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By Kevin Dobbs
Montclair Advisors, LLC
Now that many software companies really feel that the risks associated with a second recession are firmly in the rearview mirror, it now seems like everyone is looking to grow their businesses.
I read a great post yesterday by Bruce Cleveland at InterWest Ventures about the Value of Growth for SaaS Companies, which I thought really accurately captured a challenge that many software firms face when transitioning to a SaaS model. This is a subject that is near and dear to me given my background as a reformed marketing executive and someone who was responsible lead generation at Oracle years ago during the Tom Siebel and Marc Benioff era. I think it was Tom Siebel when he was running Oracle’s inside sales team that told me “I want it to rain leads from the sky!” At the time I was actually shocked because he was asking me to literally drown his sales team with qualified opportunities who wanted to buy Oracle’s database products.
As I have come to learn that he knew exactly what he was talking about and his track record demonstrates that productive sales teams deliver amazing revenue growth results. Bruce’s post highlights that a SaaS company without meaningful growth is not worth very much and probably will fetch the low-end of the valuation curve, which is still pretty good in today’s crazy market (See last week’s post about the SaaS Bubble). So how are high flying SaaS companies like Salesforce and SuccessFactors achieving CAGR’s in excess of 30% every year? Check out this chart I put together on some of the leading publicly traded SaaS firms (sans Salesforce because they will skew the chart):
As you can see the companies with the higher growth rates are also the ones that have high market caps (valued more highly by Wall Street). What is really interesting is that SuccessFactors was able to grow by almost 50% for the past three years, even through one of the worst recessions in the last 100 years. The value of growth can also been seen by a company that recently went public, Cornerstone OnDemand, they have been rewarded with a market cap that is over $800M even though the company lost more than $40M last year. Seems crazy right? But they have a great organic growth story along with a major channel relationship with ADP which could also signal even faster growth in the future.
If you talk to any software sales rep they often complain about their pipeline and the lack of quality leads. Reminds me of those coveted Glengarry leads from Mitch and Murray downtown. So at the heart of all of these companies and their rapid growth rates is that they have all developed a core competency to generate high quality leads and build pipelines quickly.
(click on picture to see clip)
Here are some tricks that I have learned along the way that will help you to build out your SaaS lead generation strategies:
- Use a Portfolio Approach - Depending on your product, buyers, and market there may be many ways to generate interest. Campaign elements of a typical lead generation strategy are a combination of organic and paid web traffic, email campaigns, webinars, customer programs, social media and targeted events. Don’t put all of your investment in a single demand generation approach, but reward the tactics that generate quality leads at an affordable price.
- Test and Test Again - With the portfolio approach you will need to continually test your messaging, packaging, value propositions, and price points. The best-in-class SaaS firms are continually testing and refining their lead strategies. This is important as most SaaS marketing organizations are trying to lower and optimize their Customer Acquisition Costs (CAC).
- Automate Where Possible - There are a lot of great Sales 2.0 tools available today that can give you a real unfair advantage in the lead generation process. Companies like Marketo, Pardot, Eloqua, Constant Contact, NetSuite and even Salesforce offer many tools to help you automate and analyze your marketing efforts. I would definitely recommend implementing a lead nurturing or drip marketing program to continue to work your lower quality leads, this is a great way to build your pipeline over time with little direct human intervention.
- Track Everything - Make sure your sales operations and marketing teams are tracking and analyzing all of your lead activities and conversion rates. You don’t need to be overly complex, but just tracking some basic things like lead scores, lead acceptance rates, leads converting to opportunities and close rates can help your organization to fuel your high growth SaaS sales engine.
By Kevin Dobbs
Montclair Advisors, LLC
The best-in-class SaaS companies are obsessed with operational efficiency, and they are constantly testing and monitoring all different types of business processes to improve speed and reduce costs.
A good example of this focus on efficiency is the use of the Customer Acquisition Cost (CAC) metric to measure the overall effectiveness of marketing and sales efforts. Since it is not possible for a SaaS firm to spend as much to sell new customers like a traditional software company, this becomes a very important efficiency metric to track because it has a direct impact on both the top and bottom line of the company.
SaaS Metrics
Just like CAC, there are a number of other process-specific SaaS business metrics that are commonplace for firms to use to monitor all areas of their company. Leading firms will usually track some subset of these types of these SaaS metrics on a quarterly, monthly or even in some cases daily basis. Here is a list of sample SaaS metrics that I have shared with my clients that can be used to kick start the discussion with operational groups inside of a firm that is considering a move to SaaS:
The most obvious areas to track are revenues, COGS, cash flows, bookings, CAC, profits, customer satisfaction, customer lifetime value, revenue per unit, customer satisfaction and churn. Beyond that there are a myriad of process specific metrics and dashboards that can be tracked and monitored, but start with the most important ones first.
Other Resources
Here are some great sources of information on SaaS metrics including:
David Skok of Matrix Partners, forEntrepreneurs blog and his SaaS Metrics post, which is really comprehensive and easy to read.
ReadWrite Cloud’s, 6 SaaS Metrics You Should Track
Michael Dunham of Scio Consulting, Haut SaaS Blog did a great post on SaaS Metrics – SaaSoNomics 101
Joel York’s Chaotic Flow Blog is always really useful and he did a fantastic post on SaaS Metrics and Economics. Joel provides a very scientific approach and a lot of details for those who are really interested in getting into what comprises SaaS metrics theory.
Some firms like j2Communications tracks hundreds of metrics related to their subscription software services but it took them ten years to get to that point. My advice to clients is always, start with something simple, make sure that works and then you can always add complexity as you go along.
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.
Company: j2 Global Communications
Started: 1995
Located: Los Angeles, California
Geography: Global – 48 countries
Market: Provider of outsourced, value-added messaging and communication services
Products: eFax, Fax.com, RapidFax, eVoice, eReceptionist, Onebox, and electricm@il
Key Customers: More than 11 million customers
Website: j2 Global Communications
NASDAQ: JCOM
Twitter: @JCOM
Recent News:
Where in the World is eFax®? Everywhere
Phone People(R) Offers Newly Released 855 Toll Free Phone Numbers Tomorrow, October 9th at 12pm EDT
eFax(R) Wireless Faxing Featured in New HP All-in-One Printer
eFax(R) Transforms the Way Documents Do Business
I asked Scott Turicchi, President a few questions about j2 Global’s business and his view of the SaaS market in 2010 and beyond.
Did you start out as a Software-as-a-Service company?
Not exactly. We didn’t get founded based on our technology. The man who spawned the idea for j2 Global Communications was a rock and roll musician born in East Germany named Jaye Muller, who was touring Europe doing concerts. Mueller was writing newsletters about current events but found it difficult to communicate using email, the phone, voicemail or even fax while on the road. Email is location independent but using traditional telephone communications while traveling with the band was a mess.
When Mueller got back to the United States he formulated his business concept and started pitching his idea to investors. Then he went out and obtained some phone numbers and began testing. He found a problem based on his own experience and his assumption was that other people wanted to be location independent and that was why email use was growing so dramatically.
j2 Global Communications, Inc., which was then known as JFax, was founded in late 1995 and started to build out our solution in 1996. The company then extended its geographic reach to London, with the ambition of building a global solution. We then raised our first round of funding in 1997 and then some additional working capital in 1998 and then in 1999 during the crazy Internet days went public. At the time we went public we were only $7M based on our trailing 12 months of revenues, a business that would never be able to do a successful IPO today. Our IPO raised $80M but we have never had to raise any additional capital since then.
Then in 2000, the stock market crashed and we had to find a way to deliver a profitable business with our model. We used our capital to purchase eFax and developed a new more efficient business model that leveraged both indirect channels as well as low cost marketing techniques. We continued to pressure test our model and by 2001 we went from losing cash to making money. Because of the cash constraints on our business due the capital markets, we had no choice but to develop a profitable subscription business model.
Why do your customers buy from j2 Global Communications?
Our founders believed that it didn’t matter whether you are an individual buyer, professional consultant, even worked inside of a large corporation; you wanted the freedom to choose your own business tools. j2 was first to the market and we had to educate the market on the value of services like converting faxes to emails and the advantages of having a broad network.
Because of our target buyer’s desire for freedom of choice, we shifted our model shifted to selling a range of phone, fax and business services that contained administrative tools, attractive pricing, support and overall control. With the ability to monitor and manage a wide range of telephone and fax services, this enabled us to effectively sell to, and retain, larger customers as well as our traditional small and medium target firms. Even today, the majority our customer base are still small businesses, those who purchase fewer than 150 seats.
Our enterprise customers like our financial stability and strength, the fact that we are publicly traded and have healthy cash balances on hand. We are currently running at about $254M in annual revenues with over $260M of cash and no debt, so this provides a lot of comfort to large customers who want to buy and use our services.
Another reason customer buy from j2 Global Communications is that we really understand how to meet their needs around messaging and communications and we have developed expertise around these core competencies and have proven we can deliver over a long period of time. Our company lives and dies by providing our services with a very high level of quality to our customers. This is our core business.
j2 Global Communications has developed strong brand awareness over the last ten years. This has become quite meaningful to us by helping to reduce the cost of running our business because a significant number of leads come to us through customer referrals, which are free leads. Currently about 40% of paid customer signups fall into the ‘free’ categories that we track.
Our sales and marketing teams get a range of investment to go out to the market and generate leads. All of these budgets are based on average revenue per unit (ARPU) and we have found that our Customer Acquisition Costs have almost been cut in half based on the strength of our brand and we can track this directly to our site activity. The investment you put behind your brand, can really be seen over time. It typically takes new brands a lot more marketing investment to build their awareness and generate quality leads.
Our organization tends to be more fiscally conservative but we are very customer-focused and that is how we have built our brand. This business philosophy was born out of necessity, but it has really paid big dividends for us over time.
What do you see as the key trend emerging in the SaaS industry?
For our company, the big trend we see is that large enterprise customers are willing to outsource more of their services to SaaS providers like j2 Global Communications. This willingness is especially true for global companies who no longer want to maintain PBX’s or fax servers; it just doesn’t make financial sense for them anymore.
The SaaS wave is real and thanks to the Great Recession, cost pressures have made the SaaS value proposition very attractive to all sizes of organizations. Big guys are really open to SaaS. Then there is huge opportunity for SMB’s who are looking for big boy software but only need 70-80% of the functionality. These firms also like the ability to pay-as-you-go model and that they don’t need any technical expertise to use our services.
What is your outlook for the balance of 2010?
We have been cautious. My thesis for 2010 has been that it is directionally better than 2009, and generally positive. j2 will re-engage from a sales and marketing perspective but we continue to monitor our business metrics such as customers, sales and other external macro-economic data on an ongoing basis, and we can re-evaluate our tactics every 30-60 days based on any changes in the economy.
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
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.
| Term | Definition |
| ACV | Annual Contract Value of a subscription software agreement. |
| API | Application Programming Interface. |
| ARR | Annual Recurring Revenue. |
| ASP | Application Service Provider. Typically associated with a hosted single tenant software solution. |
| CAC | Customer Acquisition Costs. A key -SaaS metric that measures sales effectiveness based on how long it takes to pay back Sales and Marketing investments. |
| Churn | A SaaS measure of customers who do not renew their annual or monthly subscription agreement. |
| Cloud Computing | A utility computing method that shares many types of computer resources through virtualization and delivers an elastic computing environment over the Internet. |
| CLTV | Customer Lifetime Value. A key SaaS metric that is used to measure customer value, usually over 3 to 5 years. |
| CMRR | Contracted Monthly Recurring Revenue. A key SaaS metric that is calculated for new customers, up-sells, cross-sells and removing churning customers. |
| CoLo | Co-Location facility. A term for leasing a third party’s physical data center infrastructure, which usually includes the building, power, Internet connectivity and security. |
| Cross-Sell | A key SaaS metric measuring new software functionality or modules added to an existing software subscription agreement. |
| Down-Sell | A key SaaS metric that measures when customers remove of functionality, users or capability that lowers the CMRR. |
| Freemium | A business model in which the SaaS or Cloud Computing provider offers basic features to users at no cost and charges a premium for supplemental or advanced features. |
| Hosted Software | Single tenant software that is delivered over the Internet from either the Software vendors own data center or through a third party hosting company. |
| IaaS | Infrastructure-as-a-Service refers to a combination of hosting, hardware, provisioning and basic services needed to run a SaaS or Cloud application that is delivered on a pay-as-you-go basis. |
| Mashup | It is a web application that combines data or functionality from two or more external sources to create a new service. The term implies easy, fast integration, frequently using open APIs and data sources to produce results that were not the original reason for producing the raw source data. |
| MRE | Monthly Recurring Expenses. |
| MRR | Monthly Recurring Revenues. |
| MSP | Managed Services Provider. Usually a hosting or CoLo provider who provides a higher level of application management services (App management, monitoring, reporting, billing and call center support). |
| Multi-tenancy | Refers to a software architecture where a single instance of the software runs on a server, serving multiple client organizations (tenants). Multi-tenancy is contrasted with a multi-instance architecture where separate software instances (or hardware systems) are set up for different client organizations. |
| On-Demand | Is often used as an interchangeable term along with SaaS. |
| On-Premise | Traditional method of installing and customizing software on the customer’s own computers that reside inside of their own data center. |
| Platform-as-a-Service (PaaS) | Platform-as-a-Service solutions are development platforms for which the development tool itself is hosted in the Cloud and accessed through a browser. With PaaS, developers can build web applications without installing any tools and then they can deploy their applications and services (reporting, integration, security) without any specialized systems administration skills. |
| Private Cloud | Employs Cloud Computing principles within a customer’s own internal networks. The term implies that the same virtualization and highly flexible and scalable methods used in huge Internet-based enterprise datacenters. |
| Public Cloud | Cloud Computing conducted using the public Internet outside of any enterprise firewall. |
| Renewal | Agreeing to extend an existing software subscription agreement beyond the initial term. |
| SLA | Service Level Agreement. The contractual terms of service associated with SaaS provider’s offerings. |
| SOA | Service Oriented Architecture. |
| SaaS | Software-as-a-Service refers to multi-tenant software delivered over the Internet and customers consume the product as a subscription service that is delivered on a pay-as-you-go basis. |
| Subscription | SaaS licensing method where customers rent their software from the provider usually over a 1-3 year period. |
| TCV | Total Contract Value. Total value of a transaction as measured over the term of the agreement. |
| Up-Sell | A key SaaS metric measuring additional software functionality, users, or capacity that is sold onto an existing software subscription agreement. |
| Virtualization | The creation of a virtual (rather than actual) version of an operating system, a server, a storage device or other network resources. |
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