying…well, I’m saying it. Let’s face it, there is a lot of crap out there on the Internet. Don’t be that. Whether you are creating a community blog, a corporate blog, a support blog, or your own professional B2B blog, you are in the publishing business and all good publishing basics apply. You must understand your readers and you must connect with their interests. Not casually, but completely. I considered lots of runner-up best B2B blog be’s like “be funny”, “be visual”, “be concise”, etc., all good advice for the right B2B blog audience, but there is no single B2B blog tactic that will connect with every audience. You must know your audience and publish content that is inherently interesting to them.

B2B Blog Be #2 : Be Prolific

Maintaining a steady stream of interesting content is essential to building and maintaining readership. This blogging fundamental can be approached from many angles, but the conclusion is always the same: a successful B2B blog requires prolific authors. Building readership requires a strong Internet presence. How many Web pages exist on the Internet? What fraction of that is your B2B blog? How many keywords are your potential B2B blog readers searching? What is your keyword coverage? The chance of finding your B2B blog online is directly proportionate to your content-share. Once you have readers, you want to keep them. Publish sporadically and your readers get bored and wander off. Publish regularly and your B2B blog becomes part of their routine. No matter how you come at it, even the best B2B blogs must publish or perish.

B2B Blog Be #3 : Be True

As in “to thine own self be true.” Creating a great B2B blog is hard. It requires creativity, energy and persistence. If you can’t align your own personal interests and motivations with those of your B2B blog audience, you will fail. To create a great B2B blog, you have to blog about something you know and love or you won’t blog enough and what you do blog won’t be interesting, because your heart won’t be in it. If you need to create a B2B blog for a particular audience and you don’t know and love the topic, then find someone who does. Conversely, if you are creating your own professional B2B blog, write about what you personally know and love. Your right audience, big or small, will gravitate to you.

B2B Blog Be #4 : Be Useful

Whereas a great b2c blog might be useful, a great B2B blog MUST be useful. This is by definition. If the only value of your B2B blog is entertainment, then by definition you are only appealing to the personal interests of the reader, not the business interests. Appealing to business interests requires helping your B2B blog reader solve real business problems. That means being useful. The single greatest failure of most B2B corporate blogs is that they simply are not useful. They focus on the company instead of the customer. They go on about products instead of solving problems. They are marketing brochures masquerading as blogs.

B2B Blog Be #5 : Be Original

The new breed of B2B buyer is busy, impatient, impulsive and awash in a sea of online information competing for her attention. The best B2B blogs demand that attention by standing out from the crowd with original content. While it is smart to surround your B2B blog with lots of complementary feeds, tweets and friends to round things out, you must maintain a bright shiny kernel of creativity at the core or your site is just a mashup, not a blog. Moreover, if you want other B2B blogs to pick up your syndicated content to complement their sites, then you need to offer something that they can’t get anywhere else: expertise, insider information, humor, whatever. You gotta have schtick.

B2B Blog Be #6 : Be Consistent

Whether you know it or not, you are building a brand, and people like their brands consistent. If your B2B blog is all over the map in subject matter, content quality, and publishing frequency, then your readers will get frustrated. If your readers can’t figure it out, then they won’t remember your blog. If your readers can’t rely on it, then they won’t return to your blog. And, if your readers don’t remember and return to your B2B blog, then they certainly won’t share it with their colleagues.

B2B Blog Be #7 : Be Clear

You might be The Most Interesting Man in the World, but if you can’t write, you can’t blog. Stick to selling beer. Yes, your B2B blog should show some personality. Yes, your B2B blog should be written in plain language. Yes, your B2B blog doesn’t require perfect spelling or grammar. But, there are limits. Your blog posts can be long or short. Your blog posts can be text or video. But, your blog posts cannot be difficult to read. They must be clear. Poor focus, poor writing, and poor formatting all add up to a poor use of the busy B2B buyer’s time.

B2B Blog Be #8 : Be Found

If I did my job right, some of you are first time visitors to Chaotic Flow who were looking for advice on how to create a great B2B blog. Welcome! I hope you find this post interesting, useful and clear. However you got here, my guess is you clicked on a link: a link from a B2B-related search, a link from a B2B tweet, a link from B2B discussion group, a link from another B2B blog, or a link from an email sent by a B2B colleague. Well it didn’t get there by accident. This post is SEO-optimized up the B2B wazzu. And, I used every trick in the book to make sure this blog post was syndicated and shared as widely as possible. Creating interesting, original and useful content is only half the battle. A great B2B blog must get its content in front of its intended audience and that means mastering the tools and techniques for being found on the Internet.

B2B Blog Be #9 – Be Sticky

Your new B2B blog reader is so excited, because she just found the best B2B blog ever. It’s interesting, useful, original and clearly written for a change. Unfortunately, she is out of there after reading one post never to return. Why? She couldn’t search. She couldn’t comment. She couldn’t share. She couldn’t subscribe. Couldn’t subscribe??!!! The RSS button is huge! Well…she likes to subscribe by email, so she bounced. She’s the impatient new breed of B2B buyer and she demands efficient self-service. Being sticky is about maximizing the interaction between your B2B blog content and your B2B blog reader. If you don’t give her the tools she prefers, she won’t stick around.

B2B Blog Be #10 : Be Social

A great B2B blog is a focal point of a conversation that extends out to the rest of the Internet and beyond. You’ve learned all the tactics: encourage comments, comment on other popular B2B blogs, promote posts on social networks, publish a newsletter, create your own social group, build a badge for back-links, conduct surveys and reviews, make it easy for readers to like, retweet, plus and share, and so forth. However, it’s easy to lose yourself in this bewildering array of social media tactics and actually forget to be social. Being social means expanding the conversation beyond the brilliant insight of your latest B2B blog post to include your readers, thereby increasing the value and richness of the discussion while spreading the word to potential new subscribers. The best B2B blogs are reflections of their authors and the best B2B blog authors are socially accessible. They reply to emails. They don’t censor comments. They continue the conversation offline in coffee shops, meetups, panels, and presentations. Great B2B blog authors socialize with their readers.

One hundred percent customer self-service is the holy grail of SaaS. Everyone looks for it, but it is never found. Even if your product is simple enough to provide complete self-service purchase, you are unlikely to get away with complete self-service support, because you can’t hang unhappy customer’s out to dry or you will ruin your reputation. Nonetheless, the divine power of the Internet to help customers help themselves combined with the promised land of lower customer acquisition cost and lower cost of service will always enrapture the true SaaS believers and hasten them on their quest.

SaaS Top Ten Do #3 : Accelerate Organic Growth depicts the SaaS self-service holy grail as revenue generation with zero marginal costs, because your customers can find, try, buy and use your product even if no one shows up for work. But just because your customers can, doesn’t mean they will. It’s very hard to build a product that enables one hundred percent customer self-service. In some cases it is impossible. Imagine your frustration when you finally achieve it and those pesky customers simply refuse to do it.

The Self-Service Maturity Model

The closing post of my recent New Breed of B2B Buyer series introduced the concept of the self-service limit in B2B sales. The self-service limit is that point where a customer’s desire for instant gratification is thwarted by the complexity of purchasing and using your product. Purchase complexity comes in two flavors: informational and emotional. Informational complexity arises when the buyer requires education to consummate the purchase. Emotional complexity arises when the purchase entails a personal risk to the buyer. When either or both of these purchase barriers becomes high enough, the buyer simply will not make the purchase without the aid of a salesperson.

Complexity, however, is a subjective measure that is different for every single customer. In particular, and this is the point of this post, it is very different for the novice and the experienced buyer. An experienced buyer knows your company and trusts your brand. An experienced buyer knows your product and fully understands both its value and its use. As your customer base increases, so does the percentage of experienced buyers in your market, your knowledge share.

The percentage of experienced buyers in the market, knowledge share,
increases as a SaaS business matures.
Experienced buyers that trust and understand your brand,
are not only capable of one hundred percent self-service,
they usually prefer it, bringing you closer to this holy grail of SaaS.

Increasing knowledge share reduces both the emotional and the informational complexity of buying your product. A strong brand reputation reduces purchase risk and alleviates buyer fear, eliminating the need to be reassured by a salesperson that your company is the real thing. Whereas deep comprehension of your brand gained through experience, eliminates the need to be informed by a salesperson about what your product can do, how to buy it, and how to use it. Consider the tens of thousands of dollars the experienced Google AdWords customer spends today without speaking to a salesperson as compared to when the service first launched. Experienced buyers are not only capable of one hundred percent self-service, they usually prefer it. Therefore, the greater your knowledge share, the closer you come to the SaaS holy grail of complete customer self-service.

Mindshare, Market Share and Knowledge Share Drive Organic Growth

While most SaaS executives understand the basic marketing concept of brand awareness and are all about getting out the buzz (mindshare), far fewer understand the importance of brand comprehension and getting out the knowledge (knowledge share). In the fight for market share, it is strategically important to build knowledge share as well as mindshare through deep market education and engagement with your customer community. Otherwise, you may find that everyone has heard of you, but no one is buying from you.

Many SaaS startups compete directly with enterprise software versions of the same basic product. In the beginning, they service SMB segments that their enterprise software competitors cannot reach. But as they mature, they compete more and more for the replacement market held by the incumbents. Prospects know your competitor’s product at a very deep level, because they have been buying it and using it for years. They don’t know yours. This gap in knowledge share creates a switching cost that favors the status quo. It’s just a lot easier to keep doing things the way you know how than to learn something new. Without a true understanding of your product at an experiential level, promises of rapid deployment, simplicity of use, easy maintenance and low TCO are simply that: promises.

Mindshare, market share, and knowledge share comprise a positive feedback loop that drives organic growth. The greater your mind-share, the more prospects come to you of their own accord and become customers, increasing your market share. The greater your market-share, the more experienced buyers, increasing your knowledge share. The greater your knowledge share, the more your experienced buyers share their trust and knowledge with your future prospects, enabling customer self-service and driving organic growth.

Much thanks to Peter Caswell, a board director at Xignite and CEO of Netbase, for introducing me to the concept of knowledge share, which I have shamelessly bent to my own designs.

B2B sales has been transformed by the application of many B2C Internet marketing techniques, but there are limits to the Internet where I think B2C can learn something from B2B. For example, with so many cool, self -service real estate websites like Zillow, Trulia, and Redfin available online, why is it that the vast majority of people still prefer to use local real estate brokers to buy and sell their homes? Why not just do it yourself?

Buying a home is complicated. All real estate brokers are required to pass professional certifications, and good real estate brokers spend years honing their craft in the course of many transactions in their local markets. The Internet can serve up all the information you want, but it won’t make you an expert. Plus, buying a home is an emotional roller coaster ride. For the first time home buyer, it can be downright scary. You can get all the disclosures, appraisals, comps and inspections you desire online, but the Internet will not hold your hand and tell you everything will turn out OK in the end.

This is the third post in a series that discusses the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness. The first two posts in this series explored customer self-service and B2B marketing. In this third and final post we turn our attention to B2B sales.

The Self-Service Limit in B2B Sales

A customer’s desire for sales engagement increases in direct proportion to purchase complexity. Thus, purchase complexity is a key element in identifying the right B2B sales model for your business. Simple purchases can be consummated with 100% customer self service, whereas more complex purchases require greater sales engagement as depicted in the image below adapted from the post Three SaaS Sales Models.

Price and complexity define a strategic spectrum of B2B sales approaches
that gravitate strongly toward three distinct B2B sales models:
self-service, transactional and strategic.

Purchase complexity comes in two flavors: informational and emotional, both of which are clearly present in our earlier home buying example. Informational complexity arises when the buyer requires education to consummate the purchase. Emotional complexity arises when the purchase entails a personal risk to the buyer. When either or both of these purchase barriers becomes high enough, the buyer simply will not make the purchase without the aid of a salesperson. In response, successful B2B sales reps adopt sales behaviors that complement the buyer’s purchase behavior, offering expertise and trust in direct proportion to the respective amounts of uncertainty and fear felt by the buyer.

When a purchase requires extensive knowledge and risk,
the B2B buyer will look to the B2B sales rep to reduce the complexity.
Successful B2B sales reps adopt behaviors that complement the buyer’s behavior,
offering expertise and trust in direct proportion to the uncertainty and fear
arising from the the respective informational and emotional needs of the buyer.

The B2B Sales Arms Race – The New Informed B2B Buyer

The new breed of B2B buyer is online and impatient. When she engages with a B2B sales rep, she’s done her research, but is stuck and doesn’t want to waste the time figuring out how to get unstuck. She doesn’t get something about your website, your product, your pricing or your company, so she sends an email or makes a call to sales. She is well informed, but the purchase complexity has worn out her patience. The worst thing a B2B sales rep can do at this point is wear her patience even thinner.

The new B2B buyer and B2B sales rep are engaged in an information arms race. Having followed the first two new rules engagement, you’ve published deep and wide and enabled efficient self-service. You’ve given in to the new breed of B2B buyer’s hunger for knowledge and speed, and in the process you’ve exacerbated the B2B sales rep’s challenge by eradicating the B2B sales rep’s information advantage. In fact, when the truly savvy B2B buyer knows more than your newbie B2B sales rep, you have a recipe for disaster. Today’s B2B sales rep must quickly assess the purchase knowledge and needs of the new B2B buyer and then lead, follow or get out of the way.

New B2B Buyer Rule of Engagement #5 – Consultative Selling

Consultative selling is hardly new. What is new is that the B2B sales rep that fails to step up to the information arms race runs the risk of becoming at best irritating and at worst irrelevant. It is difficult, if not impossible for a sales rep to assess a buyer’s knowledge and needs if the buyer knows more than the rep about the purchase. There are few things more irritating to the new B2B buyer than having to listen to a script explaining something she already knows. Or worse, having to explain the product itself to the newbie B2B sales rep with insufficient training and experience.

If there are inherent complexities to purchasing your product, then your B2B sales rep must master them. The B2B sales rep can’t win the B2B sales information arms race simply by memorizing the website content, because the new breed of B2B buyer is already there. If all your B2B sales reps does is usher buyers around your website and take orders, then you are either leaving money on the table or your website isn’t simple enough, because your business should be 100% self-service. The new breed of B2B buyer expects fast answers to questions she can’t answer for herself. Therefore, today’s B2B sales reps must be purchase experts that are skilled at consultative selling in order to adapt their expertise quickly and efficiently to the needs of the new B2B buyer.

B2B Sales is Risky Business – The New B2B Buyer is Only Human

While the Internet has wrought dramatic adaptations in the new breed of B2B buyer, its influence is minuscule compared to the millions of years of evolution that have preceded it. In the end, the new breed of B2B buyer is still an emotional creature that despite great attempts to cover it up in the form of ROI analyses, vendor comparison matrices, technical evaluations and the like is often driven by fear. Fear of the unknown. Fear of public opinion. Fear of failure. What is portrayed as rational decision making and risk reduction is often better characterized as rationalization and CYA. There is no shame in this. This is who we are. We are not machines and it is critically important to us to feel good about the decisions we make. The savvy B2B sales rep understands this.

New B2B Buyer Rule of Engagement #6 – Trust

Why is it that throughout history salespeople have had to deal with such bad raps? Because it’s assumed that they know things buyers don’t and the more they lie, the more money they make. Things have changed. This is the era of the new breed of B2B buyer. The stereotypical slick salesman is truly dead and the Internet killed him. Today’s B2B sales reps realize that open information and long term relationships require building trust, not breaking it. And while the marketing department can publish all the case studies, videotape all the customer testimonials, and get all the online recommendations it wants, when the stakes are high and the fear is real, there is no substitute for the B2B sales rep’s personal relationship with the buyer.

Developing trust with the new breed of B2B buyer is not easy, because most communication is virtual and terse. Emails must be crafted with care and skill. While the pre-millenium B2B sales rep needed to be a smooth talker, today’s B2B sales rep must be a smooth writer as well. Moreover, today’s B2B sales rep must actively cultivate opportunities to expand and personalize the relationship with the new B2B buyer. Although the days of the traveling B2B sales rep are over for all but the most expensive purchases, it is essential not to fall into the trap of hiding behind email. When it comes to building rapport and trust, chat is better than email, phone is better than chat, video is better than phone and face-to-face it better than video. When your business depends on trust, you must provide the technologies and opportunities for your B2B sales reps to engage with your new B2B buyers at a personal level. Because sometimes, they just need someone to talk to.

Note: I’d like to thank the Sales Leadership Council at ExecWorld for their conversations and contributions to this post.

This is the second blog post in a series that discusses the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness. The first post in this series described the behavioral traits that differentiate the new species of B2B buyer from its pre-millennium ancestor and explained how to align with the new B2B buyer’s expectations of independence and instant online gratification through extensive content publishing and efficient self-service. This second post describes how the Internet has blurred the B2B buying process and suggests ways to adapt B2B sales and marketing processes to increase engagement and influence.

The New Elusive B2B Buyer

In the pre-millennium B2B buying process, the salesperson was the gatekeeper of information. That meant that the pre-millennium B2B buyer had to engage with the salesperson early on and stay engaged throughout every stage of the B2B buying process. A prospect might go dark or a sale might be lost, but a purchase could not move forward without engaging with the salesperson. Not so today. Unfortunately for the B2B salesperson, the new B2B buying process tips the information imbalance in the prospect’s favor. The new breed of B2B buyer can find your product or service, learn about it, evaluate it, see what others think about it, and in many cases try it and buy it, all without engaging with a salesperson.

The new breed of B2B buyer is independent and elusive,
blurring in and out of focus and engaging directly with sales
only when there is clear value to be gained, not just to get information.

The new elusive B2B buyer spends more time going solo throughout the B2B buying process, blurring in and out of focus and engaging directly with sales only when there is clear value to be gained, not just to get information. This is made doubly complex by the fact that the “B2B buyer” is usually more than one person. Where before the salesperson could corral all the influencers and decision makers into a meeting and orchestrate a linear sales cycle from beginning to end, today’s B2B buying process is organic and diffuse with different stakeholders visiting your website ad hoc, checking your knowledgebase and support forums, calling your sales team for a quick question and then going dark, filing a support ticket on a trial account, discussing your product and company in social forums, and making internal decisions by email with no need to call a face-to-face meeting.

New B2B Buyer Rule of Engagement #3 – Measure, Model and Move

The bad news is that the Internet has made the new B2B buyer more elusive and the new B2B buying process harder to define and control. But, the good news is that the Internet has made the new B2B buying process more transparent. What? Wait a minute. Say that again.

While the new breed of B2B buyer appears more elusive to the B2B salesperson, this is not the case for the B2B marketer. Web browsers have cookies, hyperlinks have tracking codes, and every online interaction is overlaid with meta-data that indicates buyer intent. It’s a trade-off for everyone involved. The new B2B marketer must adapt to the new B2B buyer by developing better measures and models that move the new B2B buyer through the B2B buying process and compensate for the B2B salesperson’s loss of control over the flow of information.

The Marketing Automation Mandate

Marketing automation is one of the fastest growing SaaS categories. However, it isn’t because this technology is somehow cutting-edge (no offense to my SaaS colleagues in marketing automation). It’s core function is to measure, model and move the B2B buyer through the B2B buying process by tracking online activities and transforming that data into knowledge that is acted upon through automation. The underlying technology is not new and the applications could have been built ten years ago. But, they wouldn’t have been as valuable ten years ago.

Marketing automation is taking off because the behavioral traits of the new species of B2B buyer have created both the ability and the need to measure, model and move the B2B buying process through automation. And, the winners in the marketing automation category will be those SaaS companies that leverage SaaS Do #6 Reach Across the Firewall to create a seamless B2B buying process that fully integrates the elusive, external behavior of the new breed of B2B buyer with the internal processes of the new breed of B2B sales and marketing organizations. Marketing automation has gone from nice-to-have to must-have, because it creates real competitive advantage.

New B2B Buying Process Tech Tip

The New Impulsive B2B Buyer

The new breed of B2B buyer is more agile than its pre-millennium ancestor. Cheap and easy access to online information about products and services enables flexibility in the new B2B buying process the same way the elimination of setup costs enable flexibility in manufacturing. When the up-front cost of purchase-related information was high, the pre-millennium B2B buyer was forced to orchestrate a rigid, deterministic B2B buying process that ensured the investment required to execute the process itself was not wasted and produced a positive result, i.e., a considered purchase with high ROI. Purchase decisions were made up front–only the vendor was unknown, budgets were established before the buying process began, requirements were collected and communicated, vendors were evaluated in tandem, and a clean vendor selection was made.

The new breed of B2B buyer does not face this constraint. Today, window shopping is cheap. In the case of most SaaS and cloud applications, the entire B2B buying process is cheap: trial is free and purchase amounts to a monthly subscription that can be canceled at any time. Instead of orchestrating a structured B2B buying process with a certain outcome, the new B2B buyer can start, stop, start again, turn around, go slow, go fast, whatever. The new B2B buying process carries no internal momentum. Purchases are motivated by near term organizational priorities and the relative urgency to solve a pressing business problem, which can turn on a dime.

Online marketers lament the waning effectiveness of email. Some even claim that email marketing is dead and spam killed it. Email may be waning for marketing communications, but it is central to the internal communications of the new impulsive B2B buyer and acts as a powerful catalyst in the new B2B buying process. The new impulsive B2B buyer can research your product online, coordinate an email conversation among all decision makers, get a basic consensus without a single meeting, and then stop dead because something else came up. Then, six months later the VP of Such-and-Such decides: “This needs to get done yesterday!” And shoots off an email that reignites the urgency around the purchase. Next thing you know, a previously dead or unknown deal is suddenly very hot, and a purchase is made almost on first contact. Or, at least first contact to the unprepared who are not measuring, modeling and moving the new B2B buying process throughout its lifecycle.

New B2B Buyer Rule of Engagement #4 – Lifecycle Marketing

This new rule of engagement is a natural consequence of the three earlier rules. If you are publishing valuable online content deep and wide according to Rule of Engagement #1 and measuring, modeling and moving the prospect through the new B2B buying process with that content according to Rule of Engagement #3, then you should use your measures and models to align your valuable content with the B2B buying process to optimize its impact and encourage the new B2B buyer’s natural impulses. Map your content to the buyer’s needs at each stage of the B2B buying process and stay engaged throughout the entire customer lifecycle. Hit-and-run marketing cannot recover the control over the B2B buying process that was consciously surrendered to the new B2B buyer by enabling efficient self-service, Rule of Engagement #2.

If your prospect is actively engaged in a B2B buying process, then lifecycle marketing simply amounts to serving up the right information at the right time to keep things moving along quickly and efficiently, e.g., how to get up and running on a free trial after sign-up or where to see a video case study for a similar customer. But, if your prospect gets distracted by other priorities and stuck in the middle of the B2B buying process or worse isn’t even aware there is a need or a solution in the first place, then lifecycle marketing is about breaking the status quo and creating a sense of urgency. Unlike its rigid pre-millennium ancestor, the new impulsive B2B buyer is open, flexible and in a hurry. A compelling new idea can shift priorities and drive reallocation of budget away from lesser concerns and toward your solution.

At a minimum, marketing engagement throughout the entire customer lifecycle from latent pain to repurchase ensures you are there to capitalize on it when the new impulsive B2B buyer switches gears. At a maximum, you have the potential to nurture that impulsiveness to accelerate purchase. Inbound marketing or simply getting found by a prospect is not enough. Once you are found, you must engage with that prospect frequently and consistently throughout the entire customer lifecycle, because if you don’t, your competitors will, and what is easily found can be just as easily lost.

New B2B Buying Process Tech Tip

Today’s business buyers are awash in a deluge of online information. Virtually every business problem, process, product, and service, no matter how obscure, seems to have garnered at least one blog post or forum comment. One could debate the quality of this information, but not the quantity. Most business searches turn up thousands if not millions of results that include product descriptions, news articles, videos, podcasts, images, books, white papers, free trials, presentations, Wikipedia entries, rankings, blog posts, comments, tweets and so forth. Whatever your question, chances are someone online already has an answer.

B2B buyer behavior has evolved in adaptation to the Internet.
A new species of B2B buyer has arisen that is more connected, more impatient,
more elusive, more impulsive, and more informed than its pre-millennium ancestors.

The New Breed of B2B Buyer

The instant gratification of the Internet is so engrossing that it overshadows the long term changes it has fostered in the people that use it. People have not sat idly by as the Internet has evolved; their online knowledge, skills, attitudes and behaviors have evolved alongside it. As one of the most serious of Internet users, the B2B buyer has been transformed through adaptation to the new online environment. A new breed of B2B buyer has arisen, a species that is more connected, more impatient, more elusive, more impulsive, and more informed than its pre-millennium ancestors.

B2B Buying Process in the Pre-Millennium Era

The Internet has changed the B2B buying process so radically that it’s difficult to recollect exactly how the pre-Internet B2B buyer used to go about the business of making a purchase: paper, phone and people mostly. The process went something like this: ask the analysts about the next big thing, collect requirements into and RFP, get a list of vendors from a roundup in an industry magazine, go to a trade show and collect collateral, solicit and evaluate RFP responses by mail or fax, call in a short list of vendors to do a dog and pony show, follow up with a technical drill down meeting, maybe do a bake-off or a pilot, select a vendor, call a reference account, negotiate final pricing and contract terms, and wrap it all up by planning out phase 2 of the project: a complex and expensive implementation. It was a slow, arduous and expensive process for which consultants charged exorbitant fees that B2B buyers were happy to pay, because it wasn’t easy.

The New B2B Buyer Rules of Engagement

This is the first blog post in a series that discusses the behavioral traits that differentiate the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness.

Just as the new B2B buyer has evolved in adaptation to the Internet,
B2B sales and marketing professionals must adapt to the new B2B buyer
by mastering new rules of engagement.

The New Connected B2B Buyer

With such a treasure trove of information available online, the Internet is the 21st century B2B buyer’s first stop for researching products and services. It won’t be the only source of information for the savvy prospect, but the Internet now is a significant and recurring influence throughout the B2B buying process. The new species of B2B buyer is connected to the Internet physically, functionally, socially and frequently.

Moreover, the B2B buying process neither starts nor stops at your website. It is more likely to start at a major search engine, industry portal or social network. If you want your product or service to be considered, it’s critical that your content appear wherever the new B2B buyer goes online at every point in the decision making process. It isn’t enough to just write a blog or make a white paper available for download on your website, because your prospects may never find your website if you don’t show up in search and social media.

New B2B Buyer Rule of Engagement #1 – Publish Deep and Wide

To connect with the connected B2B buyer, you must publish deep and wide about the problems your prospect faces and the solutions your product offers. Your content must be relevant to your prospect at every stage of the buying process and be available whenever and wherever your prospect goes online. That means creating content for every depth of prospect interest and attention span from short tweets, comments and ads to detailed white papers and videos, and then redistributing that content across a wide array of online channels: websites, social networks, blogs, forums, directories, websites, ads, media sharing sites, etc.

It is important to remember that the basic needs of the B2B buyer remain unchanged, only the behavior for satisfying those needs have changed. The buyer will still need to recognize that there is a problem. The buyer will still need to investigate potential solutions to that problem. The solution will still need to fit within the business requirements and financial constraints of the buyer. And, the buyer will still look to reduce risk by getting a good price and validating both your company and your solution with independent third parties. The only difference is that much of this information now comes from the Internet. Your content should still reflect and address these buying needs, but it should be served up in the right location and the right media so it is easily found and digested online. For example, online demos and free trials replace the old-school dog-and-pony show for evaluating solution fit for SaaS and cloud providers. And, references may be solicited not just from your customers and analysts as before, but also from blogs, support forums, professional social networks, and pretty much anything anyone else has said online about your company or product.

The Impatient B2B Buyer’s Got No Time for You

The Internet has instilled the new breed of B2B buyer with far less patience than its pre-millennium ancestor. Sooner or later all that instant gratification turns into habits and expectations. If a prospect can’t find the right information on your website or figure out how to use your free trial, it’s usually goodbye. Today’s B2B buyer has to be pretty committed already to evaluating your product or service before picking up the telephone or sending in a support email. Oh, you’ll still get the early stage sales inquiry from the few remaining Internet laggards, but let’s face it, the phones just don’t ring like they used to. It’s our own fault; this is what we wanted, more self-service, lower acquisition costs, lower support costs, etc. The new impatient B2B buyer has simply adapted to the environment presented online.

New B2B Buyer Rule of Engagement #2 – Efficient Self-Service

What the new B2B buyer wants most from the Internet is independence and efficiency. When a prospect must rely on a salesperson as the primary source of information, both are lost. The Internet puts the new B2B buyer firmly in control of the buying process by allowing the prospect to regulate the flow of information. Fight this basic principle, and you’re back to goodbye. Your strongest strategy is to give the prospect efficient self-service access to your content.

New B2B Buyer Tech Tip

The self-service directive applies throughout the entire buying process from early education to stimulate latent demand to detailed product information to customer references to technical support to potential add-on purchases. Provided it is not confidential, information the new B2B buyer seeks should not be blindly hidden behind a main phone number or contact us form.

This is not to say that you shouldn’t require registration, login or some level of qualification and commitment on the part of the prospect before providing access to high value content. Creating touch points that measure buyer intent and open new channels of communication throughout the entire customer lifecycle are essential to B2B sales and marketing effectiveness. In fact, they are so important that they are deserving of much greater discussion and are the topics of the next two new B2B Buyer Rules of Engagement that will be covered in the upcoming post in this series. Stay tuned!

I routinely get asked questions like the following: What is a typical churn rate for SaaS? How much should I pay my SaaS sales reps? What is a good time frame to recover acquisition costs? A few years ago, the best answers I could give were simply based on my own experience and conversations with other SaaS colleagues. However, as SaaS has matured as a category, some high quality SaaS benchmark studies have appeared.

Recent conversations with Lauren Kelley over at OPEXEngine highlight for me how SaaS companies across the board struggle with customer acquisition costs (CAC) and churn. The 2010 OPEXEngine SaaS benchmark study shows a WIDE range of results across these critical performance metrics, indicating that there is no one right way to tackle these challenges that will work for SaaS companies across all sizes and sectors. But, there are plenty of wrong ways.

SaaS Benchmark Results – Customer Acquisition Cost

SaaS companies vary a lot in their willingness to invest in customer acquisition. For example, the OPEXEngine SaaS benchmark report gives an average payback period for CAC alone of about 18 months (CAC per new customer divided by average recurring revenue per customer). However, SasS companies with expected growth rates in the 20-50% range had a payback period of only 6.5 months, while those with expected growth rates over 50% had an average payback period of….drum roll….35 months! Ouch. While it makes sense to invest heavily in customer acquisition during high growth, SaaS Metrics Rule of Thumb #6 | Growth Creates Pressure to Reduce Total Cost of Service, highlights the importance of keeping average CAC per customer in check as you grow. Even if you’re angling toward an IPO with a churn rate under 10%, I think it’s near impossible to justify a 3 year payback period just to cover CAC. Talk about negative cash flow!!

SaaS Benchmark Results – Churn

The situation with churn is similar. While the average churn rate is about 13%, there is a wide range of performance across private SaaS companies. For example, the OPEXEngine SaaS benchmark study shows higher churn rates for SaaS companies targeting the SMB market and lower churn rates for those targeting large enterprise customers. Clearly the strong correlation between adoption costs and switching costs is playing out here, as enterprise customers are both harder to get and harder to lose. Moreover, SMBs are much more likely to go out of business altogether than large enterprises.

As you might expect, churn varies consistently with SaaS business scale and maturity. The OPEXEngine SaaS benchmark report gives a median churn rate of 8.5% for private SaaS companies with more than $10M in revenue, and a whopping 20% median churn rate for SaaS companies with less than $10M in revenue. A handful of startups have reported churn rates as high as 60%! This makes sense as you would expect churn to be high as a startup is figuring out its sales and marketing model, and then to settle down as improvements are made. Many of these smaller SaaS companies are also in the high growth category. So, if you happen to be the lucky SaaS startup with a 20%+ churn rate (meaning an average lifetime of < 5 years) AND a CAC payback period of 3+ years, you've got some serious business challenges on your hands.

The Value of SaaS Benchmarks for Growing Companies

Studies like the OPEXEngine SaaS benchmark report are great tools for SaaS executives at both large and small SaaS companies, and are especially useful for SaaS executives that are navigating the path from small to large. When both revenue and costs are in extreme and continuous flux, benchmarks help you focus on the problem areas and avoid wasting time reinventing the wheel. In addition to the CAC and churn metrics discussed here, this particular study includes a wide range of operational, financial and productivity metrics broken out by company size and growth rate, e.g., average deal size, hosting expenses, revenue per employee, and complete cost structure SaaS benchmarks covering expenses for sales, marketing, R&D, services, support, etc. For more information on how to participate in or purchase the OPEXEngine SaaS benchmark report, please see the highlight box below.

I recently had the pleasure of speaking at the Retail Solution Provider Association annual thought leadership summit on the challenges faced by channel partners and vendors in the transition from purchased software and hardware to a recurring revenue service model. Not unexpectedly, one of the hottest topics on the agenda was SaaS channel compensation. In particular, how can SaaS vendors expect their more modest channel partners to absorb the up-front costs of customer acquisition and on-boarding when the SaaS vendors have trouble doing it themselves?

The SaaS subscription model shifts risk from the customer to the vendor.
Shifting too much risk back onto the SaaS channel
lands the SaaS channel partner between the proverbial rock and hard place.

A Game of Risk

The SaaS subscription model shifts risk from the customer to the vendor. SaaS vendors promote low-risk free trials, entry-level subscription plans, and bundled on-boarding, whereas enterprise software vendors expect big up-front license payments and professional services fees. In fact, it is common practice in enterprise software to promote and sell a product before it is completely built or even started. Not so in SaaS. The risks don’t go away though, they just get shifted away from the customer back to the vendor. The SaaS vendor must make big up-front investments in R&D, customer acquisition and on-boarding just like the enterprise software vendor, but it often takes well over a year to recover these costs. If the product fails to live up to expectations; the SaaS vendor is left holding the bag, not the customer.

Between a Rock and a Hard Place

Enter the channel. Acting as a risk buffer is a long-standing value added service of the channel. Some channels exist almost solely to absorb risk, like wholesalers and investment bankers. Enterprise SaaS and software channel partners invest in sales, service and support capacity in advance, absorbing the risk of fluctuating demand. Sitting as it does between the customer and the vendor, the channel can absorb risk from either direction. Too much risk and the channel partner lands between the proverbial rock and hard place. Goodbye channel.

The problem arises when SaaS vendors try to apply licensed software math to SaaS channel compensation. Traditionally, enterprise channel partners net a portion of the license fee, anywhere from 10% to 70% depending on the scope of their services. Simple application of this margin-based compensation model to the SaaS channel can put a SaaS channel partner in the unpleasant position of having to make 100% of the up-front investment in customer acquisition and on-boarding, while only netting a fraction of the recurring revenue stream. Risk shifts from the SaaS customer to the SaaS vendor and right back onto the SaaS channel partner. Rock and hard place.

The New SaaS Channel Math

In my post on SaaS Sales compensation, I made the claims that SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay entirely up-front, because the SaaS sales rep should not be asked to bear any of the SaaS investment risk, or the rep is likely to just quit and find better work. The same basic ideas holds for the SaaS channel partner with the caveat that it is reasonable to expect the channel to absorb at least some of the risk, if not all of it. So, when it comes to SaaS channel compensation, SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay disproportionately, but not entirely up-front because the SaaS channel partner should not be asked to bear a disproportionate amount of the SaaS investment risk, or the channel partner is likely to just quit and find better work.

The trick is to apply the traditional SaaS channel margin to the lifetime value of the deal, not directly to the payment schedule. The percentage margin or revenue share still reflects the value that the SaaS channel partner brings to the table, but a flat payment schedule does not match the value-added or costs incurred by the SaaS channel partner over time.

Lifetime Value of SaaS Channel Compensation = % Margin x Lifetime Value of Deal

There are an infinite number of payment schedules for any given lifetime value, offering an infinite number of options that can be tailored to the specific needs of your SaaS channel compensation model right down to specific needs of a single SaaS channel partner. Consider the three payment schedules below with identical lifetime values consisting of a straight out 50% of a recurring SaaS revenue stream (blue), an equivalent license revenue stream of a big up front payment and 20% maintenance (red), and something in between with a 75%/35% split for initial/recurring payments (green).

There are an infinite number of payment schedules for any given lifetime value,
offering an infinite number of options that can be tailored to the specific needs
of your SaaS channel compensation model.

Match SaaS Channel Comp to SaaS Channel Value Add

There is a broad spectrum of SaaS channel arrangements from simple non-exclusive lead referral to complete sales, marketing, service and support in an exclusive territory. Therefore, there is an equally broad spectrum of potential SaaS channel compensation plans. Linking the lifetime value of SaaS channel compensation to the lifetime value of the SaaS channel value add and then matching the payment plan to how that value add plays out over time is the best approach to align SaaS company goals with SaaS channel incentives. For example, a simple lead referral could be immediately paid out as one month of recurring revenue and done. Whereas, a full service arrangement could pay up to 100% of recurring revenue for the first year to cover customer acquisition, but a much smaller percentage over time to cover ongoing support and service.

No Magic Bullet

Linking SaaS channel compensation to lifetime value breaks the direct link to the SaaS customer’s recurring revenue stream and allows the SaaS vendor to provide incentives that better match the SaaS channel partner’s value add and costs. However, it is not a magic bullet. The SaaS customer’s recurring revenue stream determines lifetime value of the deal and thereby limits the total amount available for SaaS channel compensation. If the lifetime value of a SaaS deal is significantly lower than that of the equivalent license deal, the SaaS channel will still face all the usual SaaS challenges of lowering acquisition and service costs through automation and economies-of-scale. Moreover, the SaaS customer’s recurring revenue payment places an upper bound on the potential SaaS channel compensation payment, because it will be the rare SaaS vendor that will stomach negative cash flow by paying out more to the channel than it brings in from the customer. Finally, SaaS Top Ten Don’t #5 cautions early stage SaaS startups against investing in channels too early, and ensures that no SaaS channel compensation plan will overcome lack of primary market demand.

The BridgeGroup recently surveyed 115 North American technology companies with a special focus on SaaS inside sales metrics and sales compensation for SaaS companies. As SaaS sales organization, metrics and compensation have all been recent topics here at Chaotic Flow, and since it’s always best practice to test theory with reality, I thought I’d share and comment on some of the results.

According the survey, about 50% of SaaS inside sales organizations segment hunters from farmers. Of those that do, the average ratio of hunters to farmers is 2:1.

The report covers lots of great questions from average deal size to organization size and focus as well as compensation. Of course it is an informal survey, so it is what it is, but I found that many of the results jive with my own internal SaaS benchmarks. For example, the average quota for a SaaS inside sales rep was 800K ARR while the average total annual sales compensation was 100K with a 54:46 split of base to commission. These are critical benchmarks for the average SaaS startup, because in the few years after launch a quota of 800K is all but unattainable and it is essential to have a long term goal for target quota in mind in order to manage your acquisition costs.

Without considering benefits, T&E or overhead, the percentage benchmark contribution of direct SaaS sales labor costs to customer acquisition cost is then 100K/800K = 12.5% Whether and how fast the SaaS sales VP attempts to achieve this target depends on growth objectives, local labor market rates and retention goals. I should also comment that 12.5% is a superb SaaS best practice benchmark if the SaaS sales rep is the only person orchestrating the sale and indicates a highly transactional SaaS sales model. If your SaaS sales organization includes ancillary staff, e.g., lead qualification, technical support for on-boarding, account managers, etc. then your true ratio is not 12.5%, because you need to include all labor applied directly to the sale.

I did find it interesting that the reported average quota based on monthly recurring revenue was lower than the annual figure, i.e., $4,460 MRR per month implying an annual quota of $640 ARR per year. My initial reaction to this is that SaaS sales organizations that choose monthly recurring revenue as their unit of measure probably have much higher velocity sales cycles with simpler products and lower average sales prices. This is consistent with the SaaS best practice that you should choose a SaaS sales compensation measurement period (MRR, QRR, ARR) that fits your SaaS sales cycle to ensure a more intuitive understanding of metrics and compensation plans throughout your SaaS inside sales organization.

The survey also found that 65% of SaaS inside sales organizations target both SMBs and enterprise customers with an additional 8% targeting enterprise alone, leaving only 27% that target SMSs exclusively. This fit well with the lifecycle analysis of the report, which showed a surprisingly high 54% of the companies surveyed having “crossed the chasm.” Startups under $5M represented about 27% of respondents. So, overall there is a healthy mix of SaaS companies participating in the survey at varying stages along the typical SaaS sales model evolution path.

Lastly, and not unexpectedly, the biggest challenge of SaaS inside sales organizations is…drum roll…you guessed it: Leads! Net net…I highly recommend checking out the complete SaaS best practices report on inside sales from BridgeGroup. I’ve only touched the surface in this post as there are also questions hunting vs. farming, trial conversion, and even calls per day. The report is free, but does require registration.

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