Tag Archives: saas

Selling Tools or Solutions to the Enterprise?

Are you Selling Solutions or Tools to the Enterprise?

I regularly encounter SaaS application vendors who are having difficulty getting traction in Enterprise customer acquisition.  The founders think they have an Enterprise Solution because it has the potential to change the way work is done in the Enterprise.  Because they a)  have limited functionality in the initial version and b) have not done the hard work to understand and quantify the value to the customer, they price it low ($25K ARR or less).  The result is that prospects see the application as a tool or point product.  Enterprise executives, who have the authority and political capital to authorize changes in the way work is done are looking for solutions to their top priority problems.  They do not spend cycles on low-priced tools.  They delegate the evaluation to those who don’t have the authority or political power to change the way work is done.   Often, prospects see the app as a “nice-to-have” rather than a “must have”.   The result is low close rates and long sales cycles.  Sales reps try to solve this by forcing demos on every candidate they can find.  They focus on features rather than value for the customer because they have not been trained how to sell value.   The founders may see the traction problem as poor sales execution when it may well be product positioning, low price and the lack of a clear value proposition.

See a related post on Selling Value to Executives.

If you need help, contact Growth Process Group.

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Making the Transition from On-Premise to SaaS Solution Provider

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The challenge for B2B Software Solution providers is that the growth rate of on- premise software is somewhere between single digits and negative while the growth rate for SaaS Solutions is 40% and higher.

The question is: “Should you change or die? The answer is obvious. The issue is how do you accomplish a transition? The devil is in the details.

On-Premise software solution providers license their products on a perpetual basis. Revenues are driven largely by new customer order bookings. This places primary emphasis on new account acquisition. Resources were slanted heavily toward sales & marketing with significantly less for customer support. The result was that few of these companies did a great job of insuring high customer satisfaction. Stories of long implementation projects with high costs and abandonment rates are legendary.

Cloud application (SaaS) providers (using subscription models) are driven to maximize renewals. It is generally accepted that these businesses need to achieve a renewal rate of 90% or better for decent financial performance. This leads to a focus on Customer Delight with appropriate resource allocation to that function. Customer Delight & Support is now elevated on a par with Sales, Marketing, Finance & Engineering.

Let’s take a look at how these two models lead to cultural differences that make the transition from On-Premise to SaaS provider difficult.

Key metrics for running the business:

On-Premise-the metrics are sales-oriented with new account bookings as the most important. We regularly heard the end-of-quarter announcements when a large deal did not come in on time and revenue suffered, along with stock prices for public companies.

The primary Saas metrics are Annual Recurring Revenue (ARR), Customer Acquisition Cost (CAC), and Customer Life Time Value (CLTV) and Churn. Ron Gill, CFO of Netsuite said it well: “With SaaS, companies are more model-driven than they are driven by new account sales”. Successful SaaS companies eat, breathe and sleep Customer Delight at every level in every department.

The Culture Differences

Sales-The SaaS sales department has to set reasonable expectations with prospects. Promising the moon leads to disaster. Perpetual model reps are used to doing a couple of huge deals a quarter whereas cloud app sales are more of a high velocity model in which reps have to be good at managing many more sales cycles. Attempts to use the same sales team for both models usually fail, due to the difficulty in designing compensation plans that motivate reps to behave in alignment with corporate goals. On-Premise sales structure tends to be field-centric while SaaS sales structures are more apt to emphasize Inside Sales.

Marketing- Product Marketing in On-Premise moves toward community management in SaaS. Real-time User Analytics guide Feature Set enhancement for cloud app providers who implement many updates per month or week. On-Premise software vendors do periodic customer interviews with long delays to new features. A key challenge for SaaS providers is how to hold events that are not focused on new releases.

Engineering-In the On-Premise game, engineering could work on cool features that were favored by management. Different customers often have their own unique source trees with the attendant support headaches. In a cloud model, there is a single source tree and user analytics drives the allocation of engineering resources. In On-Premise, there may be one or two product releases per year. In SaaS, we see many releases per month, per week and in some cases per day.

Operations-With SaaS, cost of goods sold (CoGS) is significant whereas it typically runs less than 5% in the old model. Security becomes the obligation of the vendor where it was managed by the customer in the old model.

Services-in the On-Premise model, the services often were 2X to 5X the license price while SaaS provider services tend to run around 30% of ARR. Interestingly, the services are very different. In SaaS, there is an emphasis on Business Process Re-engineering (BPR) more so than lower level data integration. This places a need for providers to hire different skills.

Finance-In the on-prem game, an order has a huge impact on revenue for the current period (assuming that implementation does not delay revenue recognition). This leads to the high volatility in earnings of these companies. In SaaS, revenue is recognized ratably over the life of each contract. The result is that an order booked in the current period has a very small impact on revenue for the period. The unearned revenue that builds as orders are booked leads to dramatically more accurate revenue forecasts and low earnings volatility. Chris Cabrera, CEO of Xactly said it well (paraphrased):”If you have a mixed model (SaaS and On-Premise), perpetual license revenue becomes a drug that enables you to mask an otherwise bad quarter by booking a big (On-Premise) deal”

The Culture Clash!

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As you consider making the transition to SaaS, you need to recognize that it is likely to be disruptive. Not all your existing players can or will make the change. Some of your On-Premise team may try to protect the existing (On-Premise) ways of doing business as you bring out your cloud application. This can be counter-productive to achieving a high level of customer delight.

The way of the future is SaaS. This is driven by the tremendous new capabilities, value and TCO advantages that SaaS Solutions provide customers. Large software providers like Oracle have the resources to create separate divisions where the cloud application providers have an appropriate culture. For small (<$100M) companies, we believe the smart approach is a complete, rapid transition accomplished in a year or less. Note that such a fast transition is not easy, but stretching It out over a long period increases the risk that you will not accomplish the change. We have only identified one company that is successfully providing solutions as both On-Premise/perpetual and SaaS/subscription from the same business unit. If you know of any, please identify them, as we want to learn more about this important issue. If you face these challenges and want to learn more, contact me at Growth Process Group on how best to make the transition.

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What is the Best Enterprise SaaS Sales Model: Viral or Focused?

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Are you going to market with an enterprise app that promises to improve revenue, reduce cost or improve control? Often, these products propose to accomplish success by changing the way work is done in the enterprise.

There are many enterprise SaaS market entry attempts starting with a low price (<$25K ARR) and the expectation that the customer will love the app so much that it will expand to enterprise-wide deployment. The approach is to encourage viral expansion. Free trials, web sales and freemium models pervade.

When the enterprise expansion does not meet expectations, the response may be to bring in an experienced team for enterprise sales, marketing and support. The investment required to do this is often well north of $100M. Successful examples include Zuora, Box, Marketo, Yammer, and salesforce.com. This process is endorsed by the VC funds pumping money into the space.

The issue here is the probability of success with a low end offering when there is the requirement that work flow in the enterprise be changed. Changing work flow requires the endorsement of an executive who has the authority and political power to change how work is done. Top level executives, who have the power to change how work is done, do not spend their time on small (priced) problems. They delegate decisions these to those in the departmental ranks. Lower level managers rarely have the political power or authority to change enterprise work flow. So there is a dilemma. When your price point is low (and there is an implication that your value is commensurate) and you may have difficulty getting attention from executives who are focused on strategic initiatives.

So, the question is what are some alternative sales approaches?

Top Down Sales

In this model, the focus is on enterprise-wide adoption. The sales goal is get top management adoption of the solution. Because the deals tend to be large, sales cycles are typically long and the cost of acquiring each customer is high. The sales model is complex with committees on the customer side and multiple resources deployed by the ISV. However, the risk of enterprise wide adoption is low, assuming the SaaS solution solves the customer problem. Early customer sales may focus on the vision of the future solution rather than the current MVP capability. Customer executives that commit to this approach are visionaries with strong political power. Siebel Systems mastered this in the client-server days. Today, Workday is a leading SaaS ISV employing it.

Land & Expand Model

Here, the focus is to capture a departmental unit and expand within the corporation once initial customer success has been achieved. The goal is departmental management commitment. The sales cycles are still complex, but usually shorter and lower cost than those in the Enterprise wide model. Building strong references for the solution within the customer is key to success. There is greater risk (often due to political issues) that the SaaS solution may not achieve enterprise-wide adoption. RightNow Technologies perfected this model before the Oracle acquisition. Other examples would be business intelligence, customer success and variable compensation applications.

Bottom Up Model

In a bottom-up approach, the initial targets are individual users who will become advocates of the product. Price points are low. Selling costs per unit sale are low and sales cycles are short. However, revenue growth may be slow and there is greater risk of not achieving enterprise-wide adoption because the users do not have the authority or political will to change the way work is done. Examples include salesforce.com (in the early days), Box.net, Zuora and Yammer (before the Microsoft acquisition). To achieve sustainability in the enterprise market, the investment requirement for the bottom-up model is typically over $100M (with the notable exception of Veeva). Many SaaS solution providers trying to gain entry with a product offering that will improve productivity that requires work flow changes initially positioned as low end offerings. Clearly, this approach can be successful if the firm has the intention to raise megabucks and the VCs will back it.

What sales model are you using? One of these or more than one? How is it working?

Let me know if you have experience with other approaches not discussed here.

Contact me if you want help sorting out the alternatives.

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Debunking three myths about software as a service (SaaS)

By Marc Dietz, director of IBM SaaS strategy & marketing

Software-as-a-Service (SaaS) is not a new delivery model. The SaaS market has enjoyed rapid growth over the past few years and shows no signs of slowing. In fact the SaaS market is estimated to grow at a CAGR of 24 percent to reach by $66.9 billion 2016 and the applications segment is expected to grow to $36.9 billion by 2016. The SaaS market has been evolving as it’s been accelerating but there are still quite a few myths about SaaS. In this post, I’d like to debunk three of them.

Myth No. 1: SaaS is only about reducing costs. For many solutions and many companies, the economics of the SaaS model are certainly one key aspect of the value proposition. What is less known is how organizations are embracing SaaS for its real value: competitive advantage. While a recent IBM Global SaaS study did find that reducing total cost of ownership (TCO) was the top driver for adopting SaaS, 47 percent of IT and business respondents reported that SaaS was actually transforming their businesses and providing a competitive advantage in the market. The primary sources of this competitive advantage are speed, both in terms of time to value and agility to make future changes; and innovation, made possible by freed up IT resources, ongoing updates to business applications, and unique advantages of cloud solutions over on-premise solutions. In other words, SaaS is not just another delivery model and while it offers multiple economic advantages, the real value goes beyond the economics.

Myth No. 2: SaaS is only for business users and that means bypassing IT. Just because SaaS is easy to purchase and deploy by business users and has given rise to “shadow IT” and “rogue buying” in the enterprise, this is a big myth for two key reasons. First, cloud computing is disrupting and shifting the entire software industry, including software for IT practitioners. In fact, a recent study showed that IT practitioners “go rogue” and bring unapproved SaaS apps into the business MORE than line of business users! More and more IT management applications, such as workload automation and application performance management, are now in the cloud as well, with many more middleware and other IT SaaS apps to follow. The second major debunking factor for this myth is that innovative CIOs and IT shops are getting more involved with SaaS – and not to “clamp down” on shadow IT with iron fists, but rather with open arms. In a recent IBM Global SaaS Study, we found that in Pacesetter organizations LOB and IT strongly collaborate on SaaS selection and deployment and 65 percent of pacesetters actually describe the IT and LOB relationship as a strategic partnership. SaaS also allows IT to enable the business with innovative solutions much more quickly and then focus resources on more strategic business initiatives. Security, privacy, integration, hybrid environments are all certainly still important, so IT and the collaboration between the business and IT needs to consider functional business needs as well as these factors.

Myth No. 3: SaaS is for mid-market not enterprise. Another declining but still common belief is that SaaS is really only for small or mid-market companies, not large enterprises with mature IT departments and comprehensive data centers. SaaS, and cloud computing overall, is a great option for smaller organizations, of course, but many big companies are moving to the cloud for all the same reasons: economics, agility, innovation, competitive advantage, and more. Some enterprises do still evaluate solutions in a SaaS model and then bring on-premises. But more and more we see companies start with that intent, but then never make the change (why fix what isn’t broken?). And some enterprises are even now taking a “SaaS-First” approach for business applications and I predict we’ll see much more of that in the months and years to come. The reality of course is that major enterprises will have hybrid environments even if they start a “cloud-first” approach now. They need to evaluate how SaaS solutions fit with and integrate with other legacy applications, but with capabilities available today to integrate, secure, and orchestrate dynamic, hybrid cloud environments, this particular myth is definitely fading and is certainly short-lived.

The companies that are getting beyond the myths and embracing SaaS solutions are finding success in the market. These SaaS Pacesetters are collaborating better both internally and externally and improving business relationships. They are leveraging analytics across the organization and making better decisions. And they are increasing innovation and responding faster to market changes.

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