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Archive for April, 2010

VMForce: Salesforce and VMWare’s Cool New Platform as a Service

Posted by Bob Warfield on April 27, 2010

Salesforce and VMWare have big news today with the pre-announcement of VMForce.  Inevitably it will be less big than the hype that’s sure to come, but that’s no knock on the platform, which looks pretty cool.  Fellow Enterprise Irregular and Salesforce VP Anshu Sharma provides an excellent look at VMForce.

What is VMForce and how is it different from Force.com?

There is a lot to like about Force.com and a fair amount to dislike.  Let’s start with Force.com’s proprietary not-quite-Java language.  Suppose we could dump that language and write vanilla Java?  Much better, and this is exactly what VMForce offers.  Granted, you will need to use the Spring framework with your Java, but that’s not so bad.  According to Larry Dignan and Sam Diaz, Spring is used with over half of all Enterprise Java projects and 95% of all bug fixes to Apache Tomcat.  That’s some street cred for sure.

Okay, that eliminates the negative of the proprietary language, but where are the positives?

Simply put, there is a rich set of generic SaaS capabilities available to your application on this platform.   Think about all the stuff that’s in Salesforce.com’s applications that isn’t specific to the application itself.   These are capabilities any SaaS app would love to have on tap.  They include:

  • Search: Ability to search any and all data in your enterprise apps
  • Reporting: Ability to create dashboards and run reports, including the ability to modify these reports
  • Mobile: Ability to access business data from mobile devices ranging from BlackBerry phones to iPhones
  • Integration: Ability to integrate new applications via standard web services with existing applications
  • Business Process Management: Ability to visually define business processes and modify them as business needs evolve
  • User and Identity Management: Real-world applications have users! You need the capability to add, remove, and manage not just the users but what data and applications they can have access to
  • Application Administration: Usually an afterthought, administration is a critical piece once the application is deployed
  • Social Profiles: Who are the users in this application so I can work with them?
  • Status Updates: What are these users doing? How can I help them and how can they help me?
  • Feeds: Beyond user status updates, how can I find the data that I need? How can this data come to me via Push? How can I be alerted if an expense report is approved or a physician is needed in a different room?
  • Content Sharing: How can I upload a presentation or a document and instantly share it in a secure and managed manner with the right set of co-workers?

    •  

    Pretty potent stuff.  The social features, reporting, integration, and business process management are areas that seem to be just beyond the reach of a lot of early SaaS apps.  It requires a lot of effort to implement all that, and most companies just don’t get there for quite a while.  I know these were areas that particularly distinguished my old company Helpstream against its competition.  Being able to have them all in your offering because the platform provides them is worth quite a lot.

    There is also a lot of talk about how you don’t have to set up the stack, but I frankly find that a lot less compelling than these powerful “instant features” for your program.  The stack just isn’t that hard to manage any more.  Select the right machine image and spin it up on EC2 and you’re done. 

    That’s all good to great.  I’m not aware of another Platform that offers all those capabilities, and a lot of the proprietary drawbacks to Force.com have been greatly reduced, although make no mistake, there is still a lot to think about before diving into the platform without reservation.  Force.com has had some adoption problems (I’m sure Salesforce would dispute that), and I have yet to meet a company that wholeheartedly embraced the platform rather than just trying to use it as an entre to the Salesforce ecosystem (aka customers and demand generation).

    What are the caveats?

    First, this is just an early glimpse.  You can’t actually go try this thing out and pricing isn’t even being talked about until this year.   Historically, pricing has been another Achilles Heel of the Force platform, although I know Anshu disagrees with me on that one.  We got our Helpstream service to the point where it cost 5 cents per seat per year to deliver the service.  Don’t be surprised if VMForce is a LOT more expensive than that.  Second, ISV’s will also have to wonder whether Salesforce is friend or foe.  At Helpstream, we finally got comfortable with the idea that they are a sort of Dr Jekyll and Mr Hyde.  Their product organization viewed us as competitors, and would’ve been only to happy to wipe us off the face of the Earth.  Meanwhile, we were getting around a hundred leads a month from being on the AppExchange and they were good quality leads.  We were able to appear at Dreamforce, and it was a good venue for us. 

    But VMForce represents a much higher degree of collaboration.  Take advantage of all those juicy services and it will be hard to back out of that platform, Java or no Java.  There just isn’t anything else like it, and that’s the real distinction of VMForce.com.  It’s a brilliant repackaging of some great functionality from the Salesforce apps as a platform.  What remains is to see if Salesforce can behave itself and act like Switzerland the way a platform vendor is supposed to.  And don’t overlook what kinds of data will now be completely beholden to that Swiss Data Bank.  The heavy focus on Social will be very powerful.  In the broadest sense, CRM is a system of record for what your customers and prospects are doing. 

    On balance, I think Salesforce has tee’d up a potential game changer for the SaaS platform world.  Whether or not ISV’s get comfortable with the Swiss angle, Corporate IT should find a lot to like here from the get-go.  VMForce also seems like a rich opportunity for the Salesforce ecosystem of SI’s and VAR’s to add value too.  Salesforce has listened and learned and seems to be on the right track.  I don’t see it as an Amazon killer, but rather as a welcome new addition to the Clouds that’s going to enable new things we haven’t seen before. 

    Two thumbs up for now and let’s see how things develop.

    Posted in business, cloud, platforms, saas, Saas developers, strategy | 5 Comments »

    To iPhone Or Not To iPhone, That is the Question

    Posted by Bob Warfield on April 21, 2010

    Apple’s strategy towards Adobe Flash drives me nuts.  There’s yet another flurry of posts about it as Adobe officially abandons further work on Flash for the iPhone.  Adobe hints they’re going to be more Google Android focused according to Sarah Perez, and there have certainly been all the right rumblings in terms of a good connection between Google’s Chrome browser and Flash called “Flash Embrace“.  Honestly, these Apple moves are getting a bit too Orwellian.  The new developer agreement that sparked all the controversy reads, “Applications must be originally written in Objective-C, C, C++, or JavaScript as executed by the iPhone OS WebKit engine…”  So they’re basically killing a whole raft of development possibilities, not just Flash.  Clearly their objective is total control under the banner of ensuring a consistently high quality experience.  But the reality here is that this will lead to total monopolization and monetization for Apple. 

    I had to chuckle when Steve Jobs painted himself as the underdog out to help publishers avoid the total domination of Amazon’s Kindle (hat tip to Techmeme for finding that NY Times post).  Doing no evil?  Hardly.  Helping book publishers force Amazon to raise Kindle book prices to help his own iPad get more control?  Absolutely!

    Developers and many onlookers, for the most part, are fairly outraged.  There are a few that seem to think it’s a good idea what Apple is doing, but it almost sounds like they’re sucking up to Apple, dislike Adobe, or have some other axe to grind.  GigaOm is starting a series about the whole topic:  Open vs Closed: How much is too much?

    Speaking of axes to grind, I have one too.  I’ve written a little application for the CNC machinist’s world called G-Wizard.  For a variety of reasons, I wrote it in Flex, which was well-suited to the job.  It turns out this application would be extremely handy to have in your hot little hand while you’re trying to operate the machine tool on the shop floor.  I’ve gotten scores of requests from users who want an iPhone port.  And in fact, Flex would be the perfect vehicle for this.  G-Wizard already runs seamlessly on PC, Mac, or Linux with no extra effort on my part.  It is delivered over the web and brings new data to itself from the web.  Think of it as a minimal SaaS application (I may write some posts on how that works if there is interest).  Flex’s ability to morph screen layout would be ideal for making it a First Class application on an iPhone.  Unfortunately, Apple is going to arbitrarily make it impossible for me to make my users happy. 

    Most of the chatter about Flash versus HTML 5 focuses on its use for video, but my Flex application is a completely different case.  Flex is a mature development platform and HTML 5 is a long way from that.  What are the alternatives?  Writing it in Objective-C, C, or C++ is just out of the question.  I know those platforms well, and they would make it much harder to build G-Wizard.  Javascript would be extremely cumbersome too.  None of those tools would be as productive as Flex, and each would require a total rewrite of the application.

    Can I borrow a page from Adobe and just focus on the non-iPhone Smart Phone world?  I guess I could, but so far I have had many requests for an iPhone version and no requests for, say, an Android version.  I run Google Analytics on my web site, and it provides a nifty report of mobile visitors.  It turns out that 84% of my mobile users are using an iPhone, iPad, or iTouch.  Sure, Android is growing like crazy, but its got a long ways to go to catch the iTsunami that is here today.

    It looks like I’m stuck suffering the slings and arrows of outrageous Apple behavior.  Rats!

    Posted in amazon, apple, business, saas, strategy | 5 Comments »

    Do You Need Enterprise-Envy?

    Posted by Bob Warfield on April 20, 2010

    As so often happens, a discussion of the Enterprise Irregulars group I belong to has prompted a post of my own. 

    Every business needs to spend some time thinking about what kinds of customers it doesn’t want to attract.  This kind of thinking is alien to most, but it is essential to successful sales and marketing.  Why?  Companies can’t be all things to all people.  Products are not equally suited to every segment.  Both companies and products need to be great for some segment, preferably insanely great as Steve Jobs used to say.  Spreading too thinly by trying to appeal to too many segments dilutes the possibility of such greatness.  So spend some time consciously identifying which customers you’re not interested in having.  Having done so, you can use this knowledge to help you in decision-making.  Any time the primary appeal of a decision is to make a group you’re not interested in happy, just drop it.  Focus the energy making the group you are interested in happier.

    There are many dimensions you should analyze in order to fine tune your definition of the “right” customers.   What sorts of businesses are they in (e.g. verticals)?  Who is the buyer within their company that will make the decision?  What problems are they trying to solve?  You probably should not be trying to solve all the problems even for a relatively narrow focus on type of customer.  Let’s drill down on a particularly important dimension: what size customers are you trying to attract? 

    Size changes everything.  For some markets, it spans the gamut from individual consumers to giant companies.   No single product could be right for everyone on such a huge range.  The marketing strategy you have to use to generate demand differs wildly from one end of the spectrum to the next, as do many other strategic decisions your company must make.  I spent a fascinating afternoon with Geoffrey Moore (he of the chasms) going over this for Helpstream.  There are three categories for deal size that profoundly affect your marketing strategy.  If your deals are below circa $70,000 (consider that a year’s subscription for SaaS, or the license fee for a perpetual software license), you need to market with PR and Buzz.  It’s the most efficient way to go about it.  You have to send out a signal that customers will home in on.  This kind of marketing is inbound.  BTW, at Helpstream, we move from being mostly outbound to being almost entirely inbound and it profoundly improved our results. 

    The second category involves deals bigger than about $150,000.  BTW, these numbers, $70K and $150K are approximate, and have wiggle room of 10 or 20K.  Above that size your approach should be outbound.  Draw up targeted lists and reach out to them.  The PR and advertising end is much less important.  Your messages will be very much tailored to each individual prospect.  Consultative selling is the proper approach.  This is how we went about it selling to the Global 2000 at Callidus, when I was there.  When I was at Oracle, there were cases of products being built that had to be sold for under $100K.  The Oracle Sales Force flat-out told the Product organization it had no idea why they had built those products because they had no way to sell them.  And in fact, the products did very poorly and eventually died. 

    You will notice that the third category is the middle ground, between about $70K and $150K.  This is a Dead Zone where you can’t win.  Deals are too big to sell on inbound attention and too small for the kind of focused outbound selling that works in the larger deals.  Companies here are stuck in an unhappy world.  They need to either raise or cut prices, because the costs of sales and marketing make this price point too inefficient to be practical.

    What does all this have to do with Enterprise-envy? 

    There is a peculiar form of naiveté associated with Marketing.  As my old VP of Marketing Bill Odell would say, “Everyone thinks they can do marketing.”  Most engineers want to emulate Porsche or Apple marketing (or similar “power” brands) if you ask them.  Watch their reactions to your marketing and their suggestions with that in mind and you will understand where they are coming from.  But there are tons of successful companies, great companies, that do not have the in-your-face-we’re-better-than-everything-else-by-a-lot mentality of a Porsche or an Apple.  Some products just can’t sustain the attitude (imagine selling something mundane, like pipe fittings, that way) and some markets are turned off by it.  Do you want your doctor to portray a cutting edge boy racer image, or do you want them to be conservative, competent, and safe? 

    Enterprise-envy is related to wanting all your marketing to look like Porsche or Apple.  All businesses love to talk about their customers.  It’s so much better when you can talk about a customer someone has actually heard of.  “Porsche uses our muffler framistat analyzer to build their world-class cars.”  But what if your customers, the ones who have gotten you where you are today, aren’t Enterprise-class customers?  What if they are all small businesses?  You’re going along gangbusters, racking up tons of them, but you sure are tired of not being able to flaunt some big names when people ask about your business.  Then one day, an Enterprise comes along and thinks it could use you.  Chances are good that you have Enterprise-envy.  Suddenly you’re doing back flips and turning everything upside down to try to win their business.  And guess what?  This is what the Enterprise expects.  They’re used to getting their way.  After all, they are Coca-Cola (or insert favorite brand) and you are nobody.  Just a startup.

    When that happens, drag out your description of who are not your customers.  If you’re building your business on that over-$150K deal, and this Enterprise is exactly where your sweet spot is, then by all means, jump through flaming hoops to get their business.  That’s how it is done.  Each one may take you within an inch of your startup’s ability to deliver, and you will need to rise up and make them happy.  Been there, done that.  There is nothing quite so exhilarating as being told that the deal you just closed will require your software to run 10x faster within 6 months or the customer will be pissed and you will fail.  (Paraphrasing Winston Churchill, who said “There is nothing more exhilarating than to be shot at without result.”

    However, if the Enterprise is not in your sweet spot, think about whether the value of being able to tell people about them (yes, that will market just fine and enhance your PR to help sell more under $70K deals!) is worth the flaming hoops.  Try to make sure that this new Lighthouse Account won’t sink the boat or otherwise cause you to change your product or business so much that it isn’t worth it.  In short, make darned sure you aren’t betting your business on these deals.  Sales people call it mammoth hunting.  You can eat for a long time on a mammoth, but he’ll kill a bunch of the cavemen before you bring him down.  As I have alluded to, the right way to think about it is that this deal is largely about the marketing.  Evaluate its costs as you would any other marketing program.  However big it may be (and if you are starting out, it won’t be all that huge), it is really no better than the next however many small deals it would take to make up the revenue.

    Salesforce.com provides an interesting case study here.  For years, Benioff sold against Siebel as though they were dire competitors.  Yet they could not have been.  The average customer of an early Salesforce had too few seats.  Even today their average customers has relatively few seats.  You’d think from the rhetoric that they were in competitive dogfights at every Fortune 500 company there was.  It made for good PR, and there were enough small department wins at big companies to fuel the PR machine and keep it interesting.  But the reality was a lot less than the rhetoric.  Netsuite is more honest about it when CEO Zach Nelson talks about selling to the Fortune 5 million.  I like that turn of phrase. 

    There are great businesses to be had selling to small customers.  Often its easier than going after the Enterprise because there are fewer vendors trying to serve these markets and they are less capable as competitors.

    Ignore Enterprise Envy and go after the best market for your company and products.

    Posted in business, Marketing, strategy | Leave a Comment »

    Apple, Adobe, Punctuated Equilibrium, and Commoditization

    Posted by Bob Warfield on April 13, 2010

    Lots of kerfluffle around Apple’s refusal and downright blocking of Flash on its platforms.  Developers like John Gruber are stating the obvious in explaining why Apple is behaving this way.  Techcrunch is piling on, since Steve Jobs is referring people to Gruber. 

    BFD, I explained all this years ago and in more than one post.  It really is extremely obvious what’s going on.  The more interesting question is, “Where will it lead?”

    I’ve written also about how platform vendors should behave like Switzerland.  Apple most assuredly is not behaving like Switzerland.  Under the banner of making insanely great products, they’re doing the equivalent of being a Swiss bank that makes you agree to terms that effectively lets them own all of your customers and tax all of your revenues.  Evil?  Probably.  Yes, let’s make no mistake, there is Evil here in the sense that Google used to proclaim they would not do.  Apple wants to lock up customers and tax them for every cent of revenue they possibly can.

    For the time being, this strategy will work great, but Apple should be aware that they are using artificial scarcity to drive demand.  The user experience offered by the iPhone and iPad are sublime, and there are no good enough alternatives yet.  Hence the artificial scarcity.  But it is artificial in the sense that sooner or later someone will produce a good enough alternative, at which point we get commoditization.  I’ve written about the parallels of evolutionary biology and business quite a lot.  Apple’s case is no different. The “i” products have created a punctuated equilibrium.  This is a fundamental change that gives those organisms a tremendous advantage.  They rapidly gain share in the ecosystem as a result.  However, Nature abhors such ownership, and so do the markets.  Other organisms will copy the traits that made the upstarts successful.  They will blunt these advantages and slow their growth.  There are too many dollars at stake driving that desire.

    Can it happen? 

    Well, it’s getting harder.  Apple has the full benefit of network effects.  Consider the online auction space.  Once upon a time there were a huge number of auction houses.  Today, there is largely only eBay.  A network effect happens when each new member of the network brings even more value than the previous joiner brought.  It is an exponential growth in value, and hence switching costs.  At some point, it is too hard for new players to show value.  The danger in Apple’s products is therefore not the compelling UI’s, but the switching costs.  Take my Kindle.  In a very short time I have put several hundred books on it.  Would I switch over to Apple’s formats?  No.  I’d lose my several hundred books, or at the least, I would have to fool around trying to remember which format and reader I need to use to access a particular book.  That’s a network effect.  Cell phone companies do the same with their contracts.  Ironically, I want to upgrade my iPhone and give it to my son so he gets a hand-me-down upgrade.  I couldn’t until recently because my AT&T contract wouldn’t let me.  Apple is doing the same around apps and media with the iPhone and iPad.  Facebook and Twitter, BTW, are huge because of network effects, and it will be hard to ever unplug that advantage now that it is built.

    Several things need to happen very quickly in order to thwart Apple’s growing network effects.  First, people need to be aware that this is what’s happening.  Make sure you understand the network effects and lock-in that you’re becoming a participant of.  Be careful, because there are even stronger variants than what Apple is offering.  I have argued in the past with Fred Wilson about streaming media.  Get roped into allowing your media to be strictly streamed by a few providers and you are well and truly locked in.  Second, Microsoft, Google, and whoever else needs to wake up.  You have a major problem with your Product Management and Strategy people.  Why are you unable to successfully copy Apple’s products to produce a “good enough” alternative?   Microsoft, in particular, you did it before with Windows and Mac.  Your new Kin phone seems to be a flop from the get go.  Did you forget that your role is to commoditize other people’s ideas?  Sounds tawdry, and it has certainly been proclaimed as Evil, but looked at in this kind of light it really isn’t.  It’s about providing alternatives.  Google, your Android is much better, but geez, it needs to get better a lot faster.  Time is running out as Apple builds network effects.

    Where are the Open Source community and standards making bodies in all this?  Open formats and digital rights management that transfers across devices is critical.  Portability and interconnection rule when defusing network effects.  Even if big third parties like Microsoft and Google are just sailing under the Open Banner to make money, it’s doing a service by blunting a growing monopoly.  Media owners, do you want to be marginalized by Apple?  That’s what will happen.  You backed Amazon down on Kindle (first on text to speech and then on pricing) before it was too late because you were afraid.  What are you doing with Apple?  Alternate content distribution channel owns (pretty clearly I am talking to you, Netflix, and you, Amazon–maybe you two should merge), what is your plan to navigate these waters?

    What can Apple to if it senses a revolt?  Lots of things.  It’s being extremely heavy handed at the moment.  I never heard anyone accuse Apple of humility, after all.  Totally blocking Flash is not necessary to preserve lock-in.  One could argue there is enough valuable Flash content that it is slightly counter-productive, in fact.  Apple is simply having trouble dealing with the meta-nature of computers.  It is hard to define a Turing platform like Flash in such a way that it can’t become a Trojan horse.  In fact, it may be impossible.  Instead, it is necessary to individually vet each Flash application and have the flexibility to revoke the authorization of that app if it misbehaves.  For Adobe’s part (and any other would-be platform developer), they should facilitate allowing this kind of control.  It is better to have more Flash applications than fewer, even if they must operate in shackles in the Apple world.  Apple knows how to peacefully coexist.  Their PC business flourishes after they finally adopted Intel chips and allow virtual machines to run Windows.

    I give this another 2-3 years before it becomes impossible to change the page.  If that happens, we’re stuck with the monopoly until there is another punctuated equilibrium.  That happened with Microsoft, and it took years and the Internet to get there.  It happened with Intel’s microprocessor dominance.  In both cases, the resultant products were inferior even to many peers during their time, but the network effects were too strong and the better peers didn’t get in position soon enough.  A failure to stop one of these snowballs is how monopolies are built, and they’re extremely lucrative.  Each day you wait it becomes a little bit harder.  That’s the nature of network effects.

    Posted in apple, business, flex, Marketing, Open Source, platforms, strategy | 5 Comments »

    Startups Need Starters

    Posted by Bob Warfield on April 13, 2010

    Just a short post for my Helpstream Learnings series today:

    Reading 37Signals latest book, “Rework“, has crystalized a few thoughts I’d been having since Helpstream.  It’s a great read, BTW, if you haven’t already checked it out.

    This particular post is about Starters.  The authors of Rework want to drop the term “entrepreneur” and switch to “Starter”, but I think Starter needs an even broader meaning to fit an even more important role.  Sure, every startup will have its designated entrepreneur in the form of its founder(s) and hopefully its leadership.  The thing is, everyone needs to be a Starter in a startup.   Starters are people who can get something done without other people.  They’re the leaves of the value creation tree.   It sounds funny to think of it that way, and many will ask, “Don’t you just mean employees?”  The answer is, “No, I don’t just mean employees, and that’s the essential point.”

    Traditional business, particularly large organizations, often think of employees and managers.  The employees do the work and the managers manage the employees.  But a startup can’t afford this luxury.  Managers need to be able to do work too.   A manager that can get something done without other people is a Starter, and these are the types of managers you want in your startup.  That’s not to say they can’t manage.  Startups are tough environments.  You want the people who can do it all.  I’m convinced this is one of the big problems with hiring Big Company people into Startups.  They’re probably excellent managers, perhaps better than the average Startup manager.  But very often they are not startups.  Take away their staff and consultants and they don’t get anything done.

    Look at span of control.  A good manager can optimally handle 7 to 9 reports, and a great manager can handle more.  But a startup may consist of only 15 people in its early stages.  The CEO should have more reports than anyone, and even then it won’t amount 9 if they have very many VP’s.  The VP’s may have 2 or 3.  A pure manager with 2 reports can’t accomplish much.  Instead of charging that overhead against 7 to 9, it is charged against 2 or 3.  Suddenly that is a very expensive executive indeed.  And what if a VP has no reports and isn’t a Starter?  Do they just not get anything done?  Startups never have enough people, money or other resources.  You need all the Starters you can get, and you need to minimize the overhead of professional managers until you can get big enough to have something for them to do.

    Hire Starters who are great Managers.  Whatever it is they manage, make sure they can contribute something more that doesn’t require other people.  Make sure it is something important.  Can your VP of Sales manage your CRM system and run all the reports?  Can they make all the sales calls until you’re big enough to keep a full-time Account Executive fed?  Can your VP of Marketing write the marketing content?  Can they blog, write ads, do copy for the web site, and email blasts for Marketo?  Ours could at Helpstream, and it made a huge difference.  We ran leaner, we got more done, and we were better aligned in our purpose.

    Posted in strategy, venture | 9 Comments »

    References and Pricing for SaaS Startups

    Posted by Bob Warfield on April 5, 2010

    Getting the pricing right is a pretty critical part of any startup’s early stages.  And it’s hard.  The first task when selling business software (I differentiate from the consumer software experience) is getting anyone to pay anything for it and then be willing to talk about it so you have references.  Indeed, there is often some software that is essentially given away in the early days. 

    Why?

    Give it away in order to get a list of referencible customers started.  It’s very hard to sell business software without some references.  Your first task is therefore to get references together.  You will need at least 3 or 4 to have a credible start.  The more impressive the three or four initial references are, the easier it will be for you to grow.  But you’re not really done with three or four.  In my experience, it isn’t until you have six to eight solid references that you’re starting to get beyond the point where you need to beg, borrow, or steal to get references.  And in fact, if your business depends heavily on verticals, you may need three or four in each vertical before you can start to open up that vertical.

    Okay, how do you line up your initial references?  If you’re waiting on Marketing to produce those leads, it’s going to be a long lead.  The initial references are going to come from networking.  You already know them, or you know someone who does.  Hopefully your salespeople have some of them in their contact lists (I almost said Rolodex then realized some may have no idea what that is).  Your executives will have some.  Your investors and Board will have some.  This is no time to be shy, network like crazy.  At Helpstream, I had every single person in the company sign up for LinkedIn and then made sure the sales people had everyone in their contact lists.  This meant that whenever sales wanted to check up on a prospect, they could immediately see if anyone in the company had a contact that could help.  The way LinkedIn works, they didn’t even have to ask, it would just come up on the searches.

    Now get out there and talk to everyone you can.  Wheel and deal like crazy.  This isn’t about extracting revenue.  This is about building credibility and learning something about the world’s reaction to you product.  We would tell everyone we talked to at this stage that we were offering “friends and family” pricing specifically to get some referencing going and to get started.  To give an idea, we would sell these early deals for 1/2 to 1/4 of what we’d sell for a year later.  We’d give away the professional services to install the software too.  And the CEO and VP of Engineering need to make double sure these customers know they’re going to get the extended red carpet treatment for a long time.

    There’s really only a couple of things to be cautious of at this stage.  First, you need prospects who really will be referencible.  That’s the quid pro quo for the deal.  They have to be willing, and they have to be decent references too.  Think about whether the next tier of customers you get will be impressed with those references.  Sure, they’re likely going to be venture companies just like yours, but are they larger?  Do they have first tier VC’s?  Are they getting buzz?  Second critical thing is that they are real customers.  They come from real markets you want to target.  They will really use your software because they need it.  And your software will give them a good experience they will want to talk about.  This all matters.

    Okay, you’ve established two or three referencible customers by almost giving away your software, working hard to make them happy, and jumping through whatever flaming hoops it took.  What’s next?

    An old friend and mentor once told me companies earn their way to their ultimate pricing.  He was right.  You earned your way to charge a little more for the next tranche of customers, but you’re still not likely to be at “full retail”, whatever that is.  However, you have some tools at your disposal to think about.  Are you publishing prices?  Even if you’re not, you’re certainly quoting them.  Set your price schedule up and get religion about it.  You need to break your sales staff of the “Let’s make a deal” mentality before it becomes too thoroughly part and parcel of your culture.  Insist they can discount no more than a certain amount off the schedules.  Let the VP of Sales discount a bit more.  The CEO has to approve the final discounts.  Choose some list pricing that is not yet full retail, and use discounting to get the deals done.  But don’t just give it up.  The CEO needs to be the approver of deep discounts, and they need to start testing the waters to see what the market will bear.

    Thus begins the stairstep process of setting prices, discounting until you sell, reducing the discounts, and then raising prices again when discounts are low enough.  The deep discounts right after you raise prices provides transitional flexibility so that pricing moves up more smoothly.  Initially your prices are not based on competition so much as they are based on your credibility.  That’s what this stage is all about: building credibility.  BTW, if you have not realized it yet, this means you have to get the early customers live as soon as possible and they need to be successful.  It’s the number one priority for your engineering and other non-selling staff.  The CEO and Executive Staff should be all over that process making sure it goes exceedingly well so the customer will be happy.  Smother your customers with service. 

    Second thing to keep in mind–make sure your friends and family customers know they got a special deal and that they’re not to pass that along during a reference call.  I would straight up tell them what you’re charging others.  They will appreciate you all the more for the discount you’ve given them.  They’ll also understand when the time comes for you to raise prices, because this is a SaaS deal after all, and they will eventually need to renew.  So you will have telegraphed what’s happening and you can still cut them a little better deal at renewal time.  We did well by trying to keep the discount rates constant for older referencible customers as we raised the list prices.  That way, the early customers knew they were still “special” because they were getting the deepest discounts even though the pricing was going up.

    Do you get a sense of how important it is that your pricing, even the discount rates be codified?  These are stakes in the ground and progress must be visible and measurable, not random and all over the map.  Everyone is not going to have perfect knowledge of it, nor should they.  But customers know what they paid.  They know what list was and what the discount to list was.  They should have some sense of where you’re going with pricing as they renew.  Some customers will want to sign on to longer terms.  Get them to give up some discount in order to look in list for a longer period.  Just as importantly, your Board will be monitoring this process carefully to understand what the market thinks your product is worth.

    What about terms?  SaaS is paid in advance, and you should be able to get a year in advance.  Again, some customers will sign up for more to lock in what they feel is a good price.  That’s fine.  Prepayment is cash you can use to grow your business.  Just make sure the pricing is on some rational path.  Some customers will ask you for month to month.  That’s nuts.  I would not do that except under very special circumstances.  Just the work to bill it is painful.  Month to month plans should only be for customers that represent significant new milestones, and the month to month should end after some “pilot period” no longer than six months after go live.  If they still can’t figure out whether they want you after that, they’re just taking advantage of the situation.  Quarterly is a little better, but I like the same approach.  Only do it for milestone customers and it has to end and go to annual some point after they’ve had a chance to learn to love the product.

    As an aside, the bigger SaaS companies that no longer need as much capital to bootstrap with are now starting to push month to month deals.  It’s a competitive advantage for them and it helps starve little companies of much-needed cash.  Keep an eye on that in your space.  They’re pushing a lot of rhetoric about how they’re doing it for customers, but we all know the reality of what that’s all about.

    What can you expect to do in terms of raising prices?  At Helpstream, our ASP’s (Average Selling Prices) went steadily upward.  Within the first 2 years after launch, and really within 18 months, they had tripled.  We cranked the pricing schedule every 6 months or so, and used renewals as a prime opportunity to increase prices.  Frankly, we had customers telling us we needed to increase prices due to the value we created, so there was not much squawking when we did so.

    How should pricing be done relative to competition?  First, you need to understand how you are competing.  Are you the price leader?  If so, that’s a different thing.  It will infuse everything you do.  Are you the best product?  That’s different.  If you are the best product, you may also be the price leader at times, but that is never the point of your spear.  Be clear with customers about this.  Early on you will know if a prospect is looking for the cheapest solution.  Your answer is that you are not the price leader, so-and-so is, so if that’s really all they care about, you’re probably not the right choice.  However, while we are just getting started, yada, yada, we are both the best deal in town and the best product.  At Helpstream we started out at about half the cost of the low-cost players.  By the end of my tenure we were at half the cost of the highest cost players, and that by dint of discounts and much lower friction (more on lowering friction in a future post) in terms of professional services to install.  Had we been given another couple of years, we would have been up there at the high-end of the pricing scale, but able to justify it by virtue of our ROI.

    This post is dragging, so I just want to make a few of other points to finish up:

    – If you want to lower friction in your sales cycle, make your pricing simple and transparent.  Ours was by the seat, and towards the end, we only charged for customer service representative seats not for our customer’s customers.  This was a competitive advantage because all of the other players wanted to charge for it all.  Even though we had the same list price as a Salesforce seat ($1500 a year per agent), this left a substantial advantage.   If we charged at Salesforce’s list price for customer’s customers and didn’t discount, we would’ve had a $50M a year business (theoretically, of course).  Our pricing by agent seats was also much easier to understand.  Most SaaS companies have way too complicated pricing.  Most salespeople hate pricing schedules and simple pricing, though the smart ones realize the value.  The others just look at it as interfering with their ability to play “Let’s make a deal” and with forcing them to say “no” instead of “yes.”

    –  Align pricing with value received.  Our ROI proposition was around enabling agents to be vastly more efficient.  It only made sense to charge by the agent in that case.

    – Push negotiation on discounts higher in the org.  Most sales people are about saying, “yes”, and negotiation is about saying, “no”.   What’s hard is to get the customer ready to buy from you.  Maximize the value of that difficult chore through the final negotiation.

    – Think about pricing all along the demand curve so as not to leave an exposed flank at some price point.  This borders more on packaging since it means low-end versus high-end modules, which I’ll be posting about at some point too, but it is an important long-term strategy piece.

    My next post in this Learnings Series will be, “SaaS happens when the Business Shrugs.”

    Postscript

    Dennis Moore has a couple of posts with very compatible views on how vendors arrive at pricing and cases where pricing less than customers will pay is helpful.  Dennis doesn’t focus on the importance of references or the need to earn your way to higher prices as much as I’d like, but that is probably because he was thinking about a little different part of the startup lifecycle when he wrote those posts.  The good news is that the model Dennis uses is sufficiently flexible to incorporate the two factors without change.

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