GETTING SAAS WRONG
“The significant problems we face today cannot be solved at the same level of thinking we were at when we created them.” – Albert Einstein
“Ooh, my head!” – Ritchie Valens
I read Amy Wohl’s latest post, “It’s Hard to Build a New Business Model,” with growing dismay. Reporting that “every week, [her firm is] talking to companies who are offering software as a service,” most of what Amy wrote made my brain hurt.
I don’t disagree with the premise. Building a new business model is hard – very hard. But that's why entrepreneurs exist: They have better ideas and love building better businesses. They live to develop something new that is more attractive, more effective, more profitable than the detritus that existed before.
Amy’s post suggests there are a whole lot of people who aren’t thinking about the software business in new ways. They’re approaching marketing, selling, and partnering the way ISVs always have, rehashing “tried and true” methods – no matter how badly those methods have fared – to make them fit into the new model.
Oy! That’s a recipe for failure because the operative word is N E W.
The “SaaS” companies that contort traditional ISV methods aren’t acting entrepreneurially and are doing a disservice to their customers, partners, and employees. Investors should either pull out today or go ahead and start wallpapering the bathroom with their shares.
Who’s Not Getting It?
Although I dropped Amy a couple of notes, we’ve not been able to connect, and I can’t tell from her post if she’s missing this point or if she’s just reporting what software companies are telling her. Either way, the companies Amy describes are blowing it, big time.
Yes, “traditional software vendors are used to getting the bulk of their revenue … right up front.” So what? Traditional software customers are tired of parting with their money before they receive the benefit of the application.
SaaS is demand-driven because it offers a solution to this problem. Utility or subscription pricing – “pay for what you consume” or “pay as you go” – allows users to be customers for only as long as the application provides value. When SaaS vendors act like traditional ISVs by requiring up-front annual payment, even offering deep “time-value” discounts, customers want to know how SaaS is different from the same-old, same-old and if there’s something wrong with it.
Annualized billing creates other problems SaaS companies don’t need. By adding iterations to contract negotiations, it lengthens (or, rather, robs vendors of the means to shorten) the sales cycle and better manage the sales process. Paying commissions on annualized revenues removes the incentive for SaaS salespeople to close more deals quickly, and doing otherwise is a payroll administration nightmare. None of this speaks to the difficulties in-advance billing creates for accounting, revenue recognition, tracking, and charge-backs. “Oy!” again.
Of course, SaaS companies will find it “hard to get … revenue from subscriptions up fast enough to cover costs and create a profit,” if they’re not doing anything to speed up the process!
Wow!
When you think about it, the addiction to up-front revenue (as Amy puts it) must be sucking the good sense from otherwise smart software entrepreneurs. The companies that are serious about SaaS know it’s about more than a pricing scheme (“subscription” vs. “one-time”) or a delivery mechanism (“on-line” vs. “on-prem”), so it’s a mystery when they twist traditional operations and try to make them fit SaaS.
Why, for instance, would a SaaS vendor rely on the typical stable of channel partners when so many other, more likely, possibilities exist? The average systems integrator isn’t going to be an effective reseller because SaaS actually cuts into its core business. Retail stores? Only if the SaaS application is being offered at Amazon.com. And when was the last time a VAR actually added value to a software deal?
Worse is the thinking around how to compensate the channel. No one in their right mind would advocate a perpetual annuity unless the partner “owns” the customer relationship and provides on-going technical and operational support. Annuities may work in the insurance industry, but do SaaS companies really want to invite that comparison?
Bad Habits
Unfortunately, it’s as easy to fall back into comfortable old habits as it is to slip into those beat-up sneakers just outside the back door or that frayed sweater that always finds its way to the top of the drawer. The challenge is recognizing which habits are the bad ones.
Here are a couple of good rules of thumb: If your solution is complicated, you’re approaching the problem the wrong way. If the answer to any “Why do it that way?” question is, “Because we’ve always done it that way,” or “I don’t want to lose my people,” or some other version of “Doing it differently is hard,” then you’re not thinking it through.
The bottom line is if SaaS companies are going to act like traditional ISVs, their customers, employees, and investors are going to treat them that way. They won’t realize the improvements – shorter sales cycles, more predictable, profitable and consistent revenue streams, loyal customers – promised by the new business model, and they’ll probably fail.
It’s time to look past the old ways of doing things and embrace the service model. There are tons of service industries out there that offer successful examples of the kinds of solutions SaaS vendors can employ. Let’s stop looking backward at the broken pieces of the traditional software business and celebrate the opportunity to build something truly new.
“Ooh, my head!” – Ritchie Valens
I read Amy Wohl’s latest post, “It’s Hard to Build a New Business Model,” with growing dismay. Reporting that “every week, [her firm is] talking to companies who are offering software as a service,” most of what Amy wrote made my brain hurt.
I don’t disagree with the premise. Building a new business model is hard – very hard. But that's why entrepreneurs exist: They have better ideas and love building better businesses. They live to develop something new that is more attractive, more effective, more profitable than the detritus that existed before.
Amy’s post suggests there are a whole lot of people who aren’t thinking about the software business in new ways. They’re approaching marketing, selling, and partnering the way ISVs always have, rehashing “tried and true” methods – no matter how badly those methods have fared – to make them fit into the new model.
Oy! That’s a recipe for failure because the operative word is N E W.
The “SaaS” companies that contort traditional ISV methods aren’t acting entrepreneurially and are doing a disservice to their customers, partners, and employees. Investors should either pull out today or go ahead and start wallpapering the bathroom with their shares.
Who’s Not Getting It?
Although I dropped Amy a couple of notes, we’ve not been able to connect, and I can’t tell from her post if she’s missing this point or if she’s just reporting what software companies are telling her. Either way, the companies Amy describes are blowing it, big time.
Yes, “traditional software vendors are used to getting the bulk of their revenue … right up front.” So what? Traditional software customers are tired of parting with their money before they receive the benefit of the application.
SaaS is demand-driven because it offers a solution to this problem. Utility or subscription pricing – “pay for what you consume” or “pay as you go” – allows users to be customers for only as long as the application provides value. When SaaS vendors act like traditional ISVs by requiring up-front annual payment, even offering deep “time-value” discounts, customers want to know how SaaS is different from the same-old, same-old and if there’s something wrong with it.
Annualized billing creates other problems SaaS companies don’t need. By adding iterations to contract negotiations, it lengthens (or, rather, robs vendors of the means to shorten) the sales cycle and better manage the sales process. Paying commissions on annualized revenues removes the incentive for SaaS salespeople to close more deals quickly, and doing otherwise is a payroll administration nightmare. None of this speaks to the difficulties in-advance billing creates for accounting, revenue recognition, tracking, and charge-backs. “Oy!” again.
Of course, SaaS companies will find it “hard to get … revenue from subscriptions up fast enough to cover costs and create a profit,” if they’re not doing anything to speed up the process!
Wow!
When you think about it, the addiction to up-front revenue (as Amy puts it) must be sucking the good sense from otherwise smart software entrepreneurs. The companies that are serious about SaaS know it’s about more than a pricing scheme (“subscription” vs. “one-time”) or a delivery mechanism (“on-line” vs. “on-prem”), so it’s a mystery when they twist traditional operations and try to make them fit SaaS.
Why, for instance, would a SaaS vendor rely on the typical stable of channel partners when so many other, more likely, possibilities exist? The average systems integrator isn’t going to be an effective reseller because SaaS actually cuts into its core business. Retail stores? Only if the SaaS application is being offered at Amazon.com. And when was the last time a VAR actually added value to a software deal?
Worse is the thinking around how to compensate the channel. No one in their right mind would advocate a perpetual annuity unless the partner “owns” the customer relationship and provides on-going technical and operational support. Annuities may work in the insurance industry, but do SaaS companies really want to invite that comparison?
Bad Habits
Unfortunately, it’s as easy to fall back into comfortable old habits as it is to slip into those beat-up sneakers just outside the back door or that frayed sweater that always finds its way to the top of the drawer. The challenge is recognizing which habits are the bad ones.
Here are a couple of good rules of thumb: If your solution is complicated, you’re approaching the problem the wrong way. If the answer to any “Why do it that way?” question is, “Because we’ve always done it that way,” or “I don’t want to lose my people,” or some other version of “Doing it differently is hard,” then you’re not thinking it through.
The bottom line is if SaaS companies are going to act like traditional ISVs, their customers, employees, and investors are going to treat them that way. They won’t realize the improvements – shorter sales cycles, more predictable, profitable and consistent revenue streams, loyal customers – promised by the new business model, and they’ll probably fail.
It’s time to look past the old ways of doing things and embrace the service model. There are tons of service industries out there that offer successful examples of the kinds of solutions SaaS vendors can employ. Let’s stop looking backward at the broken pieces of the traditional software business and celebrate the opportunity to build something truly new.
posted by Ken Boasso at 15:20
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