Tuesday, August 18, 2009

SaaS 2.0 Will Be All About Reducing The Cost Of Sales

A clever choice of the right architecture on right infrastructure has helped the SaaS vendors better manage their operational infrastructure cost but the SaaS vendors are still struggling to curtail the cost of sales. As majority of the SaaS vendors achieve feature and infrastructure cost parity, reducing the cost of sales is going to be the next biggest differentiation for the SaaS vendors to stay competitive in the marketplace.

Direct sales model is highly ineffective and cost-prohibitive for the SaaS vendors as it does not scale with the volume business model that has relatively smaller average deal size. The role of the direct sales organization will essentially get redefined to focus on the relationship with the customers to ensure service excellence and high contract renewal rates in addition to working on long sales cycles for large accounts.

How can a SaaS vendor reduce the overall cost of sales to maintain healthy margins and growth?

This is a difficult nut to crack. There are no quick fixes. There is no easy way to optimize the tale end of the process without holistically redesigning the entire SaaS life cycle.

Self-service demos to "self-selling" trials:

Fundamentally the direct sales model for an on-premise software sales has been all about initial investment into the right demos to model customer scenarios and align the sales pitch to match the solution needs. The SaaS vendors moved away from this model as much as they could and replaced it with the self-service demos or trials. However these demos are not "self-selling" and still requires intervention from the direct sales people at various levels.

The SaaS vendors need to move from self-service demos to the self-selling ones that are not only fully functional out-of-the-box but also articulate the solution capabilities implicitly or explicitly. The demo is not just about showing what problems you are solving but it is also about how well it maps to the customers' pain points. It is like buying a hole and not a drill. The demo and the product should scream out loud the value proposition without making customers go through a webinar or a series of PowerPoint slides.

Customer acquisition to customer retention:

SaaS companies have traditionally focused their sales and marketing budget on customer acquisition against retention. While customer acquisition is a necessity the increasing SaaS competition could result into the current customers ditching the vendors. Customer support is the new sales model. Design your customer support organization and operations to retain customers. Don't let the contract renewals slip through the cracks.

Your customers are the biggest asset that you have. Market new solutions to them as an up-sell. One of the powerful features of a SaaS platform is to be able to integrate and push the new products effortlessly to the existing customers and have them try it out before they start paying you. Modernize your internal tools to track the usage analytics to better understand your customers, sales activities and effectiveness of the marketing campaigns. You have a problem if you cannot tell which customer is using what, who are the right partners, who needs training and support etc. If you haven't lately looked at the tools that your sales people use this is the right time. I would not expect a SaaS vendor to reduce the cost of sales without empowering the sales force with the true customer, competitior, and partner intelligence.

Low-touch persuasions to hi-touch interactions:

Low-touch one-to-one selling does not scale. Replicate the Avon model. Design a great ecosystem of your channel partners to whom you can pass on the cost of sales. Align the incentives and encourage the partners to sell but ensure the customer support and overall brand integrity. This strategy would require an extensive partner program with sizable investment in training and tracking what and how the partners are selling but this investment will go long way.

Reserve the direct sales force engagement for large hi-touch CIO type deals where you are required to go whole nine yards before you get a contract. The key is to have a highly variable sales force and extremely efficient compensation model to deal with a variety of prospects and customers. One size does not fit all.

Low-barrier adoption to zero-barrier productivity:

The SaaS model pioneered the low-barrier adoption empowering the LOB to sign up and start using the software without an approval or help from the IT. Eliminate any and all barriers to further penetrate the adoption. Do not enforce upfront credit-card requirements and even skip the registration if you can. Let the customers use the software with the minimum or no information up front. Demonstrate value when asking for more information e.g. Picnik lets you manipulate image in any way you want but would ask you to register if you want to save images. There should be no paper work whatsoever, not even a physical contract. Allow customers to bring in the content from other sources such as Flickr, Facebook etc. Allow the customers to have access to a live sandbox as a step before the dedicated trial. Starting from a blank canvas could be a hindrance to evaluate a product.


Cloud Computing Services said...

Thanks for the Article...

Really helpful information!

Great Job !

Todd Lane said...

Excellent post. The main challenge that SaaS companies face is reducing the cost of sales in a down economy with so much competition and smaller deal size. Great suggestion about developing an ecosystem of channel partners. http://www.appregatta.com.

Alex said...

Great article but there is another side to some of the points:

Channel partners are hard for a startup. Yes, everyone wants this empowered, free sales force. But channel partners are interested in selling products with proven demand- not from unproven startups. A startup also loses the vital direct customer interaction in tuning product features and learning what its message to market is. Nailing this part is the key to any new business. It can be made to work- but in my experience the channel route rarely works early on. Later, once moderate initial momentum is gained, channels can be leveraged. Affiliate partners who drive web traffic are an exception, but have pitfalls as well.

Also, there are two sides to the "don't force registration" debate. Yes, some customers will go away due to this. But capturing some information is required so that a dialogue can be started. Lead nurturing is important, and as many as 70% of sales for software companies come from customers through a good lead nurturing program. If you are offering a truly valuable product, you need to have some kind of "ask", even if just an opt-in email so you can communicate later. So I would say, if you are offering a Saas solution like small business CRM, go ahead and push for emails and registration. On the other hand, if Google search required a signup before any web searches were possible, it wold merely be hindering adoption.

Just my two cents, loved your article...


Chirag Mehta said...

Alex, you are absolutely right. The start-ups do need to focus on direct customer interaction early on. In many case these early customers shape the future of the company. However the SaaS vendors, start-ups or otherwise, do need to think through the channel partner strategy early on since it impacts how they design their products. This should not be an afterthought since many design decisions are quite expensive to reverse.

I do not suggest that asking for registration or an email address is a bad idea but I strongly believe that the vendor should explicitly state the intent and the value (which you mentioned e.g. lead nurturing, follow-up etc.) There are also ways to expedite the registration processes such as allow customers to use OpenID. There are in fact companies out there such as https://rpxnow.com/ that have solutions to simplify this experience.

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