by Kevin Dobbs

Montclair Advisors, LLC

When advising software clients who are interested in moving to a SaaS business model, one of the areas I really dig into is how are they selling to new customers. Most of us in the SaaS community realize that carefully tracking your Customer Acquisition Costs or CAC, is a critical component in building a successful and profitable company, but I think it is equally important to understand how traditional software sales  and marketing models and SaaS models differ.

Traditional Software Sales & Marketing Model

Over the past 25 years there has been a traditional way to market and sell enterprise software which has been based on key principles such as:

• You need a Large direct sales force including a large support team, or as I used to call them, ‘The Cast of Thousands‘
• Front loaded compensation plans that pay out when deals are sold
  
• High average sales prices, including services, that would almost always be over $500,000
• Long sales cycles, usually 6-12 months, with pursuit costs averaging around $70,000 for every deal the company played in
• Win rates are in the 30-50% range
• Average face-to-face selling time that is around 15%
• Pipeline building using a combination of in-person events (seminars, tradeshows, user group meetings), telemarketing teams (inbound and cold calling) pounding the phones and a lot of paid marketing campaigns
• Lead pipelines that appeared full but always seemed to lack the appropriate level of qualified opportunities
• First generation CRM systems and reports that were produced periodically using Excel

Brings back the good ol’ days doesn’t it.  Many software firms are still using this model and they are finding out that it doesn’t work very well in the new world of Software-as-a-Service sales.  Some of the reasons it doesn’t work is that software buyer preferences are definitely changing, but one big issue is it is very expensive to operate this type of model, especially when you get your revenues paid out over time.

SaaS Sales & Marketing Model

There are several important differences in the SaaS model that make the traditional software sales and marketing model less than effective;

• SaaS customers pay a subscription based on users or usage of the software service over time, usually over three years.  After the recession, this has become the new normal for software sales
• More focused solutions that usually have Average Sales Prices that are typically lower, so reps need to sell more deals to hit the same quota targets
• Key metrics like customer satisfaction, renewals, up-selling and cross selling are even more important for SaaS than they were in the past
• Sales method is more of a “penetrate and radiate” approach
• It takes a long time to build up a recurring revenue stream

Given these differences, then what should your SaaS Sales & Marketing model look like?  Here are some ideas to consider when building out your SaaS sales and marketing plans for 2011 that can help you to build out a low-cost but high-efficiency sales and marketing machine;

Marketing

• Hire experienced marketing leadership and professional
• Evolve a good list of key influencers and industry contact and communicate with them frequently
• Develop a clean prospect database
• Mix paid and free social networking programs
• Build a vibrant customer community and market to them with products like Lithium
• Leverage social media like LinkedIn, Facebook and Twitter to generate interest and leads
• Use Web 2.0 marketing tools like Marketo, Eloqua, Pardot and try drip marketing
• Track everything (see the last Smart SaaS post)

Sales

• Hire experienced SaaS sales leadership and reps
• Your SaaS sales team should be more low touch than your traditional sales team
• Experiment with telesales even with high end enterprise products
• See is using an indirect channel makes sense for your business, if managed correctly these distribution partnerships can dramatically lower your sales costs
• Carefully track your lead hand off between marketing and sales, make sure leads are not falling through the cracks
• Track everything

Metrics like Customer Acquisition Costs and the Magic Number can help your sales and marketing teams see how effective their programs are and can provide insight when to invest and when to continue developing your repeatable sales model.  I would also encourage you to learn more about Mark Leslie’s Sales Learning Curve, because it offers a more scientific approach to cost-effectively building out your SaaS sales team.   Best-in-class firms that have profiled in this blog have adopted many of these techniques to build a scalable but cost-careful sales and marketing organizations.

Stay tuned for Tip #6 Package for Viral Adoption

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On a recent client engagement I was asked to provide a simple set of definitions for basic terms and concepts around Software-as-a-Service and Cloud Computing (which I often use inter-changeably).   What was interesting is that there is a lot of buzz out there but I can see why people get confused because there isn’t a standard set of definitions.

So my Friday contribution to the SaaS industry I am publishing the Montclair Advisors’ SaaS Glossary of Terms.  I would be interested in your feedback on the definitions and if I miss any key ones.

When speaking with entrepreneurs and investors about the investment required to start up a new Software-as-a-Service company, I often refer back to this list.   At Montclair Advisors thought this would be a handy reference for those looking to start a SaaS company during 2010.

Looks like you might need a money tree to start a SaaS company, but for those that reach critical mass and go public, there is a tremendous payback.  This is information has been gathered from various sources including Wachovia, CrunchBase and Google Finance.

I had an interesting briefing with Bill Soward, CEO and Greg Schneider VP of Marketing at Adaptive Planning the other day, which I wanted to share.  In the spirit of full disclosure, I will let you know that I worked with Bill years ago at Edify but I have been very impressed with what he has done at Adaptive Planning.

The original purpose of the meeting was to finalize a SaaS business profile but what I thought was even more interesting was their company’s approach to building a SaaS sales pipeline, especially in these tough economic times.   I have heard many executives talk about reducing the barriers to sales but Adaptive Planning is really going to the extreme in terms of test drives and transparency for their prospects.

Having run sales, I can tell you that sales reps always have a lot of excuses why prospects aren’t buying and I know there are plenty of excuses to be had these days.  What I think we can all learn from Adaptive Planning is that by addressing these potential sales objectives earlier in the sales process, you can build in more predictability and ultimately more sales into your SaaS sales process.  Here’s what they have done…

The New Improved Test Drive

30 day trials are no longer new and innovative, they are table stakes for SaaS firms trying to sell their software.  Adaptive Planning is no different.  They offer a 30 day trial but they also offer…

- A Hosted Express version, which is easy to set up and start to use.  This is managed and maintained by Adaptive Planning and is free to use.  Most of their prospects have opted for this approach to their trial.

OR

- Download the software for FREE, forever.  You can go to SourceForge and download the source code and the Adaptive Planning Express product.  To date they have had more than 79,000 downloads.  Many of whom will become future paying customers.  So if someone says I am not sure that your software will do what the marketing literature claims, just tell them to download it and use it.

Over-Educating Their Prospects

Bill and Greg agree that it is important to provide their prospects with as much information as possible and allow them to select what they need as part of their sales education process.  This is also part of the company’s approach to relationship transparency, more about this in a minute.  So part education building blocks consist of;

- A Resource center which is a collection of information like collateral, white papers, archived webinars and case studies.  Most companies provide this type of information library.

- Pre-recorded video demo where the prospect can get a guided tour of the software, which isn’t really breaking in new ground but can be helpful for busy executives.

- Live Webinar demo, where prospects can interact with Adaptive Planningt team, again this is nothing new.

- On-line Training, which allows you to go into more depth around the product, which I think is a great idea.  Because you always have the deeply technical buyers who need deep domain information.

- On-line Price List, this isn’t new for some of the newer SMB SaaS applications like 37Signals or FreshBooks but I think for this type of application this is quite a different approach.

- Online Community is another great idea.  Using social networking to build a strong community around not only your products but also your company.  Adaptive is using the Jive Software platform to provide chat threads, videos, blogs, polls and best practice advice.  They even offer private collaboration spaces where customers can share best practice ideas privately.

By combining all of these building blocks, it gives the prospective buyer almost every way to learn about and evaluate Adaptive Planning’s software.

WYSIWYG Transparency

Bill spoke about having a transparent relationship with their prospect and ultimately their customer.  They feel that their open information approach provides a prospect with virutally every way to experience and learn about their products, support, pricing and company.  This is a powerful differentator when buying software but more importantly when a prospect is shopping for a vendor relationship.  The reality is that today’s software buyer is more sophisticated but also realizes that their relationship with a software firm is typically lasts between 5-7 years and that they really do want to ‘try before they buy’.  For Adaptive Planning their transparent approach is paying off.

Lowering Customer Acquisition Costs and Building a SaaS Pipeline

A term you hear a lot about in the SaaS world is CAC or Customer Acquisition Costs.  This is basically the cost of finding, qualifying and signing up new customers.  In the enterprise software world, where you were getting large up-front payments, you could sell with a team of sales professionals.  In the SaaS world, where you are getting paid over time, it is imperative to sell using as close to a self-service sales model as possible and I believe this is what Adaptive Planning is doing.  What I like is that they are not just cutting costs, they are putting everything out there in a transparent, logical way for their prospects to make their own decisions and self-qualify.  There are still people at Adaptive Planning who will sell you software but only when you are ready to buy, which saves everyone time and money.

So far their approach appears to be working because they have more than 400 customers and continue to do well even in this recessionary environment.

Remember the good ol’ days of selling software, when you could talk to customers about the virtues of ROI, or Return on Investment?  ‘Our new software can cut your costs by 90%,  make you more strategic and you will get that raise you were looking for!’

Funny thing, that was only about 6 months ago. Even Software-as-a-Service sales professionals were skilled at ROI selling but now ROI is out and TCO, or Total Cost of Ownership is back in.

The reason for the change is that buyers don’t care about investments or benefits, they are only concerned with reducing  and managing costs.  So this should be really good news for SaaS providers because their solutions not only provide ROI but clear TCO advantages.  Some of these advantages include:

• No hardware required: web servers, application servers or firewalls
• No software required: database, infrastructure or security software
• No IT team required: DBA’s, IT managers, security guys, etc.

It seems like most companies have already thinned their workforces, frozen their budgets and trimmed unnecessary spending in an effort to reduce costs.  What you are going to see next is IT Cost Swapping.  This is when you start doing a line item review of all of your IT and business costs and realize that your customer is probably paying a huge amount annually for ERP maintenance to your friends at Oracle and SAP and not getting much in return.  In a recent CIO magazine article about the upcoming SAP maintenance fee increase from 17% to 22%, a Forrester survey of over 200 SAP customers found that over 85% saw little or no value in these annual fees.  So it is a stroke of genius to raise the costs as the economy goes into the toilet, right?  Well SAP isn’t alone, Oracle is also planning on a large price increase in 2009 which could be as large as 10%.  In fact Oracle said that their maintenance revenue was the most profitable component of their business, that’s because it’s pure profit!

A smart Cost Swap Strategy could involved a portfolio analysis of all of your customer’s ERP software and building a plan to replace older on-premise ERP products with up-to-date SaaS products.  The advantage with this approach is that your customer can get the benefits of modern software, while actually reducing their overall IT cost structure.   For more Cost Swapping ideas, drop me an email at: kevin@montclairadvisors.com.

When most companies think about moving towards a Software-as-a-Service business model they often just change their pricing model.  You know the drill, instead of charging a big perpetual license fee upfront with some services and then an annual maintenance fee, you switch over to a SaaS agreement that is structured quite differently; with the subscription being spread over the term of the agreement and some upfront services to get started.

Don’t get me wrong, changing your pricing is a big deal if you are a traditional software company.  By changing your pricing dynamic you are moving from a Capital Expense (CapEx)  to an Operating Expense (OpEx) orientation, this is a dramatic change!  It’s even a bigger deal if you are a publicly traded software company.  But the overall SaaS business model is really all about monitoring and measuring metrics, ratios and statistics.

I ran into a very interesting company recently, OpEx Engine,  that has done extensive benchmarking of SaaS and technology companies, and has complied a library of operational metrics for over 50 public and privately held software firms. Lauren Kelley, OpEx’s CEO is an ex- Art Technology Group (ARTG) executive who realized that smart technology  people were looking for these types of real-world benchmarks and operating metrics. Lauren’s team has spent the last two years accumulating a lot of really value information.  I can’t tell you how many times I have looked for good comparative metrics on how much companies typically invested in sales and marketing, research and development and G&A when building out a business model.  For instance, did you know that of all of the publicly-traded SaaS companies that DealerTracker (TRAK) has the lowest R&D investment as a percentage of their revenue? (4.9%)  Did you also know that Salesforce.com (CRM), Omniture (OMTR), NetSuite (N), and SuccessFactors (SFSF) all spend more than 50% of their revenues on sales and marketing? That’s an easy one but you should definately check out the free information that Lauren provides on her site.

There are many other metrics that are needed to successfully run a SaaS company but one of the most important is your overall cost of sales and marketing.  Understanding what your true Customer Acquisition Costs is a critical SaaS business performance indicator.  I was recently at the SIIA On Demand Conference in San Jose where I heard Josh James, the CEO at Omniture present his sales and marketing modeling methodology, that he has dubbed the ‘Magic Number’ for SaaS companies.   Since it would probably justify a completely separate post, all I can say that this is a really innovative way to determine if your % of sales and marketing spend is either too much or too little.  Phil Wainewright wrote a great piece on the Magic Number - When to spend cash in a SaaS business - which is definitely worth reading.  What Omniture has done really well is to figure out the overall profitability of their clients, market saturation, marketing effectiveness and the number of Quota Bearing Sales Reps (QBSR’s) that are required to grab market share. It’s cool.

Other sources of good SaaS market information and metrics are:

TripleTree, a boutique investment bank which conducts some solid SaaS research, Cutter Consortium, Saugatuck Technologies, and Jeff Kaplan’s firm Think Strategies.

If you hear of any other good ones, let me know.

I was just at the SIIA On Demand 2008 conference in San Jose this week.  There was a great panel discussion which covered one of my favorite SaaS questions; ‘How do I move over to a true SaaS business model?’

Just change the pricing model and host the product, right?  Well not quite…

Some key things to consider when moving to a SaaS model:

* Changing the DNA of your company can be difficult  but critically important to succeeding in this type of transformation.  It is helpful to inject some fresh team members into the mix who have solid SaaS experience.  Also be aware that an ‘A’ player in your old software business model might only be a ‘B’ or ‘C’ player in your new SaaS business. This is really important when it comes to transitioning your sales and development teams!

* Executive commitment.  Make sure that your CEO and executive team are bought into making the move to SaaS.  The initial financial fall off can be very scary for your company and its investors and a committed executive team is essential to crossing over the chasm.

* Different financial model for the company.  There are new ways to think about revenue recognition, annuity streams, deferred revenues, bookings, GAAP rules, VSOE and pricing that need to be managed and rationalized against your current perpetual license business.

* Move Quickly.  Once you decide to move, the sooner you make the changes the better.  You won’t look back and regret the decisions you made, but only the ones you delayed. Don’t try and live in both models, it just won’t work.

Several approaches to building your migration strategy include: 

* Cold Turkey.  When the CEO, executive team and board just decide that staying on the old model will no longer work and they make the decision to move.  This is the most direct approach and takes a nerves of steel to resist the on-going temptations of slipping back into the perpetual revenue trap in order to save your quarter.  The best case study I know of is of Steve Singh the CEO at Concur.  After the Internet bubble burst, he transitioned his firm over to a pure SaaS model and is today one of the leading publicly traded SaaS firms. Other brave firms who are using this approach are Ariba and Sabrix.

* Buy your way into SaaS.  Acquisitions can be a fast way to get the product and people needed to begin moving your model towards SaaS.  It is important that when you take this approach, that you firewall your existing and SaaS businesses and don’t try and to blend them.  Over time as your SaaS business grows to scale, you can turn off or spin out your traditional business. Examples of firms who are using this approach are SAP’s purchase of Business Objects, and  SumTotal’s acquisition of Mindsolve .

* Create a SaaS Division.  When buying an existing business doesn’t make sense, you can build a separate SaaS business unit that lives by SaaS business rules and functions alongside your perpetual software company.  This ’separate but equal’ strategy can work but executive management needs to support the independence of the division and be committed to building out a real SaaS team, because this is the beginning of your new SaaS company.

The model that really DOESN’T work, unless you are a multi-billon dollar firm, is to pursue a Hybrid Model that mixes both perpetual license with SaaS businesses.  There are plenty of examples of software companies that have tried to leverage both models with limited or no success.

Ironically for some software firms, this economic downturn may provide the ideal time to  move to a SaaS business model.  Remember to work with your executive team to build a 12 -24 month plan, then find some new SaaS talent to inject into your business, then find the model that works best for your company.

For more pointers and ideas give me a call or drop me an email.

No doubt times are tough for all software firms but if you are a Software as a Service firm here are some simple ideas that might help you weather this economic downturn:

1. Customers Always Come First.

Now would be a great time to reach out to your customers and assure them that your firm is prepared for the downturn and you are taking steps to ‘batten down the hatches’ for the long term if necessary.   While you are reassuring them, it would also be smart to be proactive about renewing any large upcoming contracts or extending contracts that might be less than 18 months from expiring.  Providing some customer incentives for a longer term commitment should give your firm more predictability in its cash flows and for smaller firms, and runway.

2. Keep Key Employees Close.

These types of economic roller coasters can really upset your employees.  Everyone is looking at the stock market, industry layoffs and sales pipelines getting smaller, it really can be concerning for them.

The last thing you need at this point is to have key employees abandon ship or become disengaged.  Over communicating with employees is crucial, especially if you have to do layoffs.  If you can afford it, for some key employees you should consider putting them on an employment contract with some creative cash or non-cash incentives. This can lessen their concerns around job security and give you more piece of mind when planning for your company’s future.

3. Everyone Sells.

If your firm really has a sales-oriented culture, then keep up the good work!  But if you are not sure that everyone understands that sales is job #1, then you need to make that clear.  This is especially important for employees who touch your customers every day.  In this type of economy, it is more likely you will get your next deals from your existing customers than from the companies that you have no relationship with.

Encourage and develop incentives for your professional services and account management teams to keep their ears and eyes open for incremental sales that your company might be able to make over the next couple of quarters.  Whether it is adding new users, incremental services projects, training, possible up-sell opportunities or even locking in renewals, every little bit helps.

4. Your Investors Are Nervous.

Whether you are a publicly traded firm or a venture-backed start up, investors today are really freaked out.  They may not tell you that, but they are.  So just like your employees and customers, now is the time to talk with your investors and shareholders.

Clearly the rules of the road for publicly traded firms is different than if you are private company but identifying a few key metrics that your business will be focusing on during the downturn and executing against those metrics is really helpful.  Communicating a clear plan, including a comprehensive cost containment strategy is important.  But equally important is re-setting your 24 month objectives that acknowledge the current challenges in the overall business environment.  For an investor, if your company is a survivor this is great news.  Because this means less competition in future for your company and a better shot at nice return for your investors in the future.

5. Tough Love for Your Sales Team.

Now is the time to do a very through pipeline review with not only every sales rep, sales manager and sales executive but also include the entire management team.  Having reps that sandbag, forecasts that are optimistic and processes that are not sharp, will kill your company.

Identify all the reps who have been consistently hitting their numbers over the past 4-6 quarters,  and make sure you have enough pipeline to keep them engaged, productive and making money.  Then take your new reps, those with less than 6 months of tenure and those who have been at the bottom of the quota list and terminate them.  Based on how much pipeline you have now, as a result of your pipeline review exercise, apply your keeper reps against these deals, if you need additional capacity, then you should reach into the pool of reps who fall between the two groups.  Keeping a bloated salesforce will quickly burn through your precious cash.

6. Understand Your Cash Flow.

You should be doing a detailed cash flow analysis, start with your CMRR (Contracted Monthly Recurring Revenue) and your monthly expenses over the next 12 months.  When looking at your CMRR make sure you are taking into account any customer attrition or customer acquisitions.  You should omit any one time revenues for now because it is important to understand your worst case scenario.  This is part of the reason behind extending and locking in customer contracts.

This process should yield some very interesting results including ideas around cash collections, highlight important client contracts, renegotiating or rationalizing expenses, as well as the need to secure necessary additional funding.  This should provide a clear view on what is needed to reach cash flow break even and ultimately profitability.

7. Don’t Turn Off Your Marketing Machine.

This is a common mistake that companies make in a downturn.  You should defer all non-essential programs but don’t think because marketing doesn’t generate revenue it is right to turn it off.  But doing this blindly can have very dire downstream affects on your future revenue.  Things to consider, you will need smart lead generation to feed your sales team, even if it is scaled back.  The best lead generation approach is to do what is called ‘lead nurturing’ that takes the leads you generate and continue to work them.  This is less expense than generating lots of new raw leads and ultimately will yield better results.

Get creative about how you use new social networking sites to continue to build your brand and make your corporate website work for you.  Set up a corporate presence at LinkedIn, Facebook, Twitter and other sites that can build your pipeline but also generate important market advocates, and this can be done for a fraction of the price of doing a big expensive tradeshow.

8. Automate Don’t Offshore.

Rethink your product roadmap to build in more automation into your product or service.  Ideas to consider would be to create product wizards, self service installation, just in time delivery of content or help, build up a library of re-usable product templates, and any other way to remove human intervention for your product or service.  Your customers will like this and it will definitely improve your margins.

For example if it takes 3 months to set up your product, challenge your team to come up with an approach that can set up the product in 1 month, then 2 weeks, then 2 days and then 2 minutes.  The closer you can get to an instantaneous set up of a product, your firm will be in a more competitive position and it can save you a lot more than outsourcing your development team.

9. Think About Free.

Your Customer Acquisition Costs (CAC) in this environment will increase because of the reluctance of buyers to sign up for new products, but if it is free, they might want to try it.  There are new SaaS providers who are now using this type of Freemium approach as a way to generate leads, build awareness and to grab marketshare that they will monetize later.  Think Google or Yahoo Mail.

Ideas might be to offer a piece of your product portfolio as a loss leader and build in an up-sell component, generate revenues from complementary services, or possibly even sell advertising.  Now is a good time to experiment.

10. Make Some New Friends.

If your company is doing fine,  then you are probably in a great position to acquire some additional capabilities or market share by purchasing a smaller firm which might not be doing very well. This process will not happen overnight, so now is a good time to begin your market scanning process.

On the other hand if your company is not doing well and you might feel that you may not make it through the current economic storm, then you better start looking for a safe place to land.  Again, this process is going to take some time, so you should begin looking at your options. Even if you are not looking for a strategic partner, you might be surprised you might find a partner who wants to invest or even resell your offerings.  You can never have enough friends.

Remember that some of the best software companies including Google, were created during downturns, so be a smart SaaS company and stay focused.

Good Luck.