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Article
Cloud Economics Part 2 - The End of the Entourage

Marketing and Selling On-Demand vs. License: An uncomfortable truth.


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In our last article, we talked about Cloud Economics and cost drivers for users and solutions providers. One of the cost drivers for the solution provider is the Sales and Marketing cost. There are some obvious and some subtle issues associated with this SaaS sale that are worth exploring.

Selling on the web

The ease of holding online meetings is well known today.1 Setting up a web meeting is a snap, and qualifying opportunities with end-user customers in web meetings is fairly standard. But then things quickly diverge. License customers expect and get the entourage of implementation experts from the tech company. Regardless of SaaS or no SaaS, a large purchase such as ERP will merit many visits from the tech company. 

Enterprise application providers still have the credibility and relationship hurdles to overcome with the users: “I want to know and trust the company in whose hands I am placing my fate.”

And since the SaaS is defacto a ‘web experience,’ more web meetings vs. the sales entourage is desirable, since the user experience, performance and connectivity are all tied to this approach, vs. software that is locally installed.

And SaaS vendors are highly motivated to keep these costs down, since there generally will be no upfront six or seven figure check coming along. Behind the screen, though, is the downside of the lack of face to face: the potentially weaker commitment from some users. 

Although SaaS enterprise apps such as ERP and WMS2 have low attrition rates,3 some apps have higher defections from users. As sales costs and commissions are based on the value of the account, these attrits can then have a high impact on sales costs and commissions.

SaaS models vary. A set-up fee can help to defray the upfront cost to the vendor and help build commitment on the user’s side. There is nothing like the process, no matter how low the cost, of seeking approval for POs to get attention, discussion, and therefore commitment in the enterprise.

However, if the implementation lags, then the monthly revenues do not come in as expected, or customers do not re-engage. Renewals are not a slam-dunk. You have to continue to earn your ‘stripes,’ unlike the traditional perpetual license, where once the initial sale is done the vendor does not have the same level of motivation. Therefore, sales professionals need to stay engaged in the SaaS accounts, ongoing.

But here is a dilemma for dual strategy companies: how to manage the sales efforts and compensations if, at the end of the sales process, the customer opts for a more On-Demand model. This dilemma is one of the many factors that keeps license/on-premise vendors from becoming on-demand providers.

The fact is, though, that SaaS does not necessarily mean on-Demand, and often, though the application may be paid monthly, the customer is committing for a hefty multi-year deal. Sales professionals still have that twinkle in their eye for the big deal, and are therefore comfortable with selling SaaS. Such examples would be the SaaS ERP sector (NetSuite, Plex, Epicor, etc.) and the transportation players such as GT-Nexus and Descartes. So, firms that have dual strategies, like Plex, can manage their sales channels. What you don’t want to wind up with is a highly divergent model—offering a truly on-demand (log-In and sign-up) and simultaneously offering a pure traditional license model.4 Dissention in the sales troops is the outcome.

An uncomfortable truth is the commission payments over time—a real concern for the company and the sales persons. If the tenure of the sales person does not last as long as the multi-year contract deal they won, how will the compensation flow? An additional uncomfortable issue associated with tenure is the replacement (new) account exec who may grow or extend the relationship started by her predecessor. Not only the sales personnel but also the solutions provider must work with a fair and transparent accounting method.

Another uncomfortable truth: True On-Demand which has an easy ‘opt-out model’ should have a web/phone based selling model to make it economical to sell. Subscription selling models such as Hoovers can be bought on the web or through ‘inside sales’ professionals. These are different types of professionals.  If your sales professionals are used to ‘big game hunting,’ they will consider that becoming an inside sales person is a step back in their career, unless other job factors are changed.

The Balance of Power

Inherent in this sales model is the shift in balance of power. This has good points for both sides—but is very different from the old model.

Since SaaS represents a continuum of services, the sales person may be less motivated to cut costs at quarter-end to make her quota: “Let me close these deals and move on,” thinks Sales. “Let me hold out till the end of the quarter, and they will drop the price,” thinks the customer.

Over time, though, the game changes. In the past, once a user bought the solution, they were more or less at the mercy of the tech company to fulfill their promises, with little recourse if things did not pan out.



Today, users can opt-out. This makes the monthly care of the customer critical. Although most relationships are multi-year contracts and most users do honor these, the opportunity is always there to walk.

Also critical to understanding the selling model is that first-time customers may not have bought all the modules, and look to the SaaS alternative to grow their automation and process changes over time. So the opportunity for upgrades and extensions is always there. The incentive is so high for the SaaS vendor to stay on top of the account!

Positive Dialogue

One of the most positive changes I see is that the conversation changes inside the enterprise. Rather than having a ‘big number’ to gain approvals for, the process is more about the organization’s need for the solutions. Although, of course, the monthly budget still has to be there, the feeling is, that if this ROI is for real, then that application will actually be a net cash producer, paying for itself ahead of the multiyear payment schedule. Now that is the power of cloud economics!

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See also Cloud Economics Part 3 - The Cloud of Clouds.

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1 Using solutions like RHUB, GotoMeeting, WebEx, etc.

2 The WMS SaaS sector has been know for smaller set-up fees but low attrition; examples are Next View, Snap and 3PL Central.

3 The more process change there is, the less likely users are to switch.

4 Often this is dealt with by the ‘large account/small account’ strategy. But the fact is, one never knows. A Fortune 100 could buy ‘one seat,’ or an SMB could buy ‘one hundred seats.’


To view other articles from this issue of the brief, click here.




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