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

Continue reading…

Company:            Yammer

Started:                2007

Located:               San Francisco, California

Geography:          North America

Market:                Enterprise Microblogging Platform

Products:            Yammer Desktop, Yammer on your Mobile Device, and Yammer Plug-Ins

Key Customers:  Deloitte, AMD, AAA of Northern California, Nevada and Utah, SMG, Cargill, Thomson Reuters, Sungard, Hill & Knowlton and SunCorp.

Website:               Yammer

Blog:                    Yammer Blog

Twitter:                @Yammer

Recent News:

Yammer is Selected as an MIT Sloan CIO Symposium Innovation Showcase Finalist

Fortune 500 Companies Flock to Yammer

Yammer Secures $10 Million in Series B Funding from Emergence Capital and Previous Investors

I asked David Sacks, Yammer’s Founder, CEO and Chairman of the Board 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?

Yes, we did start out as a SaaS company. Our company was incubated inside of Geni, which develops family tree software. I was also involved with the consumer Internet with my experience starting PayPal. As both companies scaled, I found it was hard to keep tabs on what everyone was doing, and Yammer was developed to address this challenge. We found that microblogging was a great way to keep current on the status of important projects, individual profiles and information feeds inside of an enterprise.

Then in 2008, we spun out Yammer and that same year won the TechCrunch 50’s Best in Show award.

Initially we were targeting small and medium sized businesses but we are now seeing that Yammer has strong appeal for large enterprises like AAA, AMD, Cargill, Cisco, Deloitte, and Thomson Reuters.

Yammer is very viral because it was very easy for anyone to sign-up, confirm their company’s email address and start using the system. You don’t need to wait for an IT administrator to set up Yammer and you can quickly invite your work colleagues, with the same company email domain, to join in and begin collaborating with you.

When a company wants to claim the network being used by it’s employees, they pay a nominal subscription fee, and then we provide a set of administrative tools that allow them to manage upgrades, security, compliance, deliver premium support, and customize their site.

Part of our initial business model was to base Yammer on the consumer model of software, but make it enterprise-class. We wanted to remove the traditional friction from our software sales process by making our product as easy to use as Facebook.

Why do your customers buy from Yammer?

Our customers never have to pay or upgrade our software unless their employees are using it. This is very attractive, when you compare it to the traditional software selection process where you have to vet vendors, choose one, negotiate the contract, implement the product, pay a lot of money and then no one uses it. Yammer is de-risking the traditional enterprise software value proposition. Employees are valuing it because they use it.

When large companies see thousands of employees using Yammer what do they do? They can do three things - wait and see what happens, shut it down or buy it and we are finding the vast majority of companies are buying Yammer because their employees are being productive and want to collaborate using the software.Our customers also really like our administrative tools for e-discovery, security, directory integration, and network administration.

“If Facebook and Twitter had a baby, it would be Yammer.”

We are like Twitter because we offer a real-time feed of information; you can follow any one, join groups and sort information feeds by hash tags. We are like Facebook because there is no 140-character limit, you can have attachments, threaded replies and we offer a variety of enterprise management tools.

Yammer is a like a virtual office where workers can feel more connected to each other, especially remote workers. We act like the traditional company water cooler for these distributed organizations. As workforces become more mobile, Yammer just make a lot of sense for enterprise collaboration. Today we only offer Yammer in English but we have noticed that there are an increasing number of new customers who are signing up outside of North America. In the near future we will be supporting multiple languages in addition to English.

Customers also like our value-based pricing model. We charge between $3 and $5 per seat per month, depending on the level of support and administrative tools. We also provide volume discounts for our larger customers. This is much more cost attractive than purchasing Chatter from Salesforce.com for $15 per seat, which is quite expensive and most employees don’t want to communicate through the company’s corporate CRM system. Our very fast viral Freemium approach appears to be working, because since we have been live for only the last 18 months we now have over 1 million seats today.

What do you see as the key trend emerging in the SaaS industry?

The first trend is the consumerization of enterprise software; Yammer is a great example of this trend. Real innovation in the technology space over the past 10 years has been on the consumer-side of the software market with products like Facebook and Twitter. At Yammer we want to take these learnings back into the enterprise software world. When I was at PayPal, we were very successful using the Freemium model to promote adoption. This type of approach to software can definitely result in the overall democratization of enterprise software. SaaS is the first step, when the delivery model changed, then there were no upfront costs and the risk is dramatically lower. Using techniques developed by consumer software firms, more and different kinds of buyers can now access enterprise-class software.

The second trend we see is that enterprise software products will be designed more for the end-user than power users or administrators. A good example is how Facebook and Twitter don’t do every possible feature or function and they don’t clutter the user’s screen. This simplified approach to software allow causal users to be more engaged with their products and other users. These types of causal use software products will also appeal to younger employees who have used Facebook and LinkedIn and expect their enterprise software products to be that easy to use.

Social Networking is also a major trend we are seeing. We started thinking about this over the last couple of years, since 2007. Now it seems so obvious, that social networking would grow into an unstoppable trend. The ability to connect workers, to leverage expertise and content all in real-time, which allows everyone to work smarter, just makes a lot of sense. I still think that there is confusion about Enterprise Social Networking, for instance Salesforce sees it as a CRM newsfeed, and we see it as enterprise real-time communication. Eventually we see Enterprise Social Networking replacing corporate email and instant messaging.

What is your outlook for 2010?

In January we raised $10M, led by Emergence, that  provided capital to allow us to expand our team. Our investors liked the fact that we have built a very cost effective business, based on our viral distribution model. Our Q1 sales were greater than all of our sales for last year combined.

The software industry is realizing that Enterprise Collaboration is going to be a huge space. Most software companies will want to get into this market because every company will want one of these collaboration platforms to deploy. The only problem is that most enterprise software firms looks at these types of tools backwards, because they already have multiple different product lines, then they will need to stuff it through their sales channel. At Yammer we have already solved this distribution channel problem and we can actually open up our channel to these companies as a Distribution as a Service model.

We continue to sign up a number of large customers, and this type of adoption makes other large companies comfortable using our technology. Things look great and our traction is accelerating.

Since everyone is interested in SaaS funding and valuations I thought it would be helpful to tell you about an interesting Cloud Computing investor panel I attended at the recent All About the Cloud conference in SF. The session was moderated by Jason Green from Emergence Capital Partners and was joined by Gary Hromadko from Crosslink Capital, Mark McNay from William Blair and Evangelos Simoudis from Trident Capital.

So what did they have to say?

The market has finally changed for the better

2009 was all about survival and the venture community did less than half the investments than in a typical year.

This year is now about growing again and current investments are more focused on companies that have weathered the economic downturn. Their investments are focused on changing the slope of these types of company’s growth curves, by concentrating more on sales and marketing.

SaaS and Cloud companies are leading the way

Consumers have been driving the adoption of easier to use Cloud-based solutions like eBay, iTunes, Facebook, Twitter and LinkedIn. They are viral and can reach critical mass very quickly because there are low barriers to adoption.

With SaaS, the recession has really pushed the advantages of a subscription business model and moving from CapEx to OpEx software investments. It’s like leasing your car rather than buying it.

Lean start-ups are definitely in. Almost all early stage software investments in 2009-10 are Cloud-based because it takes a fair amount of capital to fund SaaS firms and it takes a long time for them to reach profitability. One interesting comment was that later stage on-premise companies are now being asked about what their SaaS/Cloud strategy is for the future, because without it, they may find funding might be difficult.

What the VC’s are looking for

SaaS 1.0 focused on a company’s income statement, expenses and cash flows than GAAP reported financials. One important measurement is a company’s incremental contribution margins (gross margins), which is critical for SaaS. Companies needed to balance capital efficiency with building a business that can scale.

Investors are looking for unique business processes that can only be built or automated through SaaS or the Cloud. Emergence latest investments are pure Cloud-based companies that have viral qualities like YouSendit, the files sharing company and Yammer and the enterprise micro-blogging firm, both of these companies are viral enterprise solutions. Yammer has more than 70,000 customers with at least 1 user and is signing up between 7-10,000 users a month and 10% are turning into paying customers. Crosslink invested in Carbonite, a backup and recovery company, has high margins and is the only other independent player in the category with Mozy, who is owned by EMC. They felt that scarcity of competitors and their ability to manage Customer Acquisition Costs were important in establishing the company’s value.

The panelists also said they are looking for companies that have a rigorous focus on metrics like Customer Lifetime Value and Customer Acquisition Costs. In fact CAC appears to drive business value because it has a lot to do with capital efficiency and the company’s ability to grow their business.

Exits, IPO’s and Valuations

Economy has recovered and CEO’s are ready to start taking on more risk, and it’s a real change in psychology because we are at the beginning of a macro trend that will last more than 10 years.

This is evident by more than 100 M&A transactions last quarter including high profile deals like IBM buying CastIron, Salesforce buying Jigsaw for $142M, Successfactors buying CubeTree for $50M. The current environment is right for deals, especially as SaaS is gaining enterprise momentum with recent deals like SuccessFactors’ mega deal with Walmart for 1.6M users. Transactions like Jigsaw, CubeTree, and CA’s purchase of 3Tera and Nimsoft for $350M all indicate a return to a healthy M&A atmosphere, that will probably last for the next 12-18 months.

Oracle and SAP won’t be aggressive on the M&A front until they come to the realization that they can’t build Cloud solutions internally. Because many SaaS companies have now crossed the $25-30M in recurring revenues threshold, these firms may become quite attractive to these larger ISV’s looking to make the move to the SaaS business model.

But these acquirers don’t want to take on the burn associated with many start-ups so it will be important to stay close to breakeven and you may have to sacrifice growth for profitability. Since the access to capital is still tight, start-ups will have to try and collect cash upfront and continue to tune their business models to improve cash flows.

Companies that seem to own a category have perceived scarcity value which will result in a premium on any transaction, especially if they are perceived to own a segment franchise. VC’s and acquirers are looking for a minimum of 40% CAGR to get a premium valuation.

On the other side of the liquidity front, the IPO window for SaaS companies is beginning to open up and firms like SolarWinds and LogMeIn have now been joined by SPS Commerce and Convio. At least before the recent stock market downturn, these companies had traded up by 15% since their IPOs.

The panel seemed to believe that the market is definitely getting better and that is good news for SaaS and Cloud Computing companies looking for funding or an exit!

Company:            MrTed, Ltd

Started:               1999
Located:              Across the globe with 10 offices – Headquarters in London, UK
Geography:         Global presence, with strong experience in Europe
Market:                Human Capital Management – Talent Acquisition / Recruiting Technology
Products:             MrTedTalentLink™ - Enterprise Applicant Tracking System (ATS)
                            SmartRecruiters™ - Small and Medium Businesses (SMB) ATS
Key Customers:   Siemens, Heineken, Levi Strauss & Co, TomTom, Tommy Hilfiger 
Website:               MrTed Website
                             SmartRecruiters Website
Blog:                    SmartRecruiters Blog

Recent News:

Leading European RPO Ochre House selects MrTed to support its European delivery model

MrTed releases latest version of flagship Talent Acquisition Solution

MrTed Taps eQuest to Provide Job Postings on SmartRecruiters 

Ready, Set, Recruit! Talent Acquisition Leader MrTed Launches Free Applicant Tracking System

Free Applicant Tracking System Shakes Up Recruiting Software Market

I asked Jerome Ternynck, MrTed’s Chief Executive Officer a few questions about his business and his view of the SaaS market in 2009.

Did you start out as a Software-as-a-Service company?

Yes, we did. The company was started in 1999 to provide an ASP solution, yet our Applicant Tracking Software (ATS) has always been sold on a subscription-based model for our customers.  After the launch of MrTed, we faced some interesting market developments and survived. We learned a lot from the dot-com crash in 2001 and we realized that that being a pure subscription business, or what is now being called Software-as-a-Service, is important for our company’s long term stability and growth. 

Being a pure SaaS company during a recession provides more visibility into our future revenue streams and eliminates the up’s and downs we see traditional ATS competitors experiencing. We are now more than 20 quarters profitable and have strong recurring revenue; we are able to maintain our investments in our product roadmap.

Why do your customers buy from MrTed?

For the last ten years MrTed has been servicing the talent acquisition needs of large, complex, global organizations.  Our customers are one of the largest companies in the world and we also provide the technology infrastructure for some of the largest Recruitment Process Outsourcers (RPO’s), who also service these types of complex, multi-national companies. 

At MrTed, we understand global recruiting. With over 9 years experience we are able to capitalize our knowledge into our products and service delivery. Our enterprise product, MrTedTalentLink™, is a proven solution that is functionally rich but can be set up very quickly, which is attractive for our customers.  We support the local regulations and languages of all countries in Europe and most of Asia and North America.  Because of this, our clients don’t need to work with local software providers in country where they have a presence. All they have to do is work with us and we have them covered, one single solution for one global workforce. As recruiting in Germany is still not the same as recruiting in China, an enterprise needs to be flexible in its requirements. MrTedTalentLink™ is able to fulfill all the local requirements, but meanwhile maintaining the consistency on the highest level of the company. Because of our user-friendly configuration capabilities of MrTedTalentLink™ a company is able to set its own requirements and configure MrTedTalentLink™ on its own.

Our latest offering, SmartRecruiters – which is still in beta – is designed specifically for small business recruiters and hiring managers who, until now, have been forced to use expensive enterprise systems that are complicated and difficult to implement.  By contrast, SmartRecruiters is easy to use, deploys in just a few minutes, and is 100% free. Integrated with the SmartRecruiters ATS is a set of pay-per-use services and vibrant and supported by a growing user community. After only 90 days, we have over 350 SMB clients who have signed up for SmartRecruiters! This Open SaaS product was designed to be free and easy to use, which is what SMB’s are looking for. We started our mission with the believe that SmartRecruiters can change the Recruiting Software industry and that SmartRecruiters has become the fastest-growing ATS in only three months is testament to the great need in the market for something new.  We will continue to improve the application through input from the community and the addition of new services, and we are optimistic that SmartRecruiters will be the number one ATS in the industry by the end of the year.”

What do you see as the key trends emerging in the SaaS industry?

The urgency for enterprises to have one global platform and be able to adopt the local requirements, while maintaining the global consistency. If you don’t provide a single hosted and one code base solution to your customers, this will be difficult times for you.

With the launch of our SmartRecruiters Open SaaS offering for SMB’s we believe that free software is the wave of the future, especially when it comes to the SMB market.  For many mature software categories, sales penetration into smaller organizations is costly and difficult. By adopting some of the business approaches of firms like Google, Yahoo!, Linkedin and Skype, if you can aggregate a large user community, there are many ways of monetizing the customer base without having to sell software.  

Our approach to the ATS market is to use an Open SaaS approach, which is a mash-up of both Open Source and SaaS principals.  Offer the software for free, its hosted and maintained but provide pay-per-use services and wrap it with a strong user community. We think that this trend has the potential to change the SaaS industry.

What is your outlook for 2009?

We continue to grow and see opportunities in the market on both enterprises as well for the SMB businesses.

In the enterprise market, it’s time to take control and grow from one global platform and get rid of the numerous local solutions. Customers want to consolidate on numerous local solutions into a single global solution, covering and managing their global workforce. We are ideally positioned for this 2^nd buyers market. A couple of years ago this buyers group were the early adaptors of the first ATS wave, but now they understand the urgency of the current market to improve their processes, create a global workforce and be ready for the new phase of growth after the recession.

Introducing ATS technology for free to the SMB market turns the SmartRecruiters proposition into a gateway to the estimated $40 Billion staffing services spend by SMB’s in the US alone. Free ATS technology levels the playing field in the War for Talent and ensures that corporate recruiters and hiring managers in smaller businesses can be more competitive.

Although we will need to manage our business very carefully during this recessionary period, we also have new products and markets that we are now attacking, so we see continued growth potential. Unfortunately, we don’t control the current state of market or economy, but for our SmartRecruiters Open SaaS offering – which is Free & Easy –  our timing couldn’t be better to launch a free recruiting tool and turn an industry upside down.

 Thank you to Jerome Ternynck, Matthijs van Etten and Ralph Brasker for contributing to this profile.

Crazy like a fox.

With the economy in such tough shape, with customers on the sidelines with no budget to buy software, maybe now is the perfect time to embrace a Freemium software strategy.  This concept was originally proposed by a venture captialist named Fred Wilson, the founder of Union Square Ventures.

This became really clear to me over the past 6 months that this trend towards free software might be the future.   Initially I read a great article entitled Free! is the Future in Wired magazine (make sure you watch the Chris Anderson video), which I thought presented a very clear argument for free.

Think of all of the free software and services business models that went bust during the Internet Boom.  But then again there have been many businesses that were built using a free business model including Google, Yahoo!, Skype, eBay, and Craigslist just to name a few.  Some of the new kids on the freemium block include Facebook, LinkedIn, SimplyHired, Kijiji, 37signals and many of the open source software players.

My second realization of the power of free was using 37signals BaseCamp project management product.  It was a great example of providing a free product that you liked so much that you had to buy into their paid  version.  If you need a project management tool, this one is worth a subscription and you may end up pulling out your credit card like me.

Then my third reason why I thought freemium could really be the future of software is based on working with a great company, MrTed, who makes Applicant Tracking or ATS software for large companies.  MrTed just recently launched their new Small and Medium business freemium offering, SmartRecruiters, which is an Open SaaS product, which is a mashup of Open Source and SaaS business concepts.  This Open SaaS model was developed by Jerome Ternynck MrTed’s CEO and founder. SmartRecruiters like many other freemium offerings is based on the development of a strong and passionate user community, who ultimately become the revenue engine for these companies. SmartRecruiters will monetize their business model by offering a collection of value-added services that are bundled with their free software.

As companies look at their 2009 business strategies, they need to balance gaining marketshare while keeping customer acquisition costs (CAC) as low as possible.  By deploying a freemium software strategy now you might be considered crazy in 2009 but be laughing all the way in the not too distant future.