Author Archive

SaaS Marketing | Maximizing Customer Lifetime Value

What’s the stronger driver of SaaS company growth: customer acquisition or customer lifetime value? The answer is yes. Rapid, sustainable SaaS growth is equal parts customer acquisition and customer lifetime value. Simply multiply these two numbers and you get your SaaS growth ceiling, the most revenue your SaaS business can ever achieve. Period. The end. If you want to change your future, you have to change one of these numbers. However, most SaaS marketing professionals think their job ends at purchase. In SaaS, the intital purchase is only the first of many. Keeping each and every customer around longer and making the most of the business relationship along the way has as much impact on SaaS company growth as acquiring more customers. Therefore, good SaaS marketing lasts a customer lifetime.

This is the third post in a series that paves the path to sustainable SaaS growth. The first post in this series introduced the three fundamental levers of SaaS growth: customer acquisition, customer lifetime value and viral customer network effects. This installment explores the second lever and provides three proven SaaS marketing strategies to drive SaaS growth by maximizing customer lifetime value.

Two Views of Customer Lifetime Value

There are two sides to every purchase: buyer and seller. Maximizing customer lifetime value isn’t something you do to a customer, it’s something you do for a customer. In SaaS, customer lifetime value is often expressed as average recurring revenue times the average customer lifetime (one divided by percentage churn rate), however, this is only the sellers side of the coin. When thinking about what you can do to maximize customer lifetime value, it is a good habit to think about it from your customer’s point-of-view. For example, reducing churn means giving your customer a reason to stick around, while upselling and cross-selling mean solving more problems, incresing satisfaction, and providing greater ROI. Getting paid is just an end to the means.

SaaS Marketing Strategy #5 | Reduce Churn

There is only one SaaS marketing strategy to reduce churn: increase use. The more customers use your product, the less likely they are to stop using it. Most SaaS churn problems can be traced back to a SaaS marketing strategy focused exclusively on customer acquisition at the expense of ongoing use. Unfortunately, SaaS has a very short shelf life.

saas marketing reduce churn

Tweet

Some people think SaaS churn is something that happens when a customer comes up for renewal, it isn’t. The causes of SaaS churn occur much earlier in the customer lifecycle; cancellation is simply the finale. The battle against SaaS churn begins in product design. Long before a SaaS customer decides to cancel, a SaaS marketing professional decides to create a product that is hard to adopt and easy to switch by paying more attention to product features than to customer value that encourages expanded and habitual use. As use increases, customers transform your product into their product by investing in personalized configuration, user generated content, deeper learning and business process automation. Your SaaS product should be designed to increase in value with use by making it easy to explore and easy to personalize. For example, a SaaS product that is fully configured to enable a customer’s business processes and retains historical data is far more valuable after five years of use than it is right out of the box. Unused features have zero customer value and zero stickiness.

Your SaaS marketing strategy should extend beyond purchase to facilitate onboarding and encourage deeper and deeper use of your product. The same SaaS marketing tactics applied in customer acquistion: educational content, marketing automation and engagement metrics are equally important in churn reduction. But, don’t stop there. Post-acquisition, you gain access to an entirely new and extremely effective SaaS marketing channel: your product. Unlike other products, SaaS offers a direct, dynamic, personalized, two-way communication channel with your customer. Every click indicates a potential need, and every need presents an opportunity for communication that promotes use. The more your customers use your product, the more they value it and the higher your customer lifetime value. Unfortunately, the converse of this is also true. The less customers use your product, the less they value it and the more likely they are to churn.

SaaS Marketing Strategy #6 | Upsell

If you’ve managed to keep your customer’s from churning, then the next step up on the SaaS marketing pyramid is upselling. Upselling is usually defined as selling more of the same product to the same customer. In SaaS, this translates to more use by more users for more money. If reducing churn is about finding more value, upselling is about creating more value. Customer value in SaaS is a continuum that can be measured by use. Reducing churn is about preventing the flow in the wrong direction, less use. Upselling is about accelerating the flow in the right direction, more use.

Like churn, upselling begins in product design. Well-designed SaaS products upsell themselves. Customers simply discover more features and add more users until they hit a new pricing level, and then upgrade seamlessly by clicking a button. That doesn’t mean you can’t help them along the way. Since a price must be paid, strong SaaS marketing is even more essential to upselling than it is to churn. A customer must not only want to use a new feature, but must be willing to pay for it. While churn reducing SaaS marketing programs can focus exclusively on users and use, upselling must also target decision makers and present clear business value.

saas marketing upsell

Tweet

Upselling is particularly attractive when your SaaS product has an unconstrained dimension of use, as in anybody can use it or they just can’t get enough of it. For example, collaboration and personal productivity tools can be used by anyone, which means an inital 5 user purchase might eventually turn into a 5,000 user purchase. Alternatively, cloud computing and advertising products might have only a single user, but can scale indefinitely with that user’s budget. A common SaaS marketing mistake is to create pricing structures based on functional or technological modules. When putting together your upsell SaaS marketing strategy, don’t align your pricing with your technology, align your pricing with customer value along dimensions of increasing use. And, maximize upsell potential along your least constrained dimensions of use.

SaaS Marketing Strategy #7 | Cross-sell

If you aren’t lucky enough to be selling a SaaS product with unlimited upsell potential, then it might be time to move your way up the SaaS marketing pyramid to cross-selling. Cross-selling is usually defined as selling a new product to an old customer or an old product to a new customer. When creating your cross-selling SaaS marketing strategy, the golden rule is don’t stray too far from home. Pick new products that complement and increase the value of your old products and new customers that have personal business relationships with your old customers, e.g., the department next door. The whole point of cross-selling is that it should be easier and cheaper than acquisition, because it leverages your current customer relationship. Stray too far from home and you lose this leverage. For this reason, cross-selling is often the most illusory SaaS marketing strategy. Just because you have another product to sell, doesn’t mean your customer wants to buy it.

saas marketing crossell

Tweet

While rarer than unlimited upsells, some SaaS products do have seamingly unlimited cross-sell potential. Some SaaS vendors have the opportunity to create large product catalogs consisting of many similar, complementary packages, such as ERP systems, office productivity suites, and cloud platform APIs. Cross-selling to new customers has the most upside when you are targeting markets composed of highly fragmented, independent buyers with strong industry relationsips. In this scenario, leveraging current customer referrals to get to new prospects becomes an essential cross-sell SaaS marketing strategy. When customer referrals take on a life of their own, cross-selling crosses over into viral marketing, which just happens to be the subject of SaaS Marketing Strategies 8-10 in the next installment of this series on driving sustainable SaaS growth. Stay tuned!

If you liked this post, then you’ll love the eBook of the complete SaaS growth series. And if you like it, please share it!

Negative Churn | It’s Not that I Don’t Dislike It, I Do

negative churnMost of us were taught at an early age that double negatives are a bad thing, because they are unnecessarily complicated and increase the chances of miscommunication. It is with this principle in mind, that I propose that we permanently ban the ridiculous term “negative churn” from the SaaS metrics vocabulary. Churn is negative growth. Negative churn is simply growth.

Many of my esteemed SaaS colleagues have casually adopted the negative churn idea without issue, such as this post by David Skok, and this one by OpenView Partners, and this one by Lincoln Murphy, and to my knowledge the very first one by Daniel Drucker who attributes the origin of negative churn to the folks at Bessemer Venture Partners. A very prestigious group of SaaS metrics experts indeed. So, what’s got my goat?

SaaS Growth vs. SaaS Churn

Negative churn implies that the economics of SaaS growth are the same as SaaS churn, only reversed. This is not the case. The business processes and customer decisions that drive SaaS growth are fundamentally different from those that drive SaaS churn. For example SaaS growth might be driven by a sales process that targets a customer need, whereas SaaS churn might be driven by a customer going out of business. As metrics, these numbers are intended to measure those processes. When they are commingled, they lose their value.

I think the idea of negative churn looks attractive, because the mathematical definitions of SaaS churn and SaaS growth are essentially similar, give or take a minus sign.

SaaS Churn = ΔCold ; SaaS Growth = ΔCnew
Δt x Ctotal Δt x Ctotal

In the above formulas, ΔCold is the number of old customers churned (a negative number), whereas ΔCnew is the number of new customers acquired (a positive number). Or in the case of MRR churn/growth the amount of downgrades and upgrades, respectively.

SaaS MRR Churn = ΔMRRcancellations
+ ΔMRRdowngrades
; SaaS MRR Growth = ΔMRRacquisition
+ ΔMRRupgrades
Δt x MRRtotal Δt x MRRtotal

NB: While I argue throughout this article that churn should be cleanly separated from growth, there is also ample argument that upgrades and downgrades should not be commingled either, as they are in the MRR formulas above, when these metrics are driven by fundamentally different business processes from acquisition and cancellation respectively.

While churn and growth are simple mirror images in theory, they are completely different in practice. There is a trick in physics, where you can simply substitute -t for t and reverse time in theory, however, going backwards in time in practice is a little more difficult. And, therein lies the problem with negative churn.

negative churn saas growth

Tweet

In practice, acquiring a new SaaS customer is much more difficult and expensive than keeping one, and losing one is essentially free. Moreover, SaaS churn naturally scales with the size of your customer base. This is the fundamental SaaS growth challenge: SaaS churn is free and naturally viral; SaaS growth is expensive and requires persistence. Achieving viral, organic SaaS churn is a given. Achieving viral, organic SaaS growth requires network effects and economies-of-scale that result from sound business strategy, flawless execution and a little luck to boot. The label “negative churn” sounds too much like a fair fight.

Upsell is Not Negative Churn

That would be a triple negative, but who’s counting? The concept of negative churn is based on the idea that a SaaS business can offset churn with upsell, so that the net change in recurring revenue from current customers is positive. However, there is a flaw in this logic: upsell customers churn too, and when they do, they take all that lovely upsell recurring revenue with them.

Upselling increases the average recurring revenue per customer over time. It is an increase in price, not volume. SaaS churn is fundamentally a volume problem, negative virality. Upselling is better viewed as a transition from one average price scenario to another. It can soften the impact of churn, but it cannot reverse it.

upsell not negative churn

Upselling is better viewed as a transition from one average price scenario to another.
It can soften the impact of churn, but it cannot reverse it.
The chart shows how the SaaS growth trajectory when 50% of customers upsell (red line),
is really a transition from the 5K base price SaaS growth trajectory (green line)
to a higher average price SaaS growth trajectory at full penetration (purple curve).
In the long run, however, churn wins in both scenarios as net customer growth slows.

The main takeaway from the above chart is that to offset SaaS churn for any extended period of time, upsell has to be BIG. This particular example assumes 50% of customers upsell for an average of 2X the initial purchase. In other words, upselling must behave like a viral increase in customers to counter churn in the long run. You must double, triple and quadruple the value of a customer through entirely new products and expansion into new buying centers.

Needless Negativity

Aside from the economic issues, I think my biggest beef with negative churn is that it is…well…just plain negative. Negative churn feels reactive and resigned. Like you’re hoping to tie, instead of planning to win. Achieving sustained SaaS growth requires creativity and tenacity, a relentless optimism to overpower a tireless enemy. I’d rather strive for viral, organic growth. It just sounds better.

SaaS Marketing | Accelerating Customer Acquisition : CloudAve

saas marketing acceleration SaaS marketing professionals know that customer acquisition is the name of the game. What they generally don't know is that sustainable SaaS growth requires accelerating customer acquisition.

SaaS Marketing | Accelerating Customer Acquisition : CloudAve

saas marketing acceleration SaaS marketing professionals know that customer acquisition is the name of the game. What they generally don't know is that sustainable SaaS growth requires accelerating customer acquisition.

SaaS Marketing | Accelerating Customer Acquisition

SaaS marketing professionals know that customer acquisition is the name of the game. What they generally don’t know is that sustainable SaaS growth requires accelerating customer acquisition. In the long run, acquiring more customers is not enough. Your SaaS marketing strategy must aim to acquire more customers, faster. Otherwise, churn wins and you stop growing.

This is the second post in a series that paves the path to sustainable SaaS growth. The first post in this series introduced the three fundamental levers of SaaS growth: customer acquisition, customer lifetime value and viral customer network effects. This installment explores the first lever and provides four proven SaaS marketing strategies to drive SaaS growth by accelerating customer acquisition.

The SaaS Marketing Mandate: Remove Buyer Roadblocks

While shopping can be fun, buying a SaaS product is hard work. As the buyer, you have to figure out your problem, research and evaluate solutions, negotiate a purchase, and learn how to use yet another piece of software. Unfortunately, most SaaS vendors make it even harder than it has to be. Without world-class SaaS marketing, the typical SaaS product is hard to find, hard to understand, hard to buy and hard to use. And, every ounce of work creates a roadblock for the would-be buyer.

saas marketing roadblocks

Tweet

The fundamental goal of SaaS marketing is to remove buyer roadblocks to accelerate customer acquisition. Specifically, your SaaS marketing programs should focus on the roadblocks that are creating bottlenecks: the steps in the buying process where would-be buyers are getting stuck right now, because you are making their lives difficult. Every buyer bottleneck removed accelerates customer acquisition. Here are four proven SaaS marketing strategies for removing the most common buyer roadblocks.

SaaS Marketing Strategy #1 | Increase Awareness

saas marketing awarenessIf your would-be buyer can’t find your solution or doesn’t know he has a problem, that’s a real bottleneck. Your prospects must get past the awareness roadblock before they can even run into the others. There are some truly innovative SaaS marketing tactics for creating awareness when your product is not completely hidden behind a login (that I will cover in a future post), but for most SaaS businesses, increasing awareness boils down to B2B marketing basics. However, your SaaS marketing tactic of choice will depend heavily on your specific market and SaaS sales model.

If you’re selling something completely new at a high price point, then good old cold calling is the way to go (that’s right, cold calling), because your prospects won’t come looking for you and you can afford to go looking for them. If your price point is low and your product is easy to understand, then blogging, SEO and other inbound marketing techniques are likely to fit the bill. If your business has a strong industry focus and you’ve managed to acquire a few happy initial customers, then good old public relations based on customer stories is your best bet.

SaaS Marketing Strategy #2 | Facilitate Evaluation

saas marketing evaluationAfter awareness, easy product evaluation is by far the most common SaaS buyer roadblock. Many executives think product marketing is something you do after you build a product—not so in SaaS. The best SaaS marketing is built into the product itself. Online trial is easy to build into your SaaS product in the beginning, and very difficult to add later, because it requires the right architecture. Online trial may prove inadequate though if your SaaS product is fundamentally new and complex (as opposed to artificially complex, which is just bad product design).

saas marketing trial

Tweet

Your SaaS marketing strategy should facilitate evaluation by helping your prospects do things their way, and different prospects may have different ways of doing things. Even simple SaaS products can be confusing at first glance to busy buyers with short attention spans. Therefore, it’s usually a good idea to back up your online trial with sales, support and educational content.

SaaS Marketing Strategy #3 | Streamline Purchase

saas marketing accelerationIt’s just embarrassing to make it difficult for a prospect to purchase your product after she has done you the enormous favor of deciding to buy it. After all her hard work she has money in hand, but she can’t give you her credit card, finds your contract unfriendly, and doesn’t even know your price. When it’s time to buy, your SaaS marketing strategy should aspire to the example of the best consumer ecommerce sites and streamline purchase down to a single click.

Streamlining purchase is particularly important for low price SaaS products where the buyer may very well be acting on impulse. Picking up the phone or figuring out your complex pricing scheme may be more effort than the immediately perceived benefit of your product. For high price SaaS products, streamlining purchase may be quite difficult and is unlikely to accelerate customer acquisition. However, a SaaS product with a midrange price point and a transactional sales model can benefit greatly from streamlined purchase in the form of increased sales productivity.

SaaS Marketing Strategy #4 | Simplify Onboarding

saas marketing onboardingYou haven’t truly acquired a customer in SaaS until she starts using your product. Poor onboarding is such a common problem in the software industry that we even invented a special word for it: shelfware. Allowing your product to become shelfware is a huge SaaS marketing mistake, because SaaS is sold under a recurring revenue subscription model. In licensed software, shelfware is the buyer’s problem. In SaaS, it’s the vendor’s problem. Poor onboarding leads directly to churn, the arch enemy of SaaS growth.

saas marketing onboarding

Tweet

There are many ways to simplify on-boarding in SaaS, the best ones are built into the product itself and enable customer self-service. In fact, online trial is the number one way to simplify onboarding, because the prospect starts onboarding early during the product evaluation stage. Getting new users up and running, setting up business processes, and integrating other solutions can all present significant onboarding challenges. Many of these challenges lie well outside what one would think of as traditional marketing, but SaaS marketing is not traditional marketing. SaaS marketing follows the mandate of removing buyer roadblocks whatever they are and wherever they occur, because SaaS marketing accelerates customer acquisition, not purchase transactions.

If you liked this post, then you’ll love the eBook of the complete SaaS growth series. And if you like it, please share it!

Driving SaaS Growth Through The Customer Lifecycle

SaaS growth isn’t a goal; it’s an obsession. The good news is that SaaS growth can be very smooth and predictable, because of the SaaS recurring revenue subscription model. The bad news is that SaaS growth can also be predictably slow the bigger you get. After a few years of rapid SaaS startup growth, it’s easy to find yourself on the short end of the hockey stick if you don’t know the right levers to push.

The Three Levers to Break Through the SaaS Growth Ceiling

At any given time, you can calculate the SaaS growth ceiling for your SaaS business with a simple formula: customer acquisition rate divided by percentage churn rate. For example, if you acquire 200 new customers each year and your percentage annual churn rate is 20%, then at 1,000 customers ( 200 / 20% ) your growth will slow to zero, because customer churn will equal new customer acquisition of 200 customers per year. New customers come in the front door, while old customers leave out the back. Moreover, you will begin to hit the SaaS growth ceiling in exactly one average customer lifetime of 5 years, equal to 1 divided by your 20% churn rate. Finally, your SaaS growth revenue ceiling will equal 1,000 customers times your average customer subscription, e.g., $10M per year for an average subscription of $10,000 in annual recurring revenue. Without a fundamental change to your business, that’s all the SaaS growth you get.

This SaaS growth ceiling depicted in this example is calculated generally by the following basic formulas from the SaaS metrics series.

max SaaS company # customers = acquisition rate ÷ % churn rate

max SaaS company revenue = acquisition rate x average subscription value ÷ % churn rate

Alternatively…

max SaaS company revenue = acquisition rate x average customer lifetime value

This last formula highlights two of the three fundamental SaaS growth levers: acquire customers faster and increase customer lifetime value. If you double your customer acquisition rate, the SaaS growth ceiling doubles with it. Double customer lifetime value by doubling average subscription value or halving your churn rate and again the SaaS growth ceiling doubles.

In the end, however, churn always wins. Churn scales with the size of your customer base. Churn is negatively viral and can only be countered completely by a positively viral growth lever: network effects. Adding more sales reps and increasing your marketing spend are not enough. These strategies may increase your acquisition rate, but to outpace churn you must increase your acquisition rate again and again and again.

The SaaS Growth Levers Follow the Customer Lifecycle

The three fundamental SaaS growth levers: customer acquisition rate, customer lifetime value and viral customer network effects arise naturally and sequentially as a SaaS business matures. You have to acquire a few customers before lifetime value becomes important, and you have to acquire and nurture many loyal customers before network effects kick it. As your SaaS business evolves, you may find yourself cycling through each lever as your highest potential source of SaaS growth.

The three levers of SaaS growth also map nicely to the individual SaaS customer lifecycle as it evolves from initial purchase to deeper use of your product to advocacy within your customer community. Each stage of the SaaS customer lifecycle offers unique opportunities to drive SaaS growth.

saas growth customer lifecycle

The three levers of SaaS growth: customer acquisition, lifetime value and network effects
map to the SaaS customer lifecycle and each stage of the SaaS customer lifecycle
offers unique opportunities to drive SaaS growth.

The diagram above visualizes the deep relationship between the three fundamental levers of SaaS growth and the SaaS customer lifecycle. When read from left to right and bottom to top, each block of this SaaS growth pyramid highlights a proven strategy for SaaS growth that is directly linked to the SaaS customer lifecycle, beginning with driving prospects through the purchase funnel to saving customers that could churn and upselling those that don’t to nurturing a customer community that fosters advocates of your service and drives viral growth.

This is the first post in a series that explores strategies and tactics for driving SaaS growth. Having introduced the three fundamental levers of SaaS growth and their direct relationship to the SaaS customer lifecycle in this article, future posts will focus on each of the ten proven strategies for driving SaaS growth in the SaaS growth pyramid above with real-world advice on how to put each strategy into action. Stay tuned!

If you liked this post, then you’ll love the eBook of the complete SaaS growth series. And if you like it, please share it!

SaaS Business Model Competitive Advantage Revisited

What is SaaS? We seem to need to ask this question every couple of years, because the answer is a bit of a moving target. It was simple enough when SaaS was merely software applications pushed through a Web browser, but now we have to contend with the cloud, mobile and even social. Recently, Scott Maxwell of OpenView partners sparked an interesting debate on the topic on LinkedIn that got me pondering it again. I’ve weighed in on the “What is SaaS?” question before, however, every time I encounter this debate, I can’t help feeling that it skirts the more important issue: Why SaaS?

saas business model why

Tweet

When trying to create a successful SaaS business model, being SaaS is interesting, but doing SaaS is essential. It’s far less important that your SaaS business model meet the exact definition of SaaS, than it is that your SaaS business model creates sustainable competitive advantage through SaaS. Why be SaaS in the first place? Why not just be software? At any rate, this recent debate got me to re-reading some of my old blog posts on the topic and I realized that they were very text heavy and could use an upgrade. So, in this post I revisit the topic of “Why SaaS?” with a short visual tour of SaaS business model basics.

SaaS Business Model Economics

At the risk of repeating myself, I will repeat myself. The only difference between software and software-as-a-service is that SaaS is delivered over a standards-based network called the Internet. Therefore, all new economic value and competitive advantage must flow from this difference.

The SaaS business model creates competitive advantage in two Internet enabled flavors:

  1. Lower costs from…
    • Network automation of labor-intensive services and business processes
    • Economies-of-scale from aggregating customers via the network onto a uniform infrastructure
  2. Differentiation from…
    • Reengineering business processes and service delivery through network automation
    • Network effects enabled by customer-customer interaction

Yes, it’s a mouthful. So let’s look at some pictures.

saas business model competitive advantage

Competitive advantage in the SaaS business model comes from leveraging the customer-vendor network connection to reengineer business processes and service delivery, while building a large customer base to create economies-of-scale and network effects.

Network Automation in the SaaS Business Model

SaaS begins and ends with the Internet. The first impact the Internet has in SaaS is to connect the customer to the SaaS business through the product. Let’s think about that for a minute. How many products do we use everyday that can make this claim? One. SaaS. More and more, we are seeing other products, such as automobiles, security systems, and even clothing incorporate SaaS, but it is always the software communicating over the Internet that makes the connection between the customer and the vendor.

saas business model network automation

The SaaS business model connects the customer to the SaaS vendor through the product, disrupting the value chain by automating and shifting work between the customer and the SaaS business.

Network automation disrupts the value chain by automating and shifting work
between the customer and the SaaS business over the network. Self-service customers do work previously done by the software vendor. Managed service customers outsource unwanted tasks to the vendor over the network. And, smart SaaS business models aim to automate it all. The most obvious example is the work of deploying and maintaining the software itself. Whereas maintaining on-premise software is labor-intensive for customers and vendors alike, the best SaaS products are deployed instantly and maintained invisibly using a high degree of network-enabled automation.

Scale in the SaaS Business Model

The network connection between the customer and the SaaS vendor creates huge economic value, but it pales in comparison to the value created when the SaaS business model scales to hundreds, thousands or even millions of customers. Lower total cost of ownership (TCO) in the SaaS business model arises from the combination of network automation and economies-of-scale. Network automation enables the SaaS vendor to service not just one customer, but many customers from a single infrastructure. With each new customer added, the average cost of operating that infrastructure is reduced for all. When you ask “What is SaaS?”, it is easy to get hung up on things like multi-tenancy, virtualization, and so forth. When you ask “Why is SaaS?”, there are no such concerns. What matters is uniform, automated infrastructure and scale.

saas business model network scale

Unlike on-premise software, the SaaS business model creates huge economies-of-scale by servicing many customers from a single, integrated infrastructure.

The final piece of the SaaS business model puzzle falls into place when we look beyond the customer-vendor connection and consider the potential of customer-customer connections: network effects. Sharing, collaboration, crowdsourcing, and benchmarking offer unique differentiation over on-premise software in the SaaS business model. They simply cannot be done without the Internet.

saas business model network effects

The connection between customers enabled by the SaaS business model offers unique opportunities for differentiation.

The technological “what” of SaaS is a moving target, but the economic “why” is enduring. The cloud, social and mobile have not displaced SaaS. The cloud has expanded the opportunity for SaaS competitive advantage through economies-of-scale. Cloud computing enables entirely new technical architectures that deliver as much or more savings as multi-tenant databases. In turn, social and mobile have expanded the opportunity for SaaS competitive advantage through network effects by creating that many more opportunities for customers to interact with other customers. Understanding “What is SaaS?” may help you explain your business to the analysts, but understanding “Why SaaS?” will ensure you leverage the SaaS business model for all its worth, today and tomorrow.

Big Data | Thinking Outside the Firewall @Meltwater

meltwater big dataA few months back, Gartner placed big data at the peak of its hype cycle for cloud computing, meaning most big data products are solutions looking for a problem. I always find this bad entrepreneurial habit to be one of the most frustrating of our industry. Having recently joined Meltwater as head of marketing and product (BTW Meltwater is hiring marketing and product managers!), I think a lot about big data and how to unleash it’s value to solve important business problems, because that is our business. How does big data go from “so what” to “must have”?

The Big Data Challenge

Big data is a by-product of the Internet and the ever increasing power of computers. Kind of like petroleum sludge. We know there must be great value buried within this vast, raw resource, but the challenge lies in figuring out how to turn it into something useful like plastic, or the other thousands of petroleum products that we produce from the 20% of crude oil that can’t be turned into fuel.

big data by product

Click to Tweet!

This is no small feat. I can confidently predict that there will be no shortage of well-intentioned, well-funded start-ups that fail to live up to this challenge, producing varying versions of gift-wrapped sludge that never quite deliver on the promises of their pitches. Overcoming the hype and producing real value from big data requires much more than data-processing infrastructure. It requires a laser-like focus on creating order-of-magnitude improvements to how we work and live.

Reengineering Across the Firewall

More than a year ago, McKinsey and Company predicted that big data would be “The Next Frontier of Innovation, Competition and Productivity.” Now, I’m not generally one to argue with the likes of McKinsey, especially in this case as I happen to agree with it. If you have the time, I highly recommend checking out the report. At 156 pages, however, it can be a little hard to digest, so I thought I’d fearlessly attempt to boil it down to a blog post by sharinig a little of how we think about the Big Data Challenge @Meltwater.

big data meltwater reengineering

Big data implies a shift in real-time access to valuable information outside the firewall.
It offers the opportunity to reengineer business processes that cross the firewall
and that benefit greatly from this information, such as competitive strategy,
sales, customer support, vendor management, employee recruiting, etc.

Cloud-based businesses create value in one of two ways: lowering TCO (cost advantage) and network-enabled innovation (differentiation). Most early-entry, enterprise SaaS applications like Salesforce.com are really not that different from their on-premise counterparts in feature and function. They rely on lower TCO as the primary driver of adoption, and while they expand the market through lower prices to SMBs, they are locked into a replacement battle against on-premise software leaders like Oracle, SAP and Microsoft. However, there are a handful of truly innovative enterprise SaaS and cloud categories that mine the Internet for all it’s worth and have no on-premise equivalent, such as search, media monitoring, marketing automation, Web analytics, social media marketing, human capital management, and cloud integration. These categories all have one thing in common, they reengineer business processes that cross the firewall by leveraging data outside the firewall.

Reengineering is a business term that gained popularity in the early nineties as client-server washed away mainframe applications en masse. The idea was to leverage the new technology to redesign business processes for dramatic gains in productivity, as opposed to just upgrading legacy systems. Fast-forward 20 years and we find ourselves in a similar situation. We’ve spent billions of dollars on ERP, CRM, BI and countless other software acronyms to automate every last internal business process. Inside the firewall, there is very little left to do.

big data reengineer

Click to Tweet!

The vision of big data should not be an upgrade, like the next generation of enterprise business intelligence, only bigger. Big data is a fundamental shift in real-time access to valuable information outside the firewall. It offers the opportunity to reengineer business processes that cross the firewall and that benefit greatly from this information, such as competitive strategy, sales, customer support, vendor management, employee recruiting, etc. For example, it is one of the great ironies of enterprise software that in most companies customers never touch the customer relationship management system.

Social Business and Big Data

If any emerging category can claim more hype than big data, it is social business. This is no accident. Social business and big data are inexorably linked. Big social data empowers social business. Take the case of the social community manager, a new and evolving social business role. The social community manager must engage in a dialog with community members that is personal and relevant. Yet at the same time, the social community manager must sift through millions of online conversations to zero in on specific opportunities for personalized social engagement. Enter big data. Let’s redraw the above diagram for the social community manager.

social community management meltwater

The social community manager needs a social mission control panel
to digest the vast amounts of big social data and zero in on
the conversations, channels, and community members that require immediate attention.
(At Meltwater, we like to call this Meltwater Buzz 3.0 which launched today! ;))

The social community manager is engaged in the business process of building a social community. To accomplish this daunting task, the social community manager must reach across the firewall to crunch a lot of big data and engage community members in in real-time. The process goes something like this:

  1. Gather big data outside the firewall about the social community
  2. Develop a social campaign strategy informed by insights from the data
  3. Create a social campaign plan of execution
  4. Reach across the firewall to engage the social community
  5. Rinse and repeat in real-time

I think social community management is a lot like air traffic control, including the potential for social media disasters when information, systems or social community managers are not up to the task. The social community manager must digest vast amounts of big data to find the one conversation or one community member that requires immediate attention. The social community manager doesn’t need raw big data. The social community manager needs a social mission control panel to digest the vast amounts of big social data and zero in on the conversations, channels, and community members that require immediate attention.

Big Data and The Cloud | A Match Made in Heaven

The fact that big data originates largely as a by product of the Internet, and the fact that it is, well, big, lead to the natural conclusion that like big data itself, big data-based solutions are best situated in the cloud. It will be the rare global 500 company that is both big enough and motivated enough to house and sift through the mountains of data available out there to build on-premise big data analytics and automation. Economies-of-scale will rule in the aggregation, enrichment and processing of big data with most businesses interested in paying only for results, i.e., insights that can be used to reengineer business processes across the firewall for order-of-magnitude improvements in productivity and service.

Social Sales | 10 Social Sales Lead–ership Tips

Sales professionals are some of the earliest adopters and most annoying users of social networking. The problem is that most sales reps treat LinkedIn like a prospecting database for cold calling. It’s just too enticing when all your target prospects are out there showing off their company names, titles, areas of expertise, blogs, and opinions. You can use LinkedIn as a prospecting database, but it is probably the weakest and most professionally irritating use of the technology. To succeed at social sales, you must have something to offer beyond your product. You must be someone your customers want to know.

This is the fourth post in a series on social business designed to help B2B sales and marketing professionals make better use of social media by thinking in terms of social networking. This installment provides ten social sales lead–ership tips that will turn social media into a lead generation machine for your business by following the B2B Social Business Bill of Rights.

Social Sales Lead–ership Tip #1 | Activate Your Social Sales Network

B2B businesses still have rather spotty usage of social networking. Most B2B sales reps are on LinkedIn, but far fewer have active Twitter accounts. Depending on the industry, B2B prospects and customers are even less likely to be active social networkers. Social Business Right #1 says you must expand your social sales network, so take the lead and give your sales reps, prospects and customers a reason to get more social. Use social channels like blogs, forums, Twitter, Facebook, and LinkedIn to communicate with your customers and prospects. Encourage website registration using social networking accounts. And, create promotions and contests that require participation in social networks. Activate your company’s social business network by motivating its members to follow your company’s lead.

Social Sales Lead–ership Tip #2 | Capture Social Sales Contact Profiles

Upgrade your CRM to capture Twitter handles, LinkedIn profiles, blog URLs and Facebook pages in addition to the standard phone, email and fax. Does anyone still fax? Add these items to lead capture forms on your website and use data appending services to augment them. Your sales team can’t link up without the right social contact information any more than they can cold call without phone numbers.

Social Sales Lead–ership Tip #3 | Train Sales in the Art of Referrals

The most common social sales mistake is treating social media like a prospecting tool; it is a networking tool. Stick to direct cold calls and email for prospecting. The reason most sales reps struggle at networking is that they fail to understand the critical role of referrals in the art of networking. Sales reps are trained to hunt. Account managers are trained to farm. Networking is about gathering. Gathering contacts. Gathering useful tidbits of information. Gathering opportunities. Gathering things that you can share.

social sales

Social Business Right #2 advises that you build your social sales community by being helpful. Sharing referrals are not selfless acts of kindness, because reciprocity creates social networking karma. Smart networkers look for opportunities to provide referrals to those people from whom they would like to receive referrals. They know who they want to meet and what those people care about. They identify opportunities that can be referred and opportunities to refer them. Networking requires a gathering sales discipline. It’s not something you go out and do once a month. It’s something you incorporate into your daily routine, because opportunity waits for no one.

Social Sales Lead–ership Tip #4 | Train Sales on Social Networking Tools

If your sales team masters the art of networking through referrals, then your social network training will become an entirely different experience. Approaching LinkedIn with the mindset of gathering contacts that you might do business with or might introduce you to someone you might do business with someday and looking for ways to share information, introductions and business opportunities will generate many creative ideas. This proper use of social networking contrasts sharply with the more typical sales prospecting default of searching on title and trying to link up with a product pitch.

Each social networking tool from LinkedIn to Twitter to a personal blog offers different networking capabilities and opportunities. Sales reps should select the ones that fit their respective business needs and professional styles. However, mastering the ins and outs of the features, functions and formalities of each tool is essential. For example, if you choose to write a blog, you probably need to know WordPress and SEO. If you choose Twitter, you need to know how to use handles and hashtags. If you use LinkedIn, you need to understand groups and updates. Despite all your good intentions of being a helpful business colleague, it’s a competition for attention out there and mastering social networking tools is essential to social sales success.

Social Sales Lead–ership Tip #5 | Prepackage Useful, Share-able Content

Social Business Right #3 asks that you should accelerate information sharing within your social sales network. Maintaining a library of incredibly useful, industry-specific tidbits of information in easy-to-share packages like like PDFs, PPTs, Web links, and so forth can be a big time-saver, because when opportunity knocks to share some useful information, you need to answer quickly and concisely. Marketing departments can help sales reps in a big way by making sure sales is plugged into the content marketing pipeline for both original and curated content.

Social Sales Lead–ership Tip #6 | Invest in Digital Media Monitoring

The timeliness of shared information directly impacts its usefulness. Therefore, it’s important to stay on top of what’s being said in your industry everywhere from Twitter to traditional news. Staying on top of industry buzz has become impossible to do manually by reading your favorite trade publications. Strong media monitoring tools not only keep you informed, but they can become a competitive weapon for the social sales professional, because people gravitate to those who are always in the know.

The Tipping Point for Social Sales

There is a challenge hidden in these 10 Social Sales Lead–ership Tips, and since most sales professionals love competition, I will make it explicit. The ultimate goal of the Social Business Bill of Rights is to light up your social business network with viral sharing of business referrals through social networking, from simple retweets to new prospects, partners and personnel. In The Tipping Point, Malcolm Gladwell provides a straightforward formula for enabling virality built upon three key network players: connectors, mavens and salesmen.

  • Connectors, are the people in a community who know large numbers of people and who are in the habit of making introductions.
  • Mavens are information specialists, or people we rely upon to connect us with new information.
  • Salesmen are persuaders, charismatic people with powerful negotiation skills.

Presumably, a strong sales rep is already a salesman in the Tipping Point sense. The challenge then is this: can you become a social sales triple threat by being a connector and a maven too?

Social Sales Lead–ership Tip #7 | Launch a Referral Reward Program

Operationalizing referrals throughout your social sales organization is no easy task. It requires new knowledge and new habits. By introducing a simple referral rewards program, you provide a vehicle to reinforce the habit of asking for customer referrals. It is a great misconception of customer referral programs that they drive referrals through monetary incentives and discounts to your customers. They do not. When a customer provides a referral, she is doing it in order to help her friend, not the salesperson or the company. If a customer is not happy with your service, she will not refer her friend regardless of the incentive, because it will make her look bad. The best referral programs provide a small reward to your customer (reciprocity, not an incentive) and an incentive to the prospect (which allows your customer to do her friend an even bigger favor).

The most important ingredient in driving customer referrals is never a reward or incentive. It is timing. You must ask for a referral when your customer is most willing to provide it. When she is happy with your service and feeling the reciprocity vibe of your social sales karma. While there are modern marketing tricks that can triangulate on the right time and place to ask for a referral through some online call-to-action, there is no tactic stronger than the sales rep asking for a referral directly after being told by your customer just how fantastically happy she is with your product and service.

Social Sales Lead–ership Tip #8| Increase Social Sales Productivity

Staying on top of every prospect’s and every customer’s social activity across multiple social netorks is an impossible task for most busy sales professionals. Therefore, it is essential to start investing in systems that boost their social sales productivity. Twenty years ago most sales managers would have scoffed at the idea of maintaining a pipeline of opportunities and simultaneous conversations with hundreds of prospects. Today it is routine due to the productivity impact of enterprise CRM systems. The social CRM systems of tomorrow will allow sales reps to hear and participate in thousands of conversations going on inside their social sales network, but outside of today’s enterprise CRM systems on the other side of the firewall.

Social Sales Lead–ership Tip #9 | Create Online Networking Opportunities

Now that you have your social sales reps all linked and followed, why not give them more opporunities to engage? Don’t let them just sit around waiting for that great article to share or contact to introduce. Create opportunities for your social sales reps to social network. Start a LinkedIn Group. Launch a community industry blog or forum. Create social networking events by integrating online networking into offline events. Or, just create social networking events, such as tweet-ups and contests. However you do it, give your social sales reps more online networking opportunities. More opportunities for online engagement mean more opportunities to strengthen online relationships.

Social Sales Lead–ership Tip #10 | Create Offline Networking Opportunities

Social Business Right #5 asks that you consistently work to convert weak ties to strong ties within your social sales network, so sooner or later you’ve got to take it offline. All the tweets in the world are still no substitute for thirty minutes over coffee. Help your social sales reps develop stronger business relationships by providing offline networking opportunities with prospects, customers and industry influencers. These can be as simple as a meetup at the local bar or as complex as a global annual user conference. As industry trade shows shrink in the wake of modern Internet marketing, there is a growing vaccuum that must be filled to satisfy the fundamental need of B2B professionals for face-to-face networking. Don’t forget to mind the gap.

What is MRR Churn? | SaaS Metrics FAQs Part 2

saas mrr chrunSince publishing the original SaaS metics blog series and subsequent SaaS Metrics Guide to SaaS Financial Performance, I’ve received numerous inquiries on various details and hidden gotchas in SaaS metrics implementation. This new series of SaaS Metrics FAQs explores some of these finer SaaS metrics points in a simple Q&A format. In this second post, I examine SaaS MRR churn, a SaaS metric that extends from SaaS customer churn which was covered in the first installment.

SaaS Metrics FAQ #4 | What is MRR Churn?

SaaS MRR churn measures the erosion of SaaS monthly recurring revenue (MRR). Mathematically, the SaaS MRR churn rate is an extension of the SaaS customer churn rate calculated by substituting monthly recurring revenue in place of the number of customers. For example, if your SaaS business has 100 customers representing an MRR base of $1M at the beginning of the year, and 5 customers cancel a total of $100K in MRR during the year, then your annual MRR churn rate is 10%, while your annual customer churn rate is only 5%. The general formula for for SaaS MRR churn can be stated as the amount of MRR cancelled (ΔMRR) per time interval (Δt) divided by the total MRR at the beginning of the interval (MRRtotal).

SaaS MRR Churn Rate = ΔMRRcancelled contracts
Δt x MRRtotal

In the formula above, the Δ is a common math symbol that means change or interval.

SaaS Metrics FAQ #5 | Why Measure MRR Churn?

The simple answer to this question is money. SaaS customer churn rate is important, particularly if you run a B2C SaaS business where revenue is generated by monetizing users through advertising or such. However, B2B SaaS companies generate revenue from direct subscription sales. SaaS customer churn is an interesting operations metric, but SaaS MRR churn is a critical financial metric. SaaS CFO’s always prefer MRR metrics. 🙂

The slightly more complex answer is that MRR metrics tell you if SaaS customer churn is leaning more toward larger customers or smaller customers. IN addition MRR metrics highlight two very important SaaS revenue drivers that customer metrics do not: upgrades and downgrades. In the example above, the MRR churn rate was double the customer churn rate, indicating that larger customers are churning. This quality of the SaaS MRR churn rate becomes more apparent when we expand the above formula to show off its individual components.

MRRtotal = MRR1 + MRR2 + … + MRRN-1 + MRRN

ΔMRRcancelled contracts = MRRcancellation 1 + MRRcancellation 2 + … + MRRcancellation M

In the expanded formula above, MRRN is the MRR value of customer number N and MRRcancellation M is the MRR value of cancelled customer M. For example, if there are 100 customers with $10,000 MRR subscriptions and 10 customers with $100,000 subscriptions, then total MRR can be calculated using the above formula as follows.

MRRtotal = $2M = 100 x $10,000 + 10 x $100,000

If 5 $10,000 customers cancel and 1 $100,000 customer cancels, then MRR churn is $150,000 = 5 x $10,000 + $100,000. The MRR churn rate is 7.5% = $150,000 / $2M, whereas the customer churn rate would be 5.5% = 6 / 110. MRR churn is higher, because 1 $100,000 customer is worth more than 5 $10,000 customers. To this way of thinking, SaaS MRR churn can be viewed as recurring revenue weighted customer churn.

SaaS Metrics FAQ #6 | How Do I Analyze SaaS MRR Churn?

You can conduct all the same analyses on SaaS MRR churn that you do on SaaS customer churn from simple annual MRR churn rate calculations to complicated MRR churn cohort analysis. The main difference is in the interpretation of the results as recurring revenue weighted versions of the originals. Most importantly, MRR metrics provide the ability to separate the impact of downgrades and upgrades on changes to MRR from the impact of customer churn and growth, respectively.

saas mrr churn analysis

SaaS MRR churn and growth analysis allows you to separate
the MRR impact of customer churn and new customer growth
from the MRR impact of downgrades and upgrades, repectively.
(A shout out to the Meltwater finance team for turning me on to
this nice MRR churn visual. Thanks Rik, Till and Ludwig!!)

SaaS Metrics FAQ #7 | How Do I Calculate the MRR Churn Rate in Practice?

SaaS MRR churn rate is calculated by substituting MRR for the number of customers uniformly in all your SaaS customer churn rate formulas. For this reason, the SaaS MRR churn rate is subject to all the same measurement problems of the SaaS customer churn rate arising from low churn rates, high churn rates, variable contract lengths, and so forth. If you have any of these issues, you should refer to the previous post in this series which provides a number of SaaS churn calculation tips to mitigate them. If you decide to go measure MRR churn using only contracts up for renewal (Tip #3), then be sure to use the MRR weighted average contract renewal period.

Monthly MRR Churn Rate = ΔMRRcontracts cancelled in month
ΔtMRR weighted average renewal period x MRRcontracts up for renewal

In the formula above, the denominator only counts MRR from contracts up for renewal in the month and the numerator counts MRR of contracts up for renewal in the month that cancel. This gives the MRR churn slice of the waterfall diagram above, however, that still leaves upgrades and downgrades.

SaaS Metrics FAQ #8 | How Do I Calculate the MRR Upgrades and Downgrades in Practice?

It is important to separate upgrades and downgrades from churn, because they each represent distinctively different economic situations. Churn implies a severing of the business relationship, so recovering a churned customer will generally imply a new cost of acquisition. Upgrades and downgrades do not generally entail future acquisition costs, however, they do imply very different sales strategies: upselling vs. recovery respectively. Upgrades and downgrades are calculated as follows.

ΔMRRupgrades = ΔMRRupgrade 1 + ΔMRRupgrade 2 + … + ΔMRRupgrade U

ΔMRRdowngrades = ΔMRRdowngrade 1 + ΔMRRdowngrade 2 + … + ΔMRRdowngrade D

In the formulas above ΔMRRupgrade U and ΔMRRdowngrade D represent the net upgrade and downgrade MRR of customer U and D respectively. For example, if a $100,000 customer downgrades to $90,000 then ΔMRRdowngrade = $10,000.

It’s also worth noting that there is zero difference between SaaS MRR churn and SaaS ARR churn, because all the formulas are percentages (monthly recurring revenue churn vs. annual recurring revenue churn, not monthly churn vs. annual churn). To convert any of the SaaS MRR churn formulas above so SaaS ARR, you simply multiply both the numerator and denominator by 12, cancelling the conversion out of the calculation. I could search and replace ARR for MRR throughout this entire blog post and it would still be 100% correct. 😉

« Previous PageNext Page »