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/ 3 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.

The Open Current directory provides many more cloud & SaaS best practices. If you want to receive updates on Open Current cloud & SaaS best practices, you need to subscribe separately to the Open Current RSS feed. Also, suggested new entries to Open Current in the form of surveys, benchmarks, white papers and blog posts that represent cloud & SaaS best practices are always welcome (hence the “open”), but must be of the highest quality information and very light on the promotion side, i.e., independent blog posts, serious industry research, or fantastic content marketing.

And, if you see something you like at Open Current, please do right by the author and give it a tweet!

Choosing the right go-to-market sales model for your SaaS startup can be a make it or break it decision. Choose right and you grow smoothly from seed funding to A round to B round and beyond. Choose wrong and you spend precious cycles chasing your tail as cash runs out. While most B2B SaaS startups that offer recurring revenue subscriptions gravitate toward a transactional sales model characterized by inbound marketing and inside sales, this is not always the case as pointed out in this recent article entitled the Debunking the SaaS Sales Model Myth by my esteemed colleague Jeff Kaplan. But, how do you go about choosing the right SaaS sales model for your particular SaaS startup?

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

Price is Paramount

What’s your average selling price? I don’t know any single statistic that provides more insight on a SaaS startup, or any business for that matter, than average selling price (ASP). Average selling price is the intersection of supply and demand and as such it measures external factors like customer value and competitiveness, while it constrains operational metrics like costs, volume and risk.

Your ASP places a ceiling on your customer acquisition cost, which in turn limits your SaaS sales model options. If your ASP is $500 annual recurring revenue (ARR), then you are unlikely to be able to fund a direct sales force, because your sales rep would need to sell 1000 deals per year to come close to covering your customer acquisition costs. Whereas if your ASP is $500,000 ARR you only need to close a single deal, so you can afford to fly out and wine and dine your prospect to your hearts content.

Price has an inverse relationship to deal volume. For example, achieving $10M in total revenue with a $1K ASP requires 10,000 customers, whereas a $10K ASP only requires 1,000 customers. The volume requirement implied by ASP flows back through the sales process to put pressure on every upstream metric. Low ASPs require large target markets, more leads, more pipeline, higher conversion rates, shorter sales cycles, and so on to deliver a high volume of customers. High volume also requires more customer self-service, more automation and less labor, because labor is expensive, slow and has poor economies-of-scale.

Conversely, price has a direct relationship to risk. High ASP means high risk. The more risk, the more your customers will desire a personal relationship. It is the rare customer that will part with $50,000 through a self-service portal (although the Google AdWords customer does come to mind). Lacking the brand security of an established player like Google or Salesforce.com, a SaaS startup must put a human face on its service to overcome this fear. Luckily, high ASP pays for the sales and support labor required to create the personal relationship.

Complexity Constrains

How difficult is it for your customer to buy your product? Is your SaaS offering easy to find, easy to understand, easy to try, easy to buy and easy to use? Every hurdle that stands between your product and your customer reduces your sales velocity, decreases close rates, and increases your costs. The more complex the purchase, the more help the prospect will need. And, the fewer choices you will have regarding your SaaS sales model.

You can make every effort to eliminate complexity, but at any given time the amount remaining must be surmounted by your SaaS sales model. For example, a new social collaboration SaaS may appear so foreign that prospects have difficulty understanding what it is, let alone what it can do for them. Onboarding a SaaS ERP might require the customer to alter internal business processes before any value is realized. In both cases, it will fall to your SaaS sales model to help prospects navigate the complexity.

Three SaaS Sales Models

Price and complexity define a strategic spectrum of sales approaches for SaaS startups that gravitate strongly toward three distinct SaaS sales models: self-service, transactional and enterprise. While a mature SaaS business may employ all three, a SaaS startup will have the resources to master only one. However, this choice is not always straightforward when you are entering or creating a new market, because you must first find balance between price and complexity.

Price and complexity are natural adversaries. Higher complexity means higher costs, thus requiring higher ASP. But just because your product is difficult to buy doesn’t mean your prospect is willing to pay more for it. Getting the right alignment between price and complexity means ensuring the value customers place on your product always exceeds the price, time, fear and frustration they must pay. Once you achieve the right balance for your market, your choice of SaaS sales model will be obvious. Fail to find it, and you end up in the Startup Graveyard.

Customer Self Service
Achieving significant revenue at a low price point naturally entails driving complexity and cost out of the purchase to clear the floodgates for high volume. The ideal SaaS sales model is complete customer self-service. However, this requires that your customers be willing and able to service themselves. Able such that they understand the value of your product, how to buy it and how to use it. Willing such that they see little or no risk or frustrated effort in the purchase. Good examples come from well understood commodity office productivity tools that are easily adopted by a single user or department manager, such as those offered by Zoho and 37signals. The customer self-service SaaS sales model typically breaks down across customer-facing functions as follows:

• Sales: None.
• Marketing: Full revenue responsibility, creating awareness, educational content and automation capable of driving business through the entire purchase process from awareness to close.
• Support: Provides automation and tools for easy on-boarding, plus templates and educational content that allow customers to resolve any issues they encounter on their own.

Transactional Sales
As price increases, customers become less willing to part with their cash without at least knowing there are actual trustworthy human beings behind your website URL. Higher ASP brings higher expectations for the business relationship, such as signed contracts, premium SLAs, invoicing, and the ability to speak to a human when problems arise. The risk-driven need for a more interpersonal business relationship drives the SaaS sales model away from customer self-service into a transactional sales model characterized by efficient, high volume sales and support operations, short sales cycles, and rapid onboarding—all supported by automation that allows for as much customer self-service as possible were customers willing and able to service themselves, which they are neither. Good examples come from products that automate a well-defined business process or function with a bit of an Internet twist, such as those offered by Marketo, Zendesk, and Xignite.The transactional SaaS sales model typically breaks down across customer-facing functions as follows:

• Sales: Inside sales reps supported by online content and automation, tools, training, incentives and metrics that enable high efficiency and many transactions per rep.
• Marketing: Feeds highly qualified leads to the sales team to build pipeline and improves efficiency by removing roadblocks through educational content and automation that drive complexity out of the purchase.
• Support: Inside support reps that meet a range of SLAs from limited pre-sale support through premium post-sale support with tools, training and metrics that enable high efficiency and many transactions per rep, complemented by customer self-service tools, templates and educational content.

Enterprise Sales
While most SaaS startups gravitate toward transactional sales or customer self-service, some SaaS startups have products that provide so much value per customer and are so complex to buy that their natural starting point is traditional enterprise sales. Two good example categories are cutting-edge Internet marketing tools employed by big brand consumer marketers, such as BazaarVoice and BrightEdge, and feature-rich suites that automate strategic, core business processes for mid-to-large enterprises, such as Netsuite, Workday and Passkey. The enterprise SaaS sales model typically breaks down across customer-facing functions as follows:

• Sales:Territory sales reps focused on a narrow set of target prospects directly supported by product marketing and sales engineering resources at a deal level.
• Marketing:High-end marketing that facilitates brand awareness, education, relationship building and trust, complemented by direct support of the sales team, including telemarketing speeding access to target prospects and detailed sales tools such as product roadmaps, ROI calculators, etc.
• Support:High touch support up to onsite issue resolution complemented by educational tools and training tailored to the specific needs of individual customers.

Avoiding the SaaS Startup Graveyard

Regardless of your price, your SaaS sales model must provide sufficient support to enable prospects to navigate the complexity of the purchase or you will not close business. You can give your product away in a Freemium price scheme, but if the purchase is too complex, you can still find yourself hand-holding every single free customer akin to an enterprise sale. You just can’t give away complex software. Only customers that are willing to pay an exorbitant price for your hugely valuable service will also pay exorbitant amounts of time, fear and frustration to wade through the complexity of getting it. When complexity forces you into a SaaS sales model where the costs exceed your ASP, your business is destined for the SaaS Startup Graveyard.

SaaS startups that combine low price and high complexity end up in the SaaS Startup Graveyard.

There are three strategies for avoiding the SaaS Startup Graveyard, all of which amount to aligning price and complexity, so you can gravitate safely toward a viable SaaS sales model.

• Increase Velocity: The goal of this strategy is to reach a customer self-service SaaS sales model by holding your price point low and driving out complexity to build volume rapidly. To succeed at this strategy, you business must be capable of overachieving on both SaaS Do #1 Choose a Large Market and SaaS Do #3 Accelerate Organic Growth, and you must absolutely avoid SaaS Don’t #3 Launch without Online Trial.
• Increase Value: The goal of this strategy is to reach an enterprise SaaS sales model by adding value through product innovation and restricting your market to target prospects that see the most value in your offering. To succeed at this strategy, you business must innovate as in SaaS Do #6 Reach Across the Firewall without falling prey to SaaS Don’t #1 Chase Elephants that ruin your economies-of-scale, and preserve the core SaaS cost advantage through SaaS Do #8 Enable Mass Customization.
• Increase Profit: The goal of this strategy is to reach a transactional SaaS sales model by finding balance between ASP and CAC (customer acquisition cost) through operational efficiency and focus on the most profitable market segments. To succeed at this strategy, you should follow SaaS Do #4 – Craft a Compelling Story to attract only the prospects you really want to sell to, and then make it easy for them to find you by SaaS Do #2 Create a Hub on the Web and get them through the purchase efficiently by SaaS Do #5 – Build the Business into the Product.

The SaaS startup holy grail lies on the opposite end of the spectrum from the SaaS Startup Graveyard. High ASP combined with low complexity characterizes the most wildly successful SaaS offerings like Google Adwords and Amazon Web Services (cloud in this case), where customers routinely write six figure checks with the most minimal amount of personal interaction with sales and support reps.

SaaS Startup Evolution

As a SaaS startup evolves into a mature SaaS business, growth aspirations naturally lead to the desire to expand market reach to new prospects and to expand product footprint with current customers. The SaaS startup that enters the market with a customer self-service SaaS sales model represents the origin of a natural evolutionary path. The theory is straightforward. The nimble SaaS startup that has built a large self-service customer franchise for a super simple product starts pumping in new features, develops modular pricing schemes, adds a few sales reps and sets off on a quest to increase ASP from $10MRR to $100MRR to $1000MRR to $10,000MRR and beyond!

A SaaS startup that aspires to evolve beyond a single SaaS sales model
faces the challenge of mastering multiple competitive strategies.

However, the straightforward tactics belie the tectonic strategic, operational and cultural shifts required for success. Underlying the simplicity of the customer self-service model is a mass market, low cost competitive strategy. Whereas, the enterprise sales model assumes a highly differentiated product, usually characterized by cutting-edge Internet-enabled innovation. Maintaining the simplicity of the customer self-service model as a successful SaaS startup introduces more complex products and purchase processes in close proximity to the originally simple, self-service product and purchase process requires careful planning and execution. Should the products be separate offerings or modules of a single offering? Should transactional sales arise by skimming the cream of customer self-service prospects, or should entirely new lead generation vehicles be put in place. Are enterprise customers just transactional customers who are all grown up, or an entirely different species? It is often said that it is easier to move up market than down market. This is probably true, but it is NOT easy to move up without inadvertently abandoning the down.

I’ve wrapped up the highlights of my SaaS metrics series into a tidy SaaS Metrics Guide to SaaS Financial Performance. Like the original SaaS metrics series, this reference guide presents simple rules-of-thumb and graphic visualizations that capture the dynamic relationships between core SaaS metrics and SaaS financial performance.

It is NOT a comprehensive overview of SaaS metrics, but a deep dive into the most critical SaaS metrics with the goal of fostering intuition and deeper understanding of SaaS financial performance, including charts, formulas, definitions, sample calculations, and hyperlinks back to the full SaaS Metrics Rules-of-Thumb posts. Feel free to pass it along. Cheers! JY.

Click the image to download the
SaaS Metrics Guide to SaaS Financial Performance (PDF format)

Original SaaS Metrics Rules-of-Thumb Posts

• SaaS Metrics Rule-of-Thumb #1 – SaaS Churn Kills SaaS Company Growth
• SaaS Metrics Rule-of-Thumb #2 – New Customer Acquisition Growth Must Outpace Churn
• SaaS Metrics Rule-of-Thumb #3 – Viral Growth Trumps SaaS Churn
• SaaS Metrics Rule-of-Thumb #4 – Company Time to Profit Follows Customer Break-Even
• SaaS Metrics Rule-of-Thumb #5 – Best Case Time to Profit is Simple Break-Even
• SaaS Metrics Rule-of-Thumb #6 – Growth Creates Pressure to Reduce Total Cost of Service
• SaaS Metrics Rule-of-Thumb #7 – Churn Creates Pressure to Reduce Total Cost of Service
• SaaS Metrics Rule-of-Thumb #8 – Upselling and Upgrades Accelerate SaaS Profitability
• SaaS Metrics Rule-of-Thumb #9 – Joel’s SaaS Magic Number
• SaaS Metrics Rule-of-Thumb #10 – SaaS Customer Lifetime Value Drives SaaS Company Value

Since my post entitled SaaS Sales Compensation Made Easy, I’ve received a number of inquires about how to adjust SaaS sales commission percentages for very short and very long term subscription contracts, e.g., renewal periods of 1 month vs. 2 years. Clearly a 2 year contract paid in advance is worth more than a monthly renewal and should pay a higher commission. But, how much more?

In the model, I propose as best practice that SaaS sales commissions should be paid 100% up-front in proportion to the lifetime value of the sale (LTV). But to keep things simple, recurring revenue (ARR, QRR, or MRR) is substituted as the everyday measure of LTV, because LTV is always directly proportionate to recurring revenue. Basically, pay on recurring revenue in SaaS just like you would pay on price for any other product. It’s that simple….provided: 1) contract terms don’t vary widely and 2) the churn rate is uniform across customers (no churn cohorts).

However, adjusting your SaaS sales commission plan for these two factors isn’t complicated. You can do the LTV math in the background to produce a simple table of adjustments to the baseline SaaS sales commission for each contract term and/or churn cohort. Then, include this simple table of adjustments in your SaaS sales commission plan. The spreadsheet below does exactly this. (you can “Click to Edit” and play with the numbers or download to Excel. Go ZOHO!).

This enhanced SaaS sales commission model incorporates the effect of payment terms
and churn on lifetime value. The top table adjusts for contract term only,
whereas the bottom table allows for churn cohorts as well.

From the previous SaaS sales commission model post, we know that the lifetime value of a SaaS sale comprised of recurring subscription payments made in advance is given by the following formula:

i = cost of capital; a = churn rate

It is evident from this formula that if either contract term (i) or churn (a) vary across a wide range, then the calculation of the SaaS sales commission based on LTV should be adjusted accordingly (see LTV notes in the spreadsheet for the impact of contract term on i ). Put simply, if your contract terms (renewal periods) vary from monthly to every 2 years, you should consider adding a premium to the SaaS sales commission for 2 year contracts and a discount to the SaaS sales commission for monthly contracts. Or, if monthly customers cancel much more frequently than annual customers, say at a churn rate of 20% for monthly compared to a churn rate of 5% for annual, then you should again discount the SaaS sales commission paid on monthly contracts.

Using the formula above, the spreadsheet calculates a table with the commission percentage for each contract term and churn cohort. This table is created by taking the baseline commission percentage and multiplying it by the ratio of the LTV for each scenario to the baseline LTV. In the spreadsheet, an annual contract is used as the baseline.

To calculate the adjusted SaaS sales commission table that is right for your SaaS business, start by entering the target quota and target commission at quota to generate the baseline commission percentage. Then, you must select a cost of capital that reflects how much your SaaS business values cash up front. The more you value cash up front, the higher the number you put in for cost of capital. For a rapidly growing venture-funded startup, the cost of capital can be well in excess of 25%.

If your SaaS business experiences dramatically different cancellation rates by contract term, then you should adjust the churn rate for each contract term using the second table at the bottom. You can also use the spreadsheet to create adjusted SaaS sales commission tables for two different churn cohorts by entering one churn rate for the top table and a second churn rate that is the same for all contract terms in the bottom table.

It is also instructive to type in a value of 100% churn, implying that contracts are never renewed. In this case the SaaS sales comission payout is 1/12X, 1/4X, 1X, 2X, 3X for monthly, quarterly, annual, 2 year and 3 year contract terms respectively. This is the source of SaaS Sales Compensation Mistake #1 – Paying SaaS Sales Commission on Explicit Total Contract Value. Unless your churn rate is 100% or your cost of capital is infinite, you should not pay SaaS sales commissions based on total contract value. Over time, an automatically renewing annual contract will bring in exactly the same amount of money as a three year contract (provided the churn rate is the same). The only difference is the interest you can earn (or save) on the money up front, which is represented by the cost of capital.

I think it would be hard to overemphasize the importance of upgrades and upsells in SaaS product marketing. In an industry where free trials, freemium versions, bargain basement subscription prices and simply hoping to recover customer acquisition cost with first year revenue are the norm, few things are sweeter than a customer that actually wants to spend MORE money with you. Upgrades and upsells can lead to orders of magnitude difference in SaaS financial metrics. If you can acquire customers at $100/mo and rapidly upgrade them to $1,000/mo, then you may be able turn a profit in one year instead of ten years. And. if those $1,000/mo customers have a lifetime value of $100,000 instead of $10,000, then you may also turn a $50million SaaS company valuation into a $500million SaaS company valuation. ‘Nuff said.

Upgrade vs. Upsell in SaaS

Although the terms upsell and upgrade are often used interchangeable, I personally use them to distinguish between two very specific SaaS product marketing scenarios. For the purposes of this discussion, I will use the following definitions:

• Upgrade : Higher revenue from increased usage of current SaaS product capabilities.
• Upsell : Higher revenue from new SaaS product capabilities.

The reason for my distinction is that the buying dynamic is very different for the two scenarios. Upgrade potential of a SaaS product depends on the customer’s need to increase consumption of a known solution to a known problem, and deepens commitment to a particular capability. Whereas upsell potential of a SaaS product depends on the customer’s need to find new solutions to new problems, and widens your SaaS product footprint. This is not to say that upgrades and upsells are completely independent, because the need for increased usage can be highly correlated to the need for new capabilities as a growing customer’s business often entails greater volume as well as greater complexity.

Measure Value, Not Use

When SaaS product marketers think of upgrades and upsells, their minds immediately turn to pricing and packaging. Pricing and packaging are important, but you should always keep in mind that they are just a means to an end: purchase. The most important principle to follow in designing your SaaS product offering is to align pricing and packaging with customer value, or in B2B sales lingo “customer pain,” because the more a customer values a particular capability of your SaaS product, the more a customer will pay for it. In order to price what the market will bear, you must package your SaaS product into value bundles and price them using the measures that most closely correlate to customer value. You can use features, users, usage, performance, or any measure you like to price and package your SaaS product into bundles, but never forget that these measures serve as surrogates for customer value. A hundred bucks might buy you one feature or one hundred, but if that bundle of features doesn’t equate to value, your customers won’t pay it, or worse they might pay for it and still feel cheated or manipulated in the process.

Bundle Purchase Scenarios, Not Features

While customer value is the proper measure of your SaaS product bundles, it won’t tell you where to draw the pricing and packaging lines between your subscription plans. Some customers may place high value on pretty charts, while others may not value them all. The customer of a helpdesk SaaS product may value the first ten support rep users considerably more than the next fifty sales users. The first month’s use of a tax computation SaaS product may be significantly more valuable than use for the rest of the year. Competition may drive the margin for email features to zero, while unique social media capabilities may garner a premium.

The goal of any SaaS product pricing and packaging strategy is to maximize total profit by dividing it up into separate profit streams that add up to more than the profit of a single SaaS product offered at a single price. This is accomplished by segmenting the market into purchase scenarios of various customer groups and then further segmenting the stream of purchases of a single customer over time (upselling and upgrades!). More simply, you should bundle purchase scenarios, not features. OK, enough of the pricing 101. Let’s talk about how to drive upgrades and upsells.

Open The Front Door Wide

You can’t upgrade or upsell if you don’t have a customer, so it is critical to make it as easy as possible to adopt your SaaS product. Customer’s will come to you with varying degrees of sophistication and immediate need, so make sure you have an entry level offering that services the lowest, most common rung on the ladder. You may not wish to spend a lot of time and money on these customers in the beginning, especially if you have a freemium strategy. But, trial and purchase are merely the first steps to a long and profitable customer relationship when upgrades and upsells drive customer lifetime value well above that of the initial purchase.

Grow With Your Customers

If your customer only has ten salespeople, you will have a hard time upgrading your sales automation SaaS product to twenty users. If your customer has just launched it’s new website using your content management SaaS product, then advanced BI of usage statistics might be a tough sell. However, as your customer expands both its business and its understanding of your SaaS product, its need for greater usage and greater capability will expand as well. Therefore, you should map out the growth path your customer’s needs and align it with increasing SaaS product value. When your SaaS product value bundles and prices align with your customers’ growth trajectory, they will upgrade naturally, painlessly and frequently of their own accord, feeling that you have served them well and delivered what they need in return for a fair price.

Design For Discovery

Aligning value with need is a two way street. Your customer must have the need, but it must also see the value, and not necessarily in that order. You should design your SaaS product so that your customer naturally discovers and digests new capabilities just-in-time as its needs grow. Done well, this not only maximizes upgrades and upsells, it streamlines usability and simplifies adoption. There is nothing worse than being clobbered over the head with hundreds of features and options, when you only need and understand one. Or, being charged for stuff that you simply don’t need.

Track Penetration Against Potential

If you’ve done a good job segmenting your customers and their growth paths over time, then tying these standards back to actual data closes the loop and enables you to drive upgrades and upsells by personalizing your SaaS product experience, your marketing communications, and your sales interactions to the immediate needs of individual customers. Moreover, you can estimate potential customer lifetime value by type of customer and measure your upgrade and upsell penetration against it. One of the great advantages of SaaS is the ability to measure and understand in great detail exactly how your SaaS product is used, and then personalize the experience for the customer. Intelligent and considered application of customer profile and usage information can transform the discovery process from poking around a static user interface to an ongoing dialog between you and your customer. For example, the content management system above might automatically recommend checking out your BI module and offer a free trial once site traffic and back end reporting usage reaches a certain level. But, this can only be done if potential customer value is known and compared to the actual penetration in the form of customer use.

Enable Self-Service

This idea is an extension of SaaS Do #3 – Accelerate Organic Growth that claims that you should build your SaaS product such that customers can buy from you even if you don’t show up for work. If your customer has the need, and your upgrade offers the value, and your customer sees that value because you’ve pointed it out just-in-time, then you certainly don’t want your customer to fumble around because it can’t figure out how to buy it. Great self-service should allow your customer to see current subscription status and usage, evaluate the cost and terms of new capabilities, see what other customers have to say about them, try them out, buy them, and receive help getting them up and running.

Don’t Farm When You Should Hunt

Just because your customers can upgrade and upsell themselves even if you don’t show up for work doesn’t mean that you shouldn’t show up for work! When the gap between upgrade and upsell potential and penetration is limited by external customer constraints, you should farm. If you waste your time trying to sell customers stuff they don’t need in SaaS, all you will accomplish in the end is high acquisition costs, high churn and low profitability. On the other hand, when a significant value gap exists between potential and penetration simply due to a lack of understanding of either the need or the solution, you should hunt. For example, if you sell an event management system and your customer only has three events per year, your wasting your time trying to upgrade it from 5 events to 10 events. But, your customer might benefit from the social media add-on module if you can demonstrate the value. IMHO, this is the fundamental dividing line between hunting and farming. Hunting is not just for acquiring new customers. If an existing SaaS customer has a value gap that can be closed by an upgrade or upsell, then you should hunt it down and sell it. And, you should compensate sales reps for the incremental recurring revenue. If upgrades and upselling are constrained by your customer’s current state of growth such that no value gap exists, then you should farm a low churn rate by focusing on service. But, don’t farm when you should hunt, or you’ll miss out on the full potential of upgrades and upsells.

Recent weeks have brought a bewildering number of competing claims around SaaS and cloud computing. On one hand we are debating whether the SaaS experiment is over, IaaS is just an incremental advance in hosting technology, and the cloud is just hype. While on the other, Gartner estimates SaaS is now 10% of the enterprise market, Amazon AWS is a $500 million dollar business and Jim Cramer is picking his favorite cloud stocks. What’s a person to think? I for one think that recent reports of the cloud’s death are greatly exaggerated, and here is why…

The Cloud is Real. The Cloud is BIG.

It’s absolutely true to say that the cloud is simply the next evolution in computing, but saying it is an incremental change and isn’t all that different from traditional hosting or time sharing is like comparing the Internet to a T1 line. There are lot’s of new technologies and standards, big and small, that go into the cloud. And, there will continue to be others added as it matures. But, you shouldn’t allow the technology to cloud your thinking. The cloud, the REAL cloud, is about bringing any and all of the computing resources available on the Internet together to create Inter-networked applications and computing infrastructures. Consumer mash-ups perhaps being the simplest and earliest of these, but it isn’t that hard to imagine much bigger iron, mission-critical business applications running the same way. Most Internet innovation to date has focused on users and content, and has been strangled by a lack of bandwidth and integration standards. As these constraints erode, the cloud will continue to emerge. The cloud is about the machines. It is as big as all the computers connected to the Internet.

The Cloud is Hard

Security is and will remain the most difficult problem of SaaS and cloud computing, with reliability following close behind. But, this is more a matter of proliferating standards and best practice than technology. The problems are completely tractable. In the end, public standards and SLAs backed by SaaS, PaaS, and IaaS professionals working in their own areas of expertise will ultimately outperform all but the largest and most sophisticated internal IT departments. Most companies hire security firms to handle their physical security, why would they do any different with their IT infrastructure? Specialists do it better.

Cloud Adoption will be Gradual and Inexorable

The cloud is fundamentally an enterprise phenomenon, because it is about building applications and infrastructure. This is the business of businesses. And, like all things enterprise you can be sure of two growth characteristics. One, it will happen cautiously, slowly and gradually. Two, it will follow the money. The economics of the cloud are as simple as commodification, specialization and scale. Each year, more applications and infrastructure that have historically been hand-crafted on-premise by generalist IT departments becomes available online as specialized commodities. The movement from centralized generalist application deployment to distributed specialist application delivery is made possible by the Internet, and will continue to gain momentum as bandwidth and standards allow more sophisticated applications, data and computing power to be delivered over the public networks.

Cloud Fatigue is Unavoidable

So here we are. The cloud is real, the cloud is big, but the cloud is slooooowww. Salesforce.com has been preaching “no software” since 2000, and has taken a decade to build a billion dollar business, while consumer apps like FaceBook reach 500 million users in just a few years. It’s no wonder we’re tired of waiting already. All we are really seeing is that the cloud excitement is outstripping the pace of cloud adoption. And, this is likely to remain the case for the decade to come.

This week’s post is a throw down to see just how much cloud wisdom can be packed into a Twitter post of 140 characters or less. I did the best I could, but what have you got? Comment with yours and be sure to re-tweet your favorites to spread the words. I’ve coined a new tag #twisdomofclouds for Twitter tracking, so be sure to tack it on if you have room. Tweet on. JY

• Cloud skeptics think control is safety, but fear of flying doesn’t make you a pilot. #twisdomofclouds tweet it!
• A-SaaS-in enterprise software has a license to kill. #twisdomofclouds tweet it!
• Life is better on cloud 99.999%! #twisdomofclouds tweet it!
• High customer acquisition costs are a pain in the SaaS. #twisdomofclouds tweet it!
• Every cloud has an API binding. #twisdomofclouds tweet it!
• Value your SaaS customers and they’ll last a lifetime. #twisdomofclouds tweet it!
• GNU’s code-envy. Free is the cloud. #twisdomofclouds tweet it!
• Hybrid SaaS : A half-SaaSed attempt at on-demand. #twisdomofclouds tweet it!
• Fans hack Stones virtual tour on Azure private cloud. Jagger warns “Hey! You! Get off of my cloud.” #twisdomofclouds tweet it!
• DYJHIW DIY turns N2 WTF? DWBH CUZ SAAS EZ123 w/ OTH TCO!
  #twisdomofclouds tweet it!
• Don’t be CRUD on the cloud. #twisdomofclouds tweet it!
• Get your PaaS in gear and your thread in the clouds. #twisdomofclouds tweet it!
• Private cloud? Raise your hand if you own the Internet. #twisdomofclouds tweet it!
• SaaS for hire. Have software. Will travel. #twisdomofclouds tweet it!
• Need a Web service? There’s an OP for that. #twisdomofclouds tweet it!
• Without customers, SaaS is vaporware. #twisdomofclouds tweet it!
• You gotta go viral to stand out from the cloud. #twisdomofclouds tweet it!
• No room to tweet with all these dumb #AaaS acronym-as-a-service tags!
  #SaaS #PaaS #IaaS #DaaS #EaaS #twisdomofclouds tweet it!

To include the retweet link in your comment, just add the following hyperlink:

<a href=”http://twitter.com/home/?status=RT+your+twisdom+here
+%23twisdomofclouds+http%3A%2F%2Fbit.ly%2FabbcJu” > tweet it! </a>
Please tack on the #twisdomofclouds hash tag and hyperlink http://bit.ly/abbcJu back to the post if you don’t need all 140 characters, so folks can find your tweet on Twitter and their way back here to your comment.

It’s old news that the Internet has disrupted channel structure across numerous industries. So why go on about the channel now? Because, cloud computing is transforming the Internet as a channel. The evolution from Internet applications that service people (SaaS) to Internet applications that service other applications (cloud computing) transforms the Internet from a direct website channel to an indirect cloud channel and fundamentally alters the economics of the Web. This evolution has already transformed consumer advertising with the rise of syndication and social media, but the impact will not be limited to B2C communication channels. It will deepen and spread through online B2B channels with the rise of cloud computing and platform-as-a-service (PaaS).

In this post, I’ll provide some concrete examples of how the new cloud channel, or more specifically how cloud computing in the form of Web service APIs and PaaS, is driving a fresh wave of channel disruption that leaves new entrepreneurial opportunities in its wake.

Marketing Channels 101 – A Quick Review

Marketing channels accelerate revenue by streamlining the communications and logistics required to connect buyers and sellers. As such, disruptive improvements in channel cost, velocity and structure can transform industries. Basic channel functions can be categorized as follows:

• Promotion – Communicating the availability and value of a product or service
• Purchase – Facilitating and negotiating the actual sale of a product or service
• Distribution – Cost effectively transporting the product or service from seller to buyer
• Sorting & Packaging – Transforming a raw product or service into a more attractive one
• Risk – Shifting risk from buyers and sellers to channel vendors

Most channels provide more than one of these functions, and on the Internet it can be difficult to tell one from the other as content and applications are fluidly mixed and remixed as they cross the Web. In fact, it is the ability of cloud computing and PaaS to facilitate and accelerate this mixing process that is opening the new cloud channel. Instead of a single threaded link from buyer to seller through the browser, the cloud channel allows sellers to promote through, purchase through, distribute through, resort & repackage through, and shift risk through the network from application to application to application before reaching the final browser destination in front of the buyer.

Cloud Channel Disruption – Promotion

Communication, particularly advertising, is the mainstay of the consumer Web, and the impact of cloud computing on this channel can hardly be overstated. The most obvious example is the role of the RSS standard in transforming content distribution from a direct channel ruled by websites and portals to a cloud channel ruled by syndication and sharing. The combination of this standard data exchange format with Web service standards has created the penultimate “promote through” cloud channel as content is passed from blog to news site to friend to tweet and so on. It is the technical underpinnings of cloud computing as machine-to-machine interaction that enables the far reaching content syndication and person-to-person interactions of social media. Web service APIs create the conduit of the cloud channel, while the RSS standard makes the cloud channel indeterminate, organic and viral.

Cloud Channel Disruption – Purchase

Unlike blog posts and tweets, financial market data like real-time stock quotes is content of such high value that it still costs real money. In fact, according to Burton-Taylor the market for financial information and analysis is a $23 billion market. Unfortunately, market data is also incredibly difficult to buy. Mirroring the enterprise software model, market data is mostly purchased offline through third party data providers in the form of bulk, complex data feeds that require lots of on-premise data management software, hardware and professional services to parse, scrub, store and serve it to final applications and invariably force customers to buy and manage more market data than they actually consume.

Delivering market data over the Internet using standard Web service APIs, Xignite transforms the way market data is both bought and sold. Market data powers financial applications like electricity powers kitchen appliances. The Xignite market data cloud channel creates a power grid that connects the generators of market data: stock exchanges, trading networks, major brokers, etc., directly to financial applications using a Web service API as the standard socket. Immediate online access allows prospects to evaluate data fit and quality before they buy. Transparent, usage-based pricing facilitates online purchase. Web service delivery enables real-time sorting and packaging of the data to meet specific customer needs in a fashion unavailable to bulk data feeds, allowing customers to consume and purchase only the data they need. By simplifying and accelerating purchase, data providers like NASDAQ and CME Group can reach a wider global audience, including customers that can’t afford the time, effort and cost of buying a traditional data feed product.

Cloud Channel Disruption – Distribution

Application adoption and customer on-boarding is a primary challenge of every SaaS startup. While shuffling snippets of content around the Internet may satisfy the monetization needs of many a B2C Web business model, B2B SaaS companies need to move product to make money. Without APIs, the distribution channel of a SaaS application is limited to a single URL and adoption is constrained by the manual processes available from UI tools and professional services. For data-integration-intensive SaaS applications, such as BI and ERP, the adoption cost challenge seems almost insurmountable as highlighted IMHO by the failure of LucidEra and elusive profitability of NetSuite.

Frankly, I’d almost given up on these SaaS categories until I recently put the question to Roman Stanek, CEO of GoodData, and he coolly pointed out that the solution was right in front of my face: the cloud is the channel. The GoodData BI PaaS platform, puts APIs ahead of BI and cheats the adoption cost barrier outright by leveraging the cloud channel. While most SaaS BI startups sell direct, relying on low TCO and enterprise sales prowess to motivate customers over high adoption costs, GoodData plans to drive distribution through the cloud channel with a ground-up PaaS architecture, canned integration to major SaaS applications, cloud solution partners and strong support of its developer network. The SaaS BI space is crowded, competitive and unpredictable, but pure-play PaaS is the strongest and most disruptive strategy I’ve seen to date, because it focuses like a laser on eliminating the biggest obstacle to SaaS BI adoption, data integration.

Cloud Channel Disruption – Sorting and Packaging

If you use Twitter, chances are you don’t really use Twitter.com, because seventy-five percent of Twitter traffic flows through its APIs. That means that most people are using Twitter just about everywhere else, like their mobile phones, Facebook, LinkedIn, TweetDeck, and Seesmic just to name a few. Twitter is not a micro-blogging website; Twitter is a micro-blogging PaaS. Individual tweets are just not all that interesting, but when you mash them up with friends, colleagues, interest groups, search, and related Web content, they become a conversation. Had Twitter taken on a portal strategy common to social networks like Facebook, chances are it would have failed miserably. By allowing developers to easily repackage Twitter to meet the divergent needs of a myriad of market segments, Twitter leverages the cloud channel to drive adoption and use, while remaining focused on the core value of it’s service.

Cloud Channel Disruption – Risk

A common objection is that the cloud is just too risky. This despite the fact that only the largest IT organizations can come close to internally matching the dedicated expertise, SLAs and security of established SaaS and cloud companies. However, it is important to remember that the role of the channel is to absorb risk not shirk it, particularly inventory risk. On the cloud channel, inventory is measured in IT workloads, and the more unpredictable the workload, the higher the risk of managing it in-house, and the greater the value in shifting it to the cloud. I especially like this slide that the Windows Azure folks put together to illuminate this concept.

The cloud channel absorbs the risk of fluctuating IT workloads through shared infrastructure just like a wholesaler absorbs the inventory risk of fluctuating demand for physical goods.

As the cloud channel matures, I believe it will become more effective at absorbing risk of all kinds. While there are certainly applications where privacy, security and compliance concerns may permanently preclude moving them to the cloud, the vast majority of applications will succumb as the technology advances. Ten years ago, many businesses would have balked at putting their customer databases on the cloud. Now it is a common practice that Salesforce.com has turned into a billion dollar business.

The most common fallacy of the cloud channel is the illusion that control reduces risk, when in reality it is simply a reaction to fear. But, fear of flying doesn’t make you a pilot, and you probably aren’t safer flying the plane yourself.

I’ll say it again: SaaS is NOT cloud computing. As the industry rushes to embrace cloud computing, too many SaaS experts and vendors are simply updating their marketing messages with cloud buzzwords. This is not enough.

When I started this blog, the biggest challenge faced by SaaS vendors was getting our heads around the new lightweight paradigm for marketing and selling an on-demand Web application versus the heavy-handed direct sales approach of traditional enterprise software.

Today, a new challenge is arising. However, this time the threat comes not from the past, but from the future. Just as SaaS vendors have found their Internet footing, cloud computing is destabilizing the very ground beneath our feet. Depending on your SaaS business, cloud computing could impact everything from application architecture to channel strategy. Or, it may not affect you at all. Either way you should know. What is your cloud computing IQ?

The Cloud is the Computer

John Gage’s prophetic remark “The Network is the Computer” beautifully highlights the difference between SaaS and cloud computing. While SaaS applications provide on-demand services to millions of users across the Internet, cloud applications provide on-demand services to millions of other applications across the Internet. The network really is the computer.

Why should this matter to SaaS experts and vendors? Two reasons. First, because most SaaS applications today exist as silos that only solve a piece of a customer’s puzzle. Second, because cloud computing enables new economies of scale through shared infrastructure that properly designed SaaS applications can leverage to further drive down total cost of service.

SaaS Model Economics 101 states that SaaS competitive advantage comes in two Internet-enabled flavors: network-based differentiation and lower cost from economies of scale. Cloud computing creates new opportunities for SaaS vendors to extend their competitive advantage by opening their applications to the cloud through Web services and further driving down costs by running on shared cloud infrastructure.

SaaS Silos vs. Cloud Platforms

SaaS Do #9 – Open Up to The Cloud encourages SaaS vendors to reach out to complementary applications on the Web through open, standards-based APIs. But opening up to the cloud is not just about easy integration. Comprehensive Web service access will transform your SaaS application into a cloud computing platform. Virtually everyone today knows about Facebook. But, what not everyone in the SaaS community knows is that the fundamental reason Facebook kicked the crap out of Myspace and all the other wannabees vying for social network dominance was the introduction of the Facebook platform that allowed independent developers to create Facebook applications. Platform-as-a-service (Paas) opportunities are not limited to pure play PaaS companies making cloud development and deployment toolkits, PaaS opportunities are open to every SaaS vendor that thinks beyond the browser and is willing to expand its definition of “user” to include not only people, but other applications as well.

Have SaaS, Will Travel

It’s hard to believe, but we already have a “traditional model” for SaaS application architecture based on database multi-tenancy and a vertically integrated delivery infrastructure. This architectural model is the foundation of the SaaS cost advantage. However, it originated in a pre-cloud computing world based on the pre-cloud computing assumption that the SaaS application would run on a static host infrastructure.

To fully realize the cost advantages available on the Internet, the next generation of SaaS applications will not only be multi-tenant, but will be multiple tenants in their own right on shared cloud infrastructure. Monolithlic, vertically integrated SaaS applications will be broken up into loosely coupled, multi-layered Web service components that can be dynamically deployed to multiple cloud platforms in order to meet production requirements. This trend is so visible to the VC community, that the folks at Bessemer promoted it to the #1 spot of their recently revised 10 Laws of Cloud Computing and SaaS.

Blooming Channels

The inadequate grasp of cloud computing in the SaaS community was highlighted for me by some of the reactions of my fellow SaaS evangelists to this recent post of the emerging PaaS channel opportunity. As if the emergence of the PaaS channel somehow devalues the “pure” SaaS channel. This is not the case. There are fewer “pure” SaaS channel partners simply because SaaS vendors are doing a good job of making their applications easy for people to deploy and use. This is a good thing!

The fact that there are fewer “pure” SaaS channel partners does not in any way discount their value. SaaS channel partners have naturally gravitated to very high value services such as business strategy, process design, requirements definition, vendor selection, and training. However, from the SaaS vendor’s perspective these types of channel partners are gatekeepers. They don’t move product. And, anyone who has spent any amount of time in consulting will tell you that while a strategy project may net you $100K in services revenue, a development project can net you $1M. So, I’ll say it again. Cloud channels will follow the money.

This is not to say that we’re going back in time with the PaaS channel reliving the custom development glory days of enterprise software VARs. PaaS channel partners will be leading the charge into a new paradigm of cloud-based application development, sewing SaaS applications and Web services together into flexible mash-up cloud applications and application suites that are dynamically deployed across the Internet. The retooling required of traditional software VARs to deliver these services is no less daunting than the shift required of enterprise software companies to deliver SaaS. (How long did it take SAP and Oracle to get with the program?)

SaaS vendors with high cloud computing IQs recognize the cloud as the new channel. They will transform their applications into cloud computing platforms and will see their PaaS channel opportunities bloom. Whereas today’s “pure” SaaS channel opportunities are largely limited to marketing referrals from trusted advisers and affiliates, tomorrows PaaS channel partners will redistribute SaaS applications over the cloud as components, complements and containers of other applications. They will extend both the market reach and product capabilities of SaaS vendors that embrace PaaS the same way they have already done this for Salesforce, Facebook, Google and Twitter. The network is the channel.

SaaS channel partners have definitely received the short end of the stick compared to their software channel counterparts. With a few notable exceptions like Salesforce.com, Netsuite (and largest, but least recognized as SaaS, Google AdWords) there simply have not been enough customers or enough work to engender a thriving ecosystem of SaaS channel partners, at least not when compared to the sprawling extent of enterprise software channels. I think this is about to change.

Channels Always Follow the Money

There is one universal law that governs all channel management: CHANNEL PARTNERS MUST MAKE MONEY. The biggest channel mistake made by many a SaaS start-up CEO is to fall into the fantasy that SaaS channel partners are there to help your business. They are not. They are there to help themselves. And, how much money they can make boils down to a very simple formula.

SaaS channel money = SaaS channel value-add x SaaS application customers

And right here is the rub. The self-serviceability of many SaaS applications from customer acquisition through deployment significantly reduces the value-add for SaaS channel partners. In fact, if all SaaS vendors embraced SaaS Top Ten Do #3 – Accelerate Organic Growth, then the SaaS channel situation might be even more dire. Moreover, the number of SaaS applications with enough customers to drive SaaS channel development can be counted on your fingers and toes.

Unfinished Business is the Business of Channels

The work required to realize the benefit of your product is the same whether you do it, your customer does it, or a channel partner does it. Channel partners add value by finishing the unfinished work that you and your customer start, but for business reasons can’t complete. They simplify and speed adoption by shouldering tasks that they can do better, cheaper and faster. The greater the gap between your service and your customers’ ultimate needs, the greater the value delivered by the SaaS channel partner and the greater the SaaS channel opportunity.

SaaS Total Cost of Service – Visualizing the SaaS Channel Slice of the Pie

I like to visualize this as the cloud channel partner’s contribution to total cost of service (TCS), because the success of your cloud channel strategy will always hinge on a) your cloud channel partners’ ability to make money and b) your customers ability to realize value that exceeds total cost of service, including the money made by your cloud channel partner.

Developing in the Cloud: The Emerging PaaS Channel Opportunity

The problem with SaaS channels to date is that there simply has not been enough for them to do. I think this is about to change, but I also think it will happen one layer down in the cloud technology stack. If you examine the raison d’etre for the vast array of enterprise software channels it comes down to the fact that enterprise software is delivered in an unfinished state, leaving plenty for enterprise software channel partners to do and lots of it requiring very specialized technical knowledge with which customers simply don’t want to bother.

These attributes are also present in the emerging platform-as-a-service space (PaaS). Whether it is building, deploying and managing a new application on Amazon AWS or simply extending and integrating existing SaaS applications using the ever expanding pool of Web services APIs, the number of opportunities for pure cloud-based development is increasing and is sure to grow to a scale that rivals enterprise software. Unlike SaaS applications that are designed with the business user in mind, PaaS and IaaS offerings are designed for developers. They are by their very nature brimming with potential value, unfinished and highly technical–making them ripe for channels.

Whereas SaaS providers have struggled to develop the interest of potential SaaS channel partners, IaaS, PaaS, and PaaS tool vendors are likely to find their businesses increasingly dependent on cloud channel partners focused on pure-cloud application development and deployment. Moreover, you can expect these cloud channels to spark a proliferation of home-grown development, deployment and monitoring tools that will ignite and accelerate the already hot PaaS tools sector as cloud channel partners product-ize their home-grown systems and take them to market.

So, if you are an enterprise software channel partner and have been scratching your head for the last few years trying to figure out how to jump on the cloud channel bandwagon, then think PaaS channel not SaaS channel. And, get started already or you may miss the boat.

The annual SaaS Summit is next week in San Francisco, so if you are going and would like to meet up, send me a note at joelyork [at] chaotic-flow.com. The program is All About the Cloud and while I’m a little bummed there isn’t more SaaS-specific content, you gotta roll with the times and this year is definitely all about the cloud.

This year the SIIA has stepped up to the plate
and is clearly taking the SaaS Summit to the next level.

I’m particularly looking forward to the Public Cloud vs. Private Cloud debate to be queued up by Phil Wainewright and Jeff Kaplan and will likely weigh in with my own view afterward. I expect this debate will not go away anytime soon and we’ll see a proliferation of private cloud software vendors and services, but in the end there is no escaping the reality that private clouds are to public clouds as your intranet is to the Internet. Big difference.

You can also follow the conference chatter on Twitter under the tag #aatc