by Kevin Dobbs

Montclair Advisors, LLC

When advising software clients who are interested in moving to a SaaS business model, one of the areas I really dig into is how are they selling to new customers. Most of us in the SaaS community realize that carefully tracking your Customer Acquisition Costs or CAC, is a critical component in building a successful and profitable company, but I think it is equally important to understand how traditional software sales  and marketing models and SaaS models differ.

Traditional Software Sales & Marketing Model

Over the past 25 years there has been a traditional way to market and sell enterprise software which has been based on key principles such as:

• You need a Large direct sales force including a large support team, or as I used to call them, ‘The Cast of Thousands‘
• Front loaded compensation plans that pay out when deals are sold
  
• High average sales prices, including services, that would almost always be over $500,000
• Long sales cycles, usually 6-12 months, with pursuit costs averaging around $70,000 for every deal the company played in
• Win rates are in the 30-50% range
• Average face-to-face selling time that is around 15%
• Pipeline building using a combination of in-person events (seminars, tradeshows, user group meetings), telemarketing teams (inbound and cold calling) pounding the phones and a lot of paid marketing campaigns
• Lead pipelines that appeared full but always seemed to lack the appropriate level of qualified opportunities
• First generation CRM systems and reports that were produced periodically using Excel

Brings back the good ol’ days doesn’t it.  Many software firms are still using this model and they are finding out that it doesn’t work very well in the new world of Software-as-a-Service sales.  Some of the reasons it doesn’t work is that software buyer preferences are definitely changing, but one big issue is it is very expensive to operate this type of model, especially when you get your revenues paid out over time.

SaaS Sales & Marketing Model

There are several important differences in the SaaS model that make the traditional software sales and marketing model less than effective;

• SaaS customers pay a subscription based on users or usage of the software service over time, usually over three years.  After the recession, this has become the new normal for software sales
• More focused solutions that usually have Average Sales Prices that are typically lower, so reps need to sell more deals to hit the same quota targets
• Key metrics like customer satisfaction, renewals, up-selling and cross selling are even more important for SaaS than they were in the past
• Sales method is more of a “penetrate and radiate” approach
• It takes a long time to build up a recurring revenue stream

Given these differences, then what should your SaaS Sales & Marketing model look like?  Here are some ideas to consider when building out your SaaS sales and marketing plans for 2011 that can help you to build out a low-cost but high-efficiency sales and marketing machine;

Marketing

• Hire experienced marketing leadership and professional
• Evolve a good list of key influencers and industry contact and communicate with them frequently
• Develop a clean prospect database
• Mix paid and free social networking programs
• Build a vibrant customer community and market to them with products like Lithium
• Leverage social media like LinkedIn, Facebook and Twitter to generate interest and leads
• Use Web 2.0 marketing tools like Marketo, Eloqua, Pardot and try drip marketing
• Track everything (see the last Smart SaaS post)

Sales

• Hire experienced SaaS sales leadership and reps
• Your SaaS sales team should be more low touch than your traditional sales team
• Experiment with telesales even with high end enterprise products
• See is using an indirect channel makes sense for your business, if managed correctly these distribution partnerships can dramatically lower your sales costs
• Carefully track your lead hand off between marketing and sales, make sure leads are not falling through the cracks
• Track everything

Metrics like Customer Acquisition Costs and the Magic Number can help your sales and marketing teams see how effective their programs are and can provide insight when to invest and when to continue developing your repeatable sales model.  I would also encourage you to learn more about Mark Leslie’s Sales Learning Curve, because it offers a more scientific approach to cost-effectively building out your SaaS sales team.   Best-in-class firms that have profiled in this blog have adopted many of these techniques to build a scalable but cost-careful sales and marketing organizations.

Stay tuned for Tip #6 Package for Viral Adoption

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By Kevin Dobbs

Montclair Advisors, LLC

Let’s face it, Hunters and Farmers are very different types of sales people.  One is into the thrill of the chase and the high anxiety of selling the next big deal.  The other is into cultivating relationships, building communities and patience.

When it comes to sales people inside of a SaaS company, these same attributes apply to this team as well.   Trying to get your major account or direct sales reps to effectively manage your existing accounts and still hit an aggressive quota, that usually doesn’t work that well.  The same holds true if you are trying to get your account managers to push their customers to close a big deal, and they just don’t want to push too hard because they might ruin their relationship.  Then why are you trying to get them to do the same job?

The other big difference is usually how these sales professionals get compensated.  A typical software sales rep will have a $1.5-$3M annual quota and want to make at least $200K, where as an account manager might have a much smaller quota, $300-$750K and be making $110-150K.  That’s because they have different skill sets but both types of sales are critically important when building your SaaS sales team. Philippe Botteri from BVP discusses what Gary Messiana an EIR told him about how he compensated his reps for delivering MRR:

• • For 0-25% of the quota, $0.25 commision per $1 of MRR
  • For 25%-50% of the quota, $0.5 per $1 of MRR
  • For 50%-75% of the quota, $1.0 per $1 of MRR
  • For 75%+ of the quota, $1.5 per $1 of MRR

I like the simplicity of the concept and it can be applied to all types of sales roles.

Depending on the type of products/services you are selling, you may actually not have high priced outside sales reps and actually focus more on building out a low cost tele-sales capability.  Even if you do this, you should still separate out your new sales team from your account management teams.  Because SaaS is perfect for the ‘penetrate and radiate‘ sales model, you need teams that can sell that first product and then another team that keeps the customer happy and renewing as well as buying more products and services.

Bessemer Venture’s  10 Laws for being SaaSy also recommends separating your hunters from your farmers.  It is important to be able to find new customers but it is also important to be able to renew, upsell and cross-sell customers additional products, which will increase your company’s Monthly Recurring Revenues.  This well defined sales structure works well with many of the leading SaaS firms including RightNow and Salesforce.com.

One of the big objections about this type of approach is that if forces the customer to deal with two different sales teams.  Although this can be a problem, I have found that these types of channel conflicts can be remedied by using team based compensation plans that have everyone getting paid based on shared goals related to existing customers.  This type of approach also encourages development of up-sells/cross-sell opportunities by the account management team, since they often require the new sales team to engage in these deals and close them.  The team compensation approach means everyone wins, including the customer.

I keep coming back to skills and personalities when structuring your SaaS organization.  Keep your teams small and focused.  Make sure you have ways for those promising team members, who might start out in tele-marketing or account management, to have a path to progress up the sales food chain.  Just make sure that your organization structure is well defined, there are clear rules of engagement and that that compensation plans encourage your sales teams to work together and keep your customers satisfied.

Stay tuned for Tip #3 Test Everything

Here is our updated Public Company SaaS interactive spreadsheet.  Enjoy!

After our post on January 26th we got several great comments about the cost of starting a SaaS company.  It definitely takes a commitment to build a true SaaS company, especially when you consider some the following facts about the 15 public companies that I tracked in my high level analysis:

• Average Start-up Capital Required:                                   $44M
• Average Time Required from Start-up till IPO:                 7 years
• Average Capital Required per Year till IPO (Burn):             $6.8M
• Average IPO Proceeds:                                                    $76M
• Additional Capital Raised After the IPO:                           $243M
• Average Total Capital Raised:                                          $363M
• Average Market Capitalization:                                      $1,262M
• Companies Who are Profitable:                                            8

The costs of getting a SaaS start-up off the ground are substantial but only about half of the firms we tracked actually started out as a pure SaaS company.   These other Cross-Over firms started out as either Application Service Providers (ASP’s) or were traditional On-premise ISV’s that move to SaaS through a combination of organic migration or through a series of acquisitions.  Companies like Concur, Kenexa, Taleo and Ultimate Software have all transitioned to SaaS from an on-premise heritage.

Montclair Advisors - SaaS Start Up Costs - Pre IPO

The shortest time to go from start-up phase to an IPO was 4 years and the longest was 13 years.  Most of the firms we tracked were founded between 1997 to 1999, which was prior and during the Internet Bubble.

When these firms went public they raised a range between $30M (LivePerson and Ultimate Software) to over $150M (DealerTrack and NetSuite), but on average they raised about $75M.  All the firms then went on to do additional capital raises from $32M (LivePerson) up to $750M (DealerTrack) but on average each raised $243M!   The total capital raised, when considering both pre IPO, IPO and post IPO capital raised, these firms raised between $100M (LivePerson and Ultimate Software) to close to more than $500M (DealerTrack, Salesforce.com and SuccessFactors).

Montclair Advisors - SaaS Start Up Costs - Post IPO

After going public, this SaaS market basket of companies have done well as a group.  The majority of the firms are profitable, which makes for solid cash flow performance, revenue visibility and overall stability of the company’s stock, for the real SaaS firms.

The most valuable company, based on their Market Cap is Salesforce.com at more than $8B and there are at least 4 other SaaS firms with valuations over $1B (Blackboard, Concur, NetSuite and SuccessFactors).  When comparing the amount of capital raised to the market valuation, the 5 best performing firms are Salesforce.com (.09), Ultimate Software (.13) , Concur (.19), RightNow (.22) and LivePerson (.31).

Montclair Advisors - SaaS Start Up Costs - Market Caps

This year, as the economy improves, promises to launch a few new SaaS IPOs and we will continue to track this core group as well as a larger group of Hybrids and Cross Overs and will periodically report back with our findings.

Last week at Salesforce.com’s Dreamforce conference, it was interesting to see how their Platform-as-a-Service offering, Force.com is starting to gain momentum among the Independent Software Vendor community including Computer Associates and BMC Software.

What is clear for traditional software providers who are starting think seriously about getting into the SaaS and Computing arena, it might be cheaper and faster to use a partner platform than trying to re-invent the wheel.  Both CA and BMC have resources to rewrite their older applications but it isn’t the cost that seems to drive them it is the time to market.  Force.com can provide a real advantage to software firms who have the domain expertise but lack the infrastructure and skills required to write Cloud and SaaS-based products quickly.

Other interesting aspects are that traditional ISV’s are not rewriting the old applications they have, they are re-inventing these applications leveraging newer development techniques.  CA’s Agile Planner is actually filling a hole in the company’s product portfolio and could be a logical cross-sell or up-sell product for them. BMC’s Service Desk offering is designed to dove tail with Salesforce’s Service Cloud 2 offering, and provide something else ISV’s are looking for, leverage.

I am sure that many traditional software firms will have the internal discussion about build, buy or partner their way into SaaS.  Up until recently there hasn’t been a good partner alternative for ISV’s who wanted to build their own solutions but were looking for a partner with SaaS and Cloud Computing expertise.   Even though rumors abound about Oracle looking to buy Salesforce, firms competitive to Oracle like CA and BMC are dipping their toes in the water.

For these firms leverage doesn’t just stop at the platform, Salesforce delivers a very effective go-to-market capability that few other partners can offer.  Witness the 19,000 participants at Dreamforce.  This type of reach and ability to get IT and business buyers attention might make a bet on Force.com worth the risk.  More importantly, these firms are also looking to bridge their older brands to the Cloud by bridging the Salesforce brand power.  CA and BMC aren’t the only firms interested in upgrading their image how about Dell, Callidus, Fujitsui (Glovia) and the momentum is growing.  According to the AppExchange, there are currently more than 200 native Force.com applications currently available.

While at Dreamforce I spent some time with the FinancialForce.com team at the booth and this is a really interesting story.  FinancialForce.com is a wholly owned subsidiary of a European software firm, Agresso and their CODA division.

FinancialForce.com was started about three years ago at the time that Salesforce.com initially launched the Force.com platform. Jeremy Roche the CEO at FinancialForce.com, reached out to Marc Benioff to just learn on how to build a net-new SaaS product and learned about their platform. They had a number of discussions and then finally decided to build their new accounts receivable product on Force.com in 2006.

The CODA team started out by building an integration connector Saleforce.com and the CODA2Go (On-demand version) of their Accounts Receivable module. They wanted to understand how the products worked together and that required workflow between products. It took them about a year to get comfortable with the Force.com platform, there were issues that were specific to complex ERP-like applications but Salesforce was responsive and did update the platform to support these deficiencies.

Once the new company was formed, FinancialForce.com, CODA then built out an Enterprise Service BUS (ESB) to connect their SaaS solutions with their on-premise solutions. One of FinancialForce.com’s early customers, a UK-based newspaper, were using Salesforce for their CRM requirements and CODA for their back office financials but were custom developing an invoicing/AR solution. When approached about the FinancialForce.com AR module as a possible solution, what was appealing to the customer that this solution was able to integrate to both Salesforce.com and CODA. About 6 months ago FinancialForce.com also launched their General Ledger and Accounts Payable modules and now they have a solid SMB mini-financial suite.

As more partners begin building and launching applications and businesses on top of Force.com, it is clear that the momentum is building.

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:

1. 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.
2. Demonstrate your company knows how to stretch a dollar as far as possible.  Fewer employees is better… think Craigslist.
3. Show traction.  Number of transactions, members, customers, revenues, profits.
4. Shop carefully for your potential investors and don’t waste time with Zombies.

Company:           Zuora
Started:               2006
Located:              Redwood Shores, California   USA
Geography:         North America
Market:                Subscription Billing
Products:             Z-billing: Complete billing solution for subscription businesses
                             Z-payments: Payment solution for subscription businesses
                             Z-Force: Billing and payment system fully integrated with salesforce.com
                             Z-Commerce Platform: Commerce platform for cloud developers
Key Customers:   Boomi, Clickability and Marketo
Website:               www.zuora.com
Blog:                     Z-blog

Recent News:

Zuora Introduces the Business Cloud With Launch of the Z-Commerce Platform

Zuora Enables Growth, Reduces Time to Invoice and Increases Productivity at Marketsync
 

I asked Gary Hagmueller, Zuora’s Chief Financial Officer a few questions about his business and his view of the SaaS market in 2009.
 

Why did you start your company? 

Thanks to the power of the Internet and cloud computing, many products are moving to subscription services delivered online—everything from music and DVDs to software and infrastructure to groceries and cars.
 
However, companies that deliver these new services need a way to run their subscription business AND support their unique billing needs. For example, they need pricing flexibility to address different customer groups, operational scalability for growth, and key metrics like churn and monthly recurring revenue (MRR) to assess the health of the business.
 
That’s where Zuora comes in. Just as Amazon makes it easy to become an online retailer, Google makes it easy for anyone to advertise online, and PayPal makes it easy to accept online payments, Zuora’s vision is to make it easy for any company to build, manage and grow a subscription business.
 
Did Zuora start out as a Software-as-a-Service company?
Yes- Zuora was built from the ground up by SaaS industry visionaries and veterans from Salesforce.com, WebEx, Postini (now Google), and Oracle. The Zuora team grew up in the subscription services world and started Zuora with the mission in mind to help other SaaS companies build and grow. Moreover, Zuora runs its business completely in the cloud, using such applications as WebEx, eFax and Google.
 

Why do customers buy from Zuora?
Zuora is the fastest-growing on-demand subscription billing and payment service designed specifically for subscription companies. Its innovative products are able to meet a wide range of customer problems. Whether a company is having trouble processing recurring payments or spending too much time and resources of manual billing, Zuora’s team can understand and assess the issue. The Zuora platform changes the way subscription businesses manage and sell to customers and allows them to bring new products to market in less time, with less hassle.
 
What do you see as the key trend emerging in the SaaS industry?
In the current economic climate, an increasing number of companies will begin offering their products as subscription services. The success of the SaaS movement has even prompted other industries outside of software like cars and movies (i.e Zipcar and Netflix) to adopt this lucrative model of recurring revenue. The problem is…running a subscription business like salesforce.com or WebEx is hard no matter how the economy is doing, and mastering the metrics of a subscription business is even harder.
 
A key trend emerging is the Business Cloud, any easy way to add commerce capabilities such as subscription billing and recurring payments to the services that developers are building. More and more companies will be looking for a set of cloud-based services dedicated to giving them the tools they need to monetize the services that they are building on cloud platforms.
 

What is your outlook for 2009?

Our outlook for 2009 is extremely bright. The demand for our subscription billing and payment services are expected to grow, particularly in this economic environment, when businesses get lean and mean, regain focus on building differentiation in their core business, and divest non-core activities or outsource them to best of breed vendors like Zuora.

Thank you to Gary Hagmueller, Annette Giambroni and K.V. Rao for contributing to this profile.

I always thought that the Software-as-a-Service market would expland during a recessionary economy because:

1) Companies don’t have capital dollars to buy software

2) The ability to pay-as-you-go appeals to CFO’s

3) No infrastructure to buy, since it is hosted or in the cloud.

But this was a real surprise.   According to IDC,  2009 will be a breakout year for SaaS!  Robert Mahowald, research director at IDC says “SaaS thrives in down cycles, and as with the 2000 - 2001 downturn that gave Salesforce.com its start, the current freeze in IT and related Capex spending will help assure solid growth for most SaaS providers.”  Read the whole article.

As I go out and talk to firms about Software-as-a-Service I am increasingly finding firms that offer technology solutions that won’t easily fit into a traditional software mold,  but want to move to a real subscription model.  Part of the reason is that capital budgets are clearly being cut back in 2009 and also because of the success of larger, publicly traded SaaS firms and their perceived market value.

Consider that Salesforce.com (NYSE: CRM) in FY ‘09 will have $1B in cash on their balance sheet!  That is really amazing for a software company their size.  The longer term success of the SaaS model is based on predictable and transparent revenue streams that are attractive to not only investors, but also with the customers who are buying their solutions, investors who are taking stock in these firms and even employees who would rather work for these types of companies.

So back to the headline, Hybrids, Cross-Overs and TaaS.  These are new variants of  that I have come across that show that the software subscription model is evolving into many different formats.  Let me tell you about what I am seeing:

Hybrids:

Many firms are now offering solutions that don’t just comprise software but also include specialized services and hardware.  I have also found that these firms often combine a mix of hosted and on-premise deployments.  In some situations the need for an on-premise deployment is often related to the vertical market company sells into and their client’s security requirements.  For instance, in healthcare, hospitals often have very inconsistent infrastructure from location to location and the necessary integrations may be more easily accomplished by deploying behind the firewall.  Security for certain types of industries won’t allow for hosted or cloud-based systems, they really need an on-premise control of their data and systems and this would apply to many branches of the Federal government.

What’s even more interesting is the emergence of device companies who require mostly a hardware solution that is wrapped with software and services.  A great example of this is Garmin the GPS provider.  As they look at the market, is it better to sell a GPS device for $499 and a $10 a month subscription or sell the entire solution as a subscription for $39 a month?  Think about all of the device companies who are going to be challenged to get corporations to pay capital dollars for hardware, maybe a subscription option in their business makes more sense in 2009.

A couple of interesting articles to look at are Hybrid SaaS Approach is Likely Way to Go and SaaS + Appliances = Possible Peace of Mind.

Cross-Overs:

These are traditional software firms who are beginning to migrate their business models from purely a perpetual license to a subscription business.  There are thousands to these traditional firms, sometimes referred to as ISV’s (Independent Software Vendors) but not all of them are technically Cross-Overs.  Making the change can be a very difficult and dangerous endevour.  Some of the best known Cross-Overs I have run across are Concur (Expense Management),  Ariba (Procurement), and SciQuest (also Procurement).  What is clear is that many other firms are starting to moving towards a SaaS model including firms like Sabrix (Tax software), AutoDesk (AutoCAD), SumTotal, BusinessObjects (acquired by SAP), and Kana (Email).

Clearly changing your entire business model is not something that can be accomplished in a couple of quarters, it often takes companies several years to fully migrate.  Smart companies will usually create a multi-year roadmap for each of the functional areas of their company as they transition.  This transition is much harder to do if you are a publicly traded company, especially with near-term affect on cash flows.  That is why firms like SciQuest went private as part of their transition.

TaaS:

With the tightness in the credit markets and shifting technology buying habits, I believe in 2009 you will see a strong shift by any firm selling technology to embracing a subscription model.  I think this will result in a broadening of the SaaS term to expand to Technology-as-a-Service or TaaS.  Just like with the Hybrids and the Cross-Overs, this won’t happen overnight but these TaaS firms will want to have the ability to deliver their products through a subscription and host through the cloud where possible.

Think of industries that have low margins and will be challenged to purchase technology in 2009; Retail, Healthcare, Transportation, Education, State and Local governments to name a few.  Imagine if you could go to a school district and completely outfit them with laptops, wireless infrastructure, software, training and support - all for one easy monthly fee paid over five years?  What about the trucking company that wants to deploy a GPS tracking and monitoring system across their fleet, pay $5M now or $138K over 3 years?  Smart technology firms that begin to rethink their business models to take advantage of this market shift will be the big winners in 2010 and beyond.

When most companies think about moving towards a Software-as-a-Service business model they often just change their pricing model.  You know the drill, instead of charging a big perpetual license fee upfront with some services and then an annual maintenance fee, you switch over to a SaaS agreement that is structured quite differently; with the subscription being spread over the term of the agreement and some upfront services to get started.

Don’t get me wrong, changing your pricing is a big deal if you are a traditional software company.  By changing your pricing dynamic you are moving from a Capital Expense (CapEx)  to an Operating Expense (OpEx) orientation, this is a dramatic change!  It’s even a bigger deal if you are a publicly traded software company.  But the overall SaaS business model is really all about monitoring and measuring metrics, ratios and statistics.

I ran into a very interesting company recently, OpEx Engine,  that has done extensive benchmarking of SaaS and technology companies, and has complied a library of operational metrics for over 50 public and privately held software firms. Lauren Kelley, OpEx’s CEO is an ex- Art Technology Group (ARTG) executive who realized that smart technology  people were looking for these types of real-world benchmarks and operating metrics. Lauren’s team has spent the last two years accumulating a lot of really value information.  I can’t tell you how many times I have looked for good comparative metrics on how much companies typically invested in sales and marketing, research and development and G&A when building out a business model.  For instance, did you know that of all of the publicly-traded SaaS companies that DealerTracker (TRAK) has the lowest R&D investment as a percentage of their revenue? (4.9%)  Did you also know that Salesforce.com (CRM), Omniture (OMTR), NetSuite (N), and SuccessFactors (SFSF) all spend more than 50% of their revenues on sales and marketing? That’s an easy one but you should definately check out the free information that Lauren provides on her site.

There are many other metrics that are needed to successfully run a SaaS company but one of the most important is your overall cost of sales and marketing.  Understanding what your true Customer Acquisition Costs is a critical SaaS business performance indicator.  I was recently at the SIIA On Demand Conference in San Jose where I heard Josh James, the CEO at Omniture present his sales and marketing modeling methodology, that he has dubbed the ‘Magic Number’ for SaaS companies.   Since it would probably justify a completely separate post, all I can say that this is a really innovative way to determine if your % of sales and marketing spend is either too much or too little.  Phil Wainewright wrote a great piece on the Magic Number - When to spend cash in a SaaS business - which is definitely worth reading.  What Omniture has done really well is to figure out the overall profitability of their clients, market saturation, marketing effectiveness and the number of Quota Bearing Sales Reps (QBSR’s) that are required to grab market share. It’s cool.

Other sources of good SaaS market information and metrics are:

TripleTree, a boutique investment bank which conducts some solid SaaS research, Cutter Consortium, Saugatuck Technologies, and Jeff Kaplan’s firm Think Strategies.

If you hear of any other good ones, let me know.