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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
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
Started: 2003
Located: Palo Alto, California
Geography: Global
Market: Electronic Signature and Contract Management
Products: EchoSign Web, EchoSign Salesforce, EchoSign for Google Apps, EchoSign for Netsuite, and EchoSign for Oracle CRM OnDemand
Key Customers: British Telecom, Comcast, Delta Airlines, GE Capital, Qualcomm, and Time Warner Cable
Website: EchoSign
Blog: EchoBlog
Twitter: @fromechosign
Recent News:
EchoSign Electronic Signature Reaches 1,000 Customers on Salesforce.com’s AppExchange 2
EchoSign Integrates Its Electronic Signature Software with NetSuite’s Cloud Computing Platform
EchoSign Now Available Through the Google Apps Marketplace
I asked Jason Lemkin, EchoSign’s CEO and co-founder a few questions about his business and his view of the SaaS market in 2010.
Did you start out as a Software-as-a-Service company?
When we started our company in 2006 the market wasn’t that clear on what SaaS really meant. Our vision has always been clear to build a web or Cloud service where companies could execute a contract electronically on the Web.
This is my 4th start-up and the second company that I have co-founded. I was a lawyer at the Venture Law Group here in the Bay Area and it was really obvious to me that this was the right way to get contracts done but lawyers tend to be slow to adopt new technologies.
It always seemed logical to be able to execute contracts electronically, because it saves time and headaches but our vision might have been a bit early. Our early customers were an odd mix of web-centric folks who read TechCrunch, use BaseCamp project management products, and other companies that wanted to automate their business contracting processes. Now we are seeing regular businesses are catching up to our early adopters by leveraging the Web for their contracting processes. We believe this might be one of the last open areas for the automating of business processes using the Internet. Like a lot of other paradigm changes contracts will be going from the analog world to digital, and most contracts in the next 5 years will all be executed electronically.
Why do your customers buy from EchoSign?
We have sold to nearly 20,000 customers of all sizes including Proctor & Gamble to Real Hip Hop Records to Dell and more than 80% of our customers use our products for sales oriented tasks. The real advantage for our customers is going from an older fax-based contract process to EchoSign. We can take a process that currently takes days and compress it down to just a few minutes; in fact we have found that the average time to execute a contract with EchoSign is less than 45 minutes.
Aetna likes EchoSign because healthcare professionals can complete contracts faster and more reliably and can reduce the expenses associated with faxing or mailing these agreements. The company has found that by using EchoSign, they can reduce contract-processing time from three weeks to one day on average. Currently about 70% of all of Aetna’s transactions with healthcare providers are electronic and EchoSign helps with these processes and provides visibility throughout the contract lifecycle.
We built EchoSign to be a very easy to use sales tool, not just a product for lawyers. All types of business people are executing contracts today. Business professionals and sales reps just don’t have time to learn how to use new tools; they just want to focus on closing contracts and getting back to their business.
Like Aetna, many of our larger customers also see the benefits of EchoSign for their legal organizations because we provide visibility into their overall contracting process, which helps with compliance by creating electronic audit trails, delivering a secure signing process, which can also help to avoid fraud.
What do you see as the key trend emerging in the SaaS industry?
When we started the company three years ago, customers were just buying SaaS point solutions like Salesforce.com and WebEx. Today companies are running their entire business using Cloud-based software. So the concept of signing and closing contracts can no longer be viewed as just a point solution, but a component of a larger, integrated business process.
For example, a typical integrated sales process for one of our customers might be capturing a new lead from Google Adwords, then demonstrating their product over the Web using WebEx and managing the sales process using Salesforce.com and then executing the new customer contract using EchoSign. Our customers would ideally like all of their SaaS tools and processes to be integrated because it saves them time and money. Applications should just be loosely connected together using API’s, they want these products to work together in a more integrated way.
Another trend we see is the rise of many different partner ecosystems that companies like ours will need to work with over time. EchoSign is a Salesforce AppExchange partner; in fact in 2009 we were the signal highest rated application on the AppExchange. We also work with Google Apps, Oracle, Salesforce, Box.net and others. We have these partnerships because our customers are looking to integrate all of these web products together to run their businesses and we want EchoSign to be a part of these expanding set of business processes.
Even though Salesforce has over 70,000 customers, the Laws of Attach Rates would tell us that we can only assume that 1-2% of their customers will consume our service. We just announced we have signed our 1,000th Salesforce customer, so we are doing well but we need to work with many of these partners who support large eco-systems of customers. Because we are relatively easy to integrate into, we should have a higher attach rate to these solutions and this partner leverage will enable us to grow our business quickly.
What is your outlook for 2010?
Last year, during the recession, we saw elevated churn rates but now our business is back to pre-recession levels. The churn was related to bankruptcies and other similar types of recession fallout.
Our customer’s buying patterns are pretty consistent. Prior to the recession, we had many lower quality customers, but now we are seeing more stable, higher quality customers who are less likely to churn in the future.
These stronger companies are buying our solutions now, which is fueling the growth of our business and we are not seeing those lower quality customers out in the market. I guess it was easier to build a company when equity and debt were available to start a business. Today, strong companies are succeeding and accelerating out of the recession and EchoSign can help these companies optimize their sales processes.
A good sign for our business is that we are starting to see our customers asking to pre-pay for multi-year deals as a way to lock in future pricing.
I listened to an interesting panel discussion at the Opsource, SaaS Summit a few days ago and I thought I would share what I heard.
Venture capital panelists were from Intel Capital, Emergence Capital Partners, CrossLink Capital and Hummer Winblad Venture Partners and Merrill Lynch.
New Investments
Seems like there was no agreement from the panel about what stage of investment was the most popular given the downturn. There were several Series A and Seed investments that were mentioned including Crowd Factory and Zuberance. One bright spot for investors was the fact that OpenTable has filed for an IPO, which would be a good step in the right direction given 2008’s anemic IPO performance.
Zombie Venture Capitalists
Most of the panelists had done some investments in the past six months but it is clear that SaaS entrepreneurs need to be on the look out for Zombie VC’s, who are still operating but are no longer making investments. These walking dead have their lights on, they have websites, and cash to support existing investments but no longer have enough cash to add new portfolio companies. In writing this post I even discovered that peHUB publishes a list of these Zombie VC’s. If they haven’t made any new investments during 2008, then I would be careful about wasting any time with these firms.
Flat is the New Up
One phrase that was uttered more than once is that ‘Flat is the New Up’. Although when it comes to Software as a Service… it appears that ‘Up is still Up’. Even in 2008, most publicly traded SaaS companies have bounced back from their lows by an aggregate of 20%, which is much better than the S&P 500. Apparently Wall Street likes SaaS companies and now are valuing them at 3 to 3.5 times their recurring revenues, unfortunately at the beginning of 2008 that number was closer to 8x. Keep in mind that this is better than a lot of public firms that are currently trading at their cash values. Other Wall Street analysts are valuing SaaS firms at 12x their cash flow but it is difficult to understand if there is a consistent valuation metric that firms or investors should be using.
Another interesting development is that Venture firms are now forced to value their private portfolio the same way they would value a portfolio of publicly traded stocks due to new accounting regulations (FASB 157). Based on the discussion this new regulation, it will only create more company valuation compression on top an already tough market for portfolio companies.
What Does a Good Investment Look Like?
So what are the VC’s looking for in an attractive investment in this market? Apparently the same things they were looking for in the past; a game changing idea, the team, the product and a big market. If you are a software company you better be offering a real SaaS solution or be leveraging the Cloud Computing to even be considered.
They are also looking for new portfolio companies to be more conservative about spending their precious cash. There is now an overt trade-off between the rapid growth rates of the last five years and capital efficiency to provide a longer runway for portfolio companies. The panelists indicated that they would like to see their new Series A companies, for example those who might raise $4 million, to survive at least for 18-24 months before going out for their next round! With the difficult market dynamics it is important for SaaS firms to form a strong syndicate when raising capital because your next round will be an insider round.
The panel indicated that they are looking for operating executives who know how to manage cash and scrub expenses. Another observation was that many of the early stage companies that they are seeing now are much more mature and well run than they were just a few years ago.
There also won’t be any more Salary.com (NASDAQ: SLRY) IPO’s of $15 million companies. IPO candidates will need to be $50 to $70 million in revenues and ideally profitable before filing their S-1.
For public SaaS companies you are going to see a slow down in the rapid growth rates we were seeing from companies like Salesforce.com (NYSE: CRM) and SuccessFactors (NASDAQ: SFSF). Public markets want to see profitability first and growth now comes second. Momentum stocks, those with high growth rates were trading at 8-9 times revenues, like Salesforce and SuccessFactors, are giving way to slower growth companies that are profitable and are given a multiple on cash flows.
Customer Acquisition Costs
When building your SaaS business model, it is important to assume that for every dollar of recurring revenue you will probably need to invest $.50 to $1.00 in your Customer Acquisition Costs (CAC). It is important than ever to have an active program of testing various CAC channels and tactics to maximize your investments. Then you need to have a smart statistical framework that you can explain to your investors.
Smart firms like EchoSign and YouSendIt are creating leads virally by infecting their customers and they are finding that they are finding 1/3 to 1/2 of all of their leads are generated organically. It is also important to leverage distribution channels, especially companies that have access to large customer bases like Salesforce.com, Google, and Intuit. Take more of a focused approach to your customer acquisition efforts by targeting a vertical market and use the power of your customer referrals because ‘word of mouth’ is the least expensive and most effective lead generation engine. Keep in mind that your sales process needs to be as easy as possible, in other words it needs to be ‘friction-less’. When your prospects sign up for a trial, it only takes a few minutes and weeks and they can do it without any involvement from your company. Give them a free trial, a sandbox a free version.
So I came away from this panel discussion with the following advice for companies looking for funding in this environment:
- You need to still need to have a great idea, product and team but you might need to have reduced risk for your potential investors.
- Demonstrate your company knows how to stretch a dollar as far as possible. Fewer employees is better… think Craigslist.
- Show traction. Number of transactions, members, customers, revenues, profits.
- Shop carefully for your potential investors and don’t waste time with Zombies.
Good Luck!
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