By Kevin Dobbs

Montclair Advisors, LLC

One of the questions that I get quite often from firms that are starting down the path towards selling SaaS solutions, ‘should we use the same sales team to sell both our on-premise and SaaS solutions?‘ It seems like this would be easy and you should be able to definitely leverage your existing sales team to penetrate not only prospective accounts but also with existing customers.

No one wants to re-invent or re-invest in building out a new SaaS-specific sales team but this is critical to building out a successful SaaS business.  What many executives overlook is that SaaS is not just a delivery model but it is really a truly different business model.  I thought it might be helpful to use this table to illustrate those business model differences and why creating a specialized sales team is necessary.

Let’s review some of these important differences in each sales approach and how it affects the typical software sales rep:

Value Proposition: Traditional software is sold to solve a targeted business requirement and then customized to meet the specific needs of a customer.

SaaS takes a different approach.  It is usually sold with the promise of lower costs, more rapid time-to-value and ease of use.  This is accomplished using a standard system and configuration that is not tailored or customized for each customer. These are two very different value propositions and would be hard to expect every sales rep to be able to master both sales strategies.  Keep in mind that these two value propositions also appeal to two very different buyers; business buyers and IT.

Procurement:  Similiar to the value proposition, positioning the value of of a subscription purchase versus the actual purchasing of a software license are quite different.   After the recession, and part of our new normal economy, most organizations are now leading with a the requirement of subscribing to software instead owning it.  This allows customers to keep their more cash on their balance sheets and longer term, save on hiring staff to manage their internal systems inside of their own data centers.

Sales Cycles: Customers are also looking for just enough software to get the job done and are not usually looking to purchase a lifetime’s worth of functionality anymore.  They want to purchase a small piece of functionality now and then grow their relationship with their software provider over time, once they know the software works and they are comfortable with this relationship.  This means that SaaS sales cycles are going to be much shorter than traditional, on-premise software sales transactions.

Transaction Sizes:  Because of the different buying behaviors associated with SaaS from traditional software, SaaS transactions tend to be much smaller.  This means that a SaaS sales rep is going to need to close more deals, more frequently in order to make the same quota target that a perpetual license sales rep is assigned.

Pricing:  Putting together proposals are always difficult, but asking a sales rep, or even sales management, to offer both license and subscription options is really complex.  I think this is also not a great idea because it ultimately confuses the customer, since they will try and normalize the pricing for both options, which is hard to do.  Comparing a SaaS solution to an on-premise perpetual license is like comparing apples to oranges, and your sales team needs to pick one of these solutions and really learn how to sell it.

Methodologies/Touch:  Best-in-class SaaS sales organizations is a laser focus on Customer Acquisition Costs (CAC).  Living with the reality that the majority of your revenues will come in over the life of any contract, it is imperative to keep your sales costs low.  A SaaS model doesn’t lend itself to using the high-touch sales model, or engaging the ‘cast of thousands‘, to come in and get deals done.  Most SaaS firms operate a lower-touch model using tele-sales, remote demonstrations, and many automated self-service tools to assist the sales team in getting deals done quickly.

Channels: Effective use of indirect channels is another way of lowering customer acquisition costs.  Although some traditional software companies use channel partners to sell their products, it appears that the use of channels is really gaining popularity among SaaS providers.  Many SaaS firms are complimenting not only their tele-sales capablities but also using partners to deliver value-added services as well.

Demos:  Another way of reducing the cost of sales is to be more selective and smart about how customers are exposed to a software providers’ solutions.  This is usually accomplished by showing the software either using a Web-based conferencing service or some type of self-service environment.   This is quite a different approach than what was done with on-premise software, which was done in person and using a highly scripted demo.

Trials:  In the past, if a customer wanted to get their hands on the software and really use it, the only way that can be accomplished was with a Professional Services team and a conference room pilot.  Most SaaS companies allow prospective customers to play with their products by offering them a 30-day trial, after a simple self-service sign up and a quick tutorial.  This automated approach is cost effective and allows a SaaS firm to manage potentially hundreds of product trials with very little support personnel required, and this is a great source of qualified leads.

Renewals & Customer Relationships: This is another contrast between the two models. In a traditional software company the customer relationship is usually dispersed among various functions including Sales, Support and possibly Professional Services.  In SaaS firms the customer relationship and the renewal process are both very important, and usually have clear ownership, usually with the Account Management organization.

When you consider all of the differences in these two approaches to selling traditional software and software as a service, it is not reasonable to have the same reps trying to master selling both options.  The best sales reps are always focused on selling, hitting quota, and earning commissions.  Sales reps will sell what they are comfortable with and when considering a SaaS transition, it is best to create separate teams, with one that can specialize in the SaaS value proposition, solution, sales methodology and can make money on the SaaS-specific comp plan.

When firms make it simple for their reps to sell, you will get the sales momentum you are looking for in all of your lines of business.  You don’t want your sales reps to be the ‘jacks of all trades and masters of none‘, because that isn’t the formula for SaaS sales success.

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.