Depending on who you listen to, things are either recovering slowly, or we are slipping back into a recession. It can be argued that for most software companies, if you are selling a SaaS-based solution then it shouldn’t affect your business very much. In fact, as the economy gets tighter for buyers, SaaS solutions even make more sense for forward thinking businesses who are focusing on innovation and cost controls.

During the Great Recession we saw that traditional software companies experienced a net decline in their revenues and in some cases their revenues went down by nearly 50% year-over-year between 2008-2010. In big part this was because traditional software customers no longer had available the necessary capital dollars to spend on their perpetual license-based products and the banks were no longer lending.

These traditional software companies had also hastened their revenue decline by raising their annual maintenance rates, which put more pricing pressure on their customers at a time when they could least afford it. So their customers started taking a hard look at SaaS solutions as potential alternatives to traditional on-premise software.

Recession Accelerates SaaS Adoption

It wasn’t that SaaS solutions hadn’t been around for many years, it was that for many large software buyers, they hadn’t felt comfortable with software that was being managed by another companies. There were a lot of questions: Where was their data being housed, was it safe, what if they can’t handle our requirements? These were legitimate questions but many SaaS value propositions began to win over these large, skeptical customers:

• You could try their software before you buy it
• Get can get this software up and running quickly
• Only buy the functionality that you need
• If you don’t like their software, for any reason, cancel your subscription
• The software’s performance and availability is guaranteed
• Pay though a subscription, a big lump sum payment is not required
• No more upgrades, this type of software is always current
• Less or even no staff required to manage their software
• Lower total cost of ownership

These types of on-line solutions started resonating not only with the small and medium-sized company buyer but also with the very large, global enterprises as well. Over the last couple of years we have seen well-known organizations like Siemens, Walmart, Flextronics, Thomson Reuters and even the US government adopt SaaS and Cloud-based solutions.

It’s About Innovation Not Reducing Costs

Businesses during the last recession were primarily trying to reduce costs, which resulted in large scale layoffs. These firms were trying to ‘do more with less’.  This was the reason that many of these companies continued to buy software because they not only wanted to streamline operations, but also they needed to continue to innovate their business.

By deploying the latest in software technology, these innovative companies are looking to move into new markets, provide state-of-the-art tools to their employees, and optimize their supply chains.   This required them to get smarter about their businesses, markets and competitors, and solutions like SaaS-based business intelligence products were also really in high demand.  Given the flexibility and affordability of SaaS products compared to their on-premise predecessors, it is no wonder that most SaaS companies grew at more than 30% year-over-year even during the worst part of the recession.

There are SaaS solutions for almost every enterprise need including ERP, Financials, CRM, Marketing, Human Resources, Talent Management and even specific specialized vertical solutions.  Click on this link to access Montclair Advisors Public SaaS Index to see which firms offer leading SaaS solutions.

In the next 12-18 months we may be either headed for very slow growth in the economy or even another recession, but SaaS companies will continue to grow quickly because most companies are still looking for ways to lower their total cost of operations and improve their ability to innovate and increase their overall competitiveness.  As long as SaaS providers continue to deliver on their Cloud-based value propositions, they will experience rapid growth even if the economy continues to be tight throughout 2012.

By Kevin Dobbs

Montclair Advisors, LLC

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 thinking about your transition to SaaS, there are many questions to consider including target customers, value propositions, packaging, pricing and how best to build customer relationships.

After conducting more than 50 Smart SaaS business profiles of all different types including pure SaaS, Hybrids and Cross-Overs, all of these companies would probably answer many of these types of questions differently depending on their type of customer, functionality, geography, vertical markets and the only way they can get useful answers is to continually test everything.   Best in class SaaS firms are always trying different pricing, packages, messages in order to optimize their businesses, like a recent firm we profiled - Clarizen.

Some resources when thinking about these types of considerations include:

Software Pricing Partners - Jim Geisman

Chaotic Flow - Joel York

SaaS Blogs

Sixteen Ventures - Lincoln Murphy

4 Pillars of SaaS - Phil Wainewright, ZDNet

In addition to testing, it is a good idea to measure everything including website traffic, marketing campaigns, product usage, customer satisfaction and a myriad of other SaaS and business metrics.  Again, the best firms track and monitor all the key business metrics in order to improve their ability to generate revenues, build market share and reduce unnecessary customer churn.  SaaS requires a very tight operational model and has moved business an art to a science and now there are an entire new class to tools to improve revenue performance and reduce costs.  Some of these next generation of tools include:

Sales Automation

EchoSign - Provides electronic signature and contract management.

InsideView - Sales business intelligence and social media platform.

JigSaw - Business information and data services.

NetSuite - CRM and ERP suite.

RightNow - CRM, call center and social platform.

Salesforce.com - Salesforce is not only a solid Customer Relationship Management system but also a great system of record for all types of sales, marketing and service information and applications. Also offers a application marketplace that provides value added extensions.  Salesforce also offers Chatter a collaboration platform to improve internal communications.

SugarCRM - Open source based CRM that provides a robust no cost solution.

Marketing Automation

Eloqua - Marketing automation platform.

Genius.com - Sales and lead automation.

MarketBright - Marketing and lead generation management.

Marketo - Marketing and revenue management.

Pardot - Business to Business lead automation.

SaaS Analytics

Birst - On demand business intelligence product.

Cloud9 Analytics - SaaS performance management.

GoodData - SaaS business intelligence product.

PivotLink - On demand business intelligence product.

Using many of these tools companies can help a SaaS firm track their business, sales and marketing performance.  The question that I often get is ‘what should I be tracking?’  There are an emerging set of SaaS-based business metrics that include Monthly Recurring Revenues (MRR), Churn, Customer Acquisition Costs (CAC), The Magic Number (MN) and others that provide very precise views into how a SaaS business is performing.  Here is a chart that details some of the more common SaaS business metrics by functional area:

Other resources to learn about SaaS metrics;

5 C’s of SaaS Finance - Bessemer Ventures

Chaotic Flow - Joel York

For Entrepreneaurs - David Skok, Matrix Partners

Haut Tech - Michael Dunham at Scio Development

My opinion about the SaaS business model is that there are a lot of new considerations about building a profitable subscription business today.  The buyers are different, there are many robust low-cost tools available, Cloud technology that can radically change your cost model and time to market as well as many other business factors, so the only real way to really tune your business for SaaS is to continually test everything!

I would be interested in your comments and hearing about what you are testing.

Stay tuned for Tip #4 Sales & Marketing on a Budget

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.