The Role of Marketing is to Turn Strangers Into Friends, Or At Least Acquaintances

I’ve asked a variety of SaaS CEO’s such as Concur’s Steve Singh what they see the role of web marketing as, and the answer that usually comes back is the role is to educate the prospect until they’re ready to be sold to.

Educating the prospect is a very acceptible answer, but upon reading Seth Godin’s post about the difference between Strangers and Friends, I think that more can be accomplished.  Godin, as usual, cuts directly to the chase:

Strangers are justifiably suspicious.

Friends give you the benefit of the doubt.

It makes me want to ask, “How is your marketing turning strangers into friends?”  It’s pretty hard to do, isn’t it?  You can’t be too overt about the marketing because friends don’t spam friends.  It’s a courtship.  Friends give and try to avoid the perception of taking.  Social Media are an ideal tool for this courtship because they invoke an important component in cultivating friends, and that would be friends of friends.  We see it a little bit outside the Internet.  At Callidus, we always tried to invite as many prospects as possible to our user conference, and then we left them alone with our happy customers.  It worked wonders.  By becoming friends of our customers, they were that much closer to being ou friends too.

Think about the many opportunities to use the web to turn strangers into friends.   Start by asking how your prospects can have a good time learning to be you friends.  It’s also critical to take good care of your new friends (as well as the old ones you call customers).  Nurture and protect them.  Watch out for their interests and don’t take undue advantage.  View that as an obligation.

I once spent time chatting with a concierge at a Ritz Carlton.  It was late at night, we were having a drink in the bar at the hotel, and I was curious about the job.  It turned out she was the widow of a US Senator and clearly didn’t need the money or the job.  I asked why she did it, and the answer was that she had a real passion for being a hostess.  I was curious about how the Ritz went about selecting the right sort of person for the job.  Her answer was fascinating.  There is a fairly normal interview process, but then there is an extraordinary component.  For a period of a month, the applicant is on call 24×7.  They must answer the phone any time it rings.  At the other end will be a simulated hotel customer who needs something.  Sometimes its a happy thing.  Sometimes they are very disgruntled.  Sometimes they will be incredibly unreasonable.  She confessed that at first she was very uncomfortable with the excercise.  She complained she’d had no training and had no ideas what her scope of authority was.  What could she promise and what should she not promise?  The hotel simply said she should treat the callers as though they were guests in her home.  She found that worked extremely well, got the job, and has enjoyed it ever since.  That’s just one more example of treating customers like friends.

First Chance I Get, I’m Dropping AT&T From Our iPhones

Just heard from Apple WWDC:  the new iPhone 3.0 will support tethering, but AT&T will not.

Here’s the company spending zillions advertising how great their 3G network is, but they are opting out of supporting tethering on the iPhone. 

This is a cause well worth starting a consumer revolt over.  Send messages to Apple and to AT&T to express your unhappiness if you have an iPhone.  Tweet about it with hashtag #NoTetherNoATT.

First chance I get, I will be opting out of supporting AT&T any further with my iPhone dollars.

Related Articles

Sam Diaz calls AT&T the iPhone’s boat anchor over on ZDNet.  Amen.

Dan Frommer says Steve Jobs missing from WWDC and AT&T too.  AT&T’s absence in terms of supporting key features was worse.  At least we no Steve is still in the background just trying to get healthier.  AT&T has no excuse.

BS Excuse #whatever:  AT&T says no MMS because they have to manually update the accounts Opt-Out option.  Come on, people.  These are computers.  Nothing has to be manual!

Google Apps Profitable; Microsoft = Titanic?

Upon reading that Google Apps is a profitable business from Larry Dignan, one of my Enterprise Irregular blogging cohorts quipped that Microsoft was the Titanic and they’re standing in a couple inches of water soon to get much worse.

I responded:

Nah, there’s no water in the Titanic yet.  But the steel plates of the hull are extremely brittle, there is an iceberg coming up off the port bow, and Captain and Crew are at a party in full tux alternately listening to an entertainer named “Bing” and trying to get the attention of a lovely lady at the next table named “Bartz.”

Intel Goes to the One Place that can Never Be in the Cloud

Intel buys Wind River, maker of embedded systems software, for almost 2.5x revenue.  That’s a lot more than the 30% one often sees these days, so we can assume they see it as strategic.

I’ve quipped that embedded systems are the one place that can never be in the Cloud.  An embedded system is a device, like a cell phone, MP3 player, digital camera, or other gadget of the Digerati as well as many industrial gizmos and even cars.  These days everything has a computer at its heart. 

Intel doesn’t see this as strategic because its never going to the Cloud, rather I think there is something else at work here.  

First, the vicious upgrade cycle is largely over due to the multicore crisis.  People don’t buy new computers every 18-24 months like they used to.  There is even some sense there may be a trend to lower-powered devices like netbooks.  But people are still upgrading their phones and the like very quickly, not to mention buying more kinds of devices.  For years I had one digital camera, a little Canon Elph.  Then I got 2:  the little one and a full-featured Nikon.  Then I had a camera in my phone.  Now I just bought a Flip for movies, and the rest of the family is starting to accumulate multiple cameras.

Software for these things is finicky because it has to be small and powerful.  Some kinds of embedded system use things like Linux (the Tivo comes to mind), but I don’t think we’re there yet for handheld devices.  Hence Wind River has a thriving business.

The second issue is I believe Intel is concerned about competition coming up from the bottom.  There is a family of all-in-one chips that are really cool that I’ve been watching evolve.  One of the latest is called the Arduino, and it is Uber Trendy!  Gizmos like this have been out for a while with names like “PIC” and “Stamp”.  What they are is tiny little general purpose embedded devices.  They have everything on the chip including:

- A language like Basic or dialect of C

- I/O capabilities to control real world devices like switches or rheostats.  They can hook to sensors and use them to control other devices including motors, pumps, robots, sound synthesizers, you name it.

It’s a very generic way to build an extremely sophisticated custom device with a “brain” (no more Mr Scarecrow) and in very small quantities.  Arduino can cost circuit $50 in small quantities, which means you can build a little device in small quantities and make money from it in the $100 – 200 range.  There is a thriving robot hobbyist world out there, creating crazy gizmos like the robot penguin:

But beyond such frivolous exercises for geeks, there is no end of other possibilities.  As these devices become increasingly sophisticated, the low end is steadily move up into Intel’s territory.  The defining difference is that they combine hardware and software on the same chip.  For Intel to do that, they need some software to add to their hardware.  It’ll be very cool if the embedded device market heats up into an arms race.  The little guys like Arduino have been doing cool stuff, but it’s relatively under powered.  If we get to a race for power because Intel is involved and investing, who knows what can happen?

Bob’s Rules for Happiness, Applied to Marketing

Read a post from John Jantsch today that says there are only 5 things people really buy:

1) Make them more money
2) Save them more time
3) Allow them to avoid the frustration of doing stuff they don’t like (like wasting time and money)
4) Help them save or not lose money today and in future
5) Help them feel better about themselves

I’ll paraphrase John with a quote of my own about how to achieve happiness:

At any point in time, you should be doing one of these things:

1. Having a good time.

2. Making money.

3. Sleeping.

4. Teaching your offspring about 1-3.

If you find yourself doing anything else, stop at once and do one of those 4 things. 

#4 got added after we had kids, and I might add it is best practiced by participating with them in the other 3. 

I find my list to be a little less B2B than John’s (you can definitely market the heck out of having a good time, ask Captain Morgan or even Zappo’s) but we’re on a similar track!

SaaS: Why Warren Buffet Won’t Invest in High Tech

Buffet is one of my heroes.  He is the pre-eminent and most successful investor of all time.  It’s unclear his record will ever be equalled, let alone exceeded.  How does he do it? 

There are whole books available on his strategies, and I have read several.  It all boils down to one thing, in my opinion: 

Buffet’s strategy is to buy stocks producing great earnings that he will never have to sell. 

That’s a very interesting strategy, and it has deep implications.  Asked why he doesn’t invest in high tech like his bridge player buddy Bill Gates, Buffet’s reply is very, “Aw shucks.”  He’ll say it’s because he doesn’t understand those businesses.  But the real reason is more subtle.  Buffet wants companies that are as immune to change as possible and that have unnaturally high margin businesses.  They will preserve their unnaturally high profit margins essentially forever.  If they grow, so much the better, but he doesn’t even insist on that. 

He wants no part of the Innovator’s Dilemma or Paradigm Shifts.  The likelihood that a company can successfully beat the S&P 500 year after year is higher over a long period if they don’t have to deal with change.  Change is often destructive to those unnaturally high margins, if only because you have to invest to keep up with it.  Hypergrowth plus high margins can’t last.  The math simply doesn’t hold up.  If you work it out year after year, you wind up with every man, woman, and child on Earth having to spend a lot of money on something they never will. 

In 1957 Buffet had his first investment partnerships, and he was a millionaire in 1962.  He’s still at it today in 2009, over 50 years later.  It takes a long time perspective to be successful on his scale.  The magic of compound interest works slowly, but there is no more powerful force given time.

What does this have to do with SaaS?

Just that big companies are more like Warren Buffet.  They don’t embrace change.  It works well for them over time as they steadily grow and gain power, particularly if they are monopolies as so many are.  But change is destructive to them.  It is anathema.  It means they’ve reached the plateau, they see higher peaks, but they must descend and start to climb over again to reach them. 

SaaS is forcing that change inexorably on the big software firms.  Some, like Oracle, have turned to acquisitions over innovations to insulate themselves somewhat from change.   Eventually, there will be no more companies of a scale that matters to Oracle to buy that still sell on-premises software.  Certainly they have narrowed the field considerably.

That leaves only two outcomes:  either SaaS really only applies to an uninteresting subset of the market (largely SMB and only certain kinds of software are the usual claims) and the Oracle’s and SAP’s are safe, or big companies will eventually have to embrace the change or die as SaaS continues to take hold higher and higher up the food chain to ever larger companies.  The first is a heck of a bet, and one that I think is wrong, even though there will likely always be some categories that can’t use SaaS.  The latter is a heck of a challenge that most companies will fail at.

Michael Krigsman got me thinking along these lines (not that I haven’t thought of the subject before) with his excellent post today wherein he asks VC Mike Fitzgerald whether Enterprise software companies can do SaaS.

The post got me thinking about all the reasons it is so hard for big companies to embrace SaaS.  They range from Mike Fitzgerald’s point that these companies have a culture that is hooked on Big Deals.  That culture can’t deal with selling $1000 a month subscriptions.  We could riff on that theme alone in so many ways:

-  It takes a completely different kind of sales person to do Big Deals versus small deals.  Not only can you not afford to pay a Big Deal Salesperson to close Small Deals, the tools they use will be ineffective as well.  Fail on two levels.

-  The marketing works completely differently.  As Geoff Moore put it in a recent strategy session with my company, Helpstream, if you have a $200K deal, you can afford to create buzz inside an organization that may be a customer through feet on the street.  If you have deals of $50K or less, you have to create the buzz through PR and marketing.  Deals in the middle can’t win either way. 

-  It isn’t just the deal size.  It’s the margin on the deals.  SaaS companies have to be very numbers conscious because their margins are razor thin.  When you close a big license deal for $1 million, probably $900K of that is pure profit.  You do whatever it takes.  On a $10K deal where maybe $6K is margin, you have to do very little lest you invest more than you can ever make back on the deal.

I am reminded of a scene that played out while I was in school.  We were all shocked the day DEC’s Ken Olsen went on record as saying PC’s made no sense:

“there is no reason for any individual to have a computer in his home”

I remember realizing some time later that this statement probably had as much to do with the fact that Olsen’s minicomputer salesforce couldn’t tolerate selling in the computer stores of the day as much as any technical grounding Olsen may have felt the idea had. 

The most destructive change is change that affects how products are sold.  Add to that change that affects how revenue is collected and even how profit accrues and you have the Mother of all Nightmares for Warren Buffet or any Big Company.

SaaS is all that and more.

Why Do SaaS Companies Lose Money Hand Over Fist?

This discussion comes up time and time again in the eternal SaaS vs On-Premises debate.  The SaaS guys (yup, that’s me) wax eloquently about all the advantages of SaaS only to have the On-Prem guys shoot us down by proclaiming SaaS companies aren’t real businesses because they can’t make a profit.  The thing is, it just ain’t so.

The latest bout of this I had was amongst my Enterprise Irregulars blogging group, and comes in the aftermath of Sapphire (SAP’s User Conference), which always brings out a lot of discussions like this.  Our discussion got started through Michael Krigsman’s excellent post on SAP’s continued commitment to their SaaS product, Business by Design.  As Michael points out:

The economic differences between delivering software via SaaS and on-premise methods are substantial, with profound implications for how software companies optimize internal operations.

While the group generally agreed that the product had made a lot of progress from the user experience side, it is still extremely hampered from the standpoint of dealing with these economic differences.  In fact, despite having been introduced years ago in February 2006, and despite SAP setting a target goal of 100,000 customers by 2010, the product is nowhere in sight on reaching such goals. 

The continued commitment Michael refers to is a commitment to overcome these problems.  Yet the amount of time that has passed and we still find ourselves at a point where SAP’s CFO has to personally approve any sales of BBD because they lose money on every sale, leads me to believe the challenges must be huge relative to the reality.  In fact I suggested that nothing less than huge architectural issues could delay them so long.  Issues of the kind that often require a complete rewrite of a system to overcome.  I wrote a long time ago that this problem was SAP tacitly quantifying the advantage of SaaS for customers in my post, “SAP Admits that SaaS is Cheaper for You Too.”

It may also be that they aren’t trying hard enough.  Perhaps there are forces inside SAP, as Dennis Howlett hints, that are not enamored of BBD.  As Vinnie Merchandani points out, SAP does not see the SaaS market as very important—perhaps 5%.  Inevitably, all this angst triggered the On-Prem crowd to come forward and argue that it’s a lot of nonsense to pillory SAP for a lack of profitability with BBD when the SaaS companies themselves do no better.

Having looked at the numbers many times, I decided to take a tour once again through these numbers, this time with a comparison versus SAP.  Do SaaS companies really spend money hand over fist to accomplish little?  Are On-prem companies, of which SAP has to be one of the gold standards, run tremendously more efficiently?  To find out, I selected two SaaS companies, SuccessFactors (because it was brought up in the discussion as a well run SaaS company that had a hard time making a buck) and Salesforce.com (because how can you have the discussion without looking over Salesforce?).  We’ll compare the numbers from these companies against SAP.

Given the radically different scales of these organizations, I favor comparing percentages over actual dollars.  How many dollars of Sales and Marketing expense are required for each organization to make a dollar of revenue?  How many dollars of R&D to do the same?  And so on.

Here is what I found, using the most recently reported financial periods:

Sales and Marketing

Let’s start here, because this is really the crux of the argument.  It’s where SaaS companies spend the Lion’s share of their budgets, and where On-prem seemingly doesn’t spend much at all.  Here’s what the numbers look like:

-  SuccessFactors spends a ripping 56 cents for each dollar of revenue they bring in.  Analysts expect about 85% growth in exchange.

-  Salesforce is spending almost as much:  54 cents to bring in a dollar for which the analysts expect 44% growth.

-  SAP has a much more frugal 29 cents per dollar brought in, but the analysts only expect them to grow 17.5% next year.

As a function of pure cost, SFDC and SFSF spend 2x what SAP does for an incremental dollar of revenue, which on the face of it looks highly inefficient.  But, before we write the SaaS guys off, note that by spending so much, they manage to deliver 2.5X to nearly 5X the growth of SAP.  Which one is more efficient?  Not hard to make an argument for the SaaS guys when you look at S&M dollars as payment for growth. 

1. Either company would be extremely profitable if they wanted to slow down spending, but they’re investing in growth.

SuccessFactors covered this issue in great detail for investors on their IPO road show.  They demonstrated how profitable they could be any time they wanted (you can throttle Sales and Marketing pretty fast) and argued convincingly that they should be allowed to grow.

General and Administrative

This is a category everyone loves to hate.  It’s overhead that delivers no value.  Surely the SaaS companies must be wasting a lot of money here?  Large organizations benefit from economies of scale on G&A, don’t they?

-  SFSF spends 21 cents on this for every $1 of revenue.

-  CRM spends 16 cents for every $1.

-  SAP spends 17 cents.

 

I could almost expect that economies of scale ought to lower G&A over time and that this is SFSF’s problem versus CRM.  However, that wouldn’t explain why SAP doesn’t get a further reduction in G&A.  These SaaS companies seem reasonably efficient with G&A.

Research and Development

-  SFSF spends 16%

-  CRM spends just 10%

-  SAP spends 21%

Lots of R&D going on in Germany, I would say!  CRM seems to me is starving the innovation side worse than these other 2 as well, which is kind of interesting.  At some point, Salesforce ought to invest more in developing new products.  I will speculate they have the throttle hard over investing in Sales and Marketing, and that long term, they may wish they’d spent more on products.  In any event, we have heard from many sources it is cheaper to develop SaaS software (no need for multiple platforms, no need to support patching for customers who won’t upgrade, etc.) and these figures clearly bear that out.

Cost of Revenue

This is one of my favorites.  Keeping the cost to deliver the service low is essential for SaaS companies.  The fact SAP says they lose money on every sale of BBD is a direct reflection on this number.  SaaS companies use a variety of technologies like multi-tenancy to keep costs lower, and it seems likely SAP has missed these tricks.  We can’t get the numbers for BBD, but we can compare SAP’s cost to deliver software (largely cost to deliver maintenance, which is Tech Support) to the costs of a SaaS company:

 - SFSF spends 24% to deliver their service.

-  CRM spends just 13%

-  SAP spends 22%

It’s fascinating that SAP spends more than Salesforce spends to run the product and deliver support just to deliver Tech Support.  We can also see that SuccessFactors has a ways to go improving their operational efficiencies.  They spend nearly twice what Salesforce spends, which puts them at a disadvantage.

Conclusion

It seems pretty clear these SaaS companies could be just as profitable as SAP if they were prepared to dial back significantly on their growth.  SaaS companies spend money hand over fist because they’re engaged in a land grab.  The big players like SAP are extremely slow getting to SaaS for various reasons.  As long as these companies can grow like this, they should keep investing heavily in it.  The likelihood an on-prem vendor will dig these customers back out again seems very low.  Customers being taken this way are probably lost for good to the SAP’s of the world.

Search Isn’t Broken

Henry Blodget has another Techmeme-noted article about Wolfram Alpha wherein he says WA isn’t a Google-killer because search isn’t broken:

Another next-generation search engine launches.  It looks more differentiated than the much-ado-about-nothing known as Cuil, but that’s not saying much.

Our prediction: Wolfram Alpha (terrible name) will see a nice spike in traffic for a few days, then it will disappear unnoticed along with all the other “next-generation” search engines.

Why?

Because search isn’t broken.  It can be improved, yes, and companies like Wolfram Alpha will show Google how to improve it.  But no search engine we’ve seen, including this one, comes close to making the quantum leap in performance required to get real volumes of Internet users to switch.

Others says WA isn’t Google and shouldn’t be compared to Google, but this misses the important point Blodget is making, so we should all stop right here, quit worrying about WA versus Google, and take a deeper look at Blodget’s key proposition, that search isn’t “broken.”

We can put it into more classical business strategy and product marketing lines by restating his proposition more along the lines that there isn’t enough pain associated with Google that any of the alternatives can save to be worth switching.

True or false in your experience?  I think I’m with Henry on this one.  By and large, Google works pretty darned well.  Do I wish it worked better?  Yes, but it would have to work a lot better, and with all due respect, I think it’ll take some real hard core AI before that happens.

We’ve been nattering around this problem for ages, but let’s face it.  No matter how much semantic slight of hand we throw at the problem, computers don’t understand human languages.  They guess with some statistical precision at what we might want.   Wolfram Alpha does this, Google does this, and so does every other engine out there. 

It’s a messy problem to extract interesting signals from the noise.   Google’s essential breakthrough was Page Rank, which was a very clever take on Mark Twain’s approach of getting someone else to paint the fence.  It was a breakaway heuristic, because it was so broadly applicable.  It’s also very vulnerable.  Google is involved in a continuous arms race to stop the SEO’s from totally gaming the value of the algorithm away.

We could use some more breakaway heuristics while we wait for the Singularity (I’m not holding my breath!) to deliver true AI.

Meanwhile, I read Don Dodge’s post about Microsoft Live Search.  Don says Live Search will surprise you in a good way, so you should try it out.  He writes about how he searched for a local restaurant and was surprised at how easy it was to get great directions.   I typed “Gayle’s bakery Santa Cruz” into Google and proceeded to get directions, a link to Gayle’s site, and reviews just like Don got from Live Search.

Don, it’s like Henry was saying:  search isn’t broke, and even if it is, LiveSearch doesn’t fix what’s broken.

The One Thing That Annoys Customers More Than Anything Else Happened to Louis Gray with Adobe

I read with wry amusement Louis Gray’s two blog posts about his dealings with Adobe.  Seems he had a terrible time getting them to fulfill his order.  In my experience, nothing is worse than having the money, being ready to spend it, but finding the merchant unwilling or unable to take your money and give you product.  I feel for ya, Louis!

In this case, Louis ordered via the Internet and directly from Adobe a downloadable version of the Creative Suite for over $1000.  You’d think ordering this way would be the fastest possible way to get product, no? 

No.

They put a hold on his order and 2 unhelpful customer service calls later he was still held up.  The finger pointing started up with Adobe firmly holding to the story that it was the credit card and the credit card company saying they’d already cleared the transaction.

It’s pretty darned silly in this day and age for these shenanigans to be going on.  The worst part of it was that it left Louis stuck.  If it had been me, I would’ve known I could stop by Fry’s on my way to work and pick up the software, but I’d have thought it more convenient just to download it right away.  Winding up with the worst of both worlds (download didn’t work, and now I have an theoretically closed purchase so I can’t just go buy it either) would’ve sent me straight to the moon.

Shame on you Adobe for this foolishness!

Can You Define Twitter in One Word?

Concise

Immediate

Burst

Anyone?