There have been a couple of articles recently bemoaning the increasing COGS of SaaS solutions and questioning if this is the downfall of SaaS. Evangelos Simoudis of Trident Capital warns against rising sales costs and a move to field sales and Jeff Kaplan of ThinkIT Services, warns against VC’s getting cold feet.
So, is the SaaS model too good to be true? Sort of!
Software as a service is a phenomenal business model, but it’s not foolproof. Luckily, it’s not rocket science either. Why are COGS increasing? For the same reason they increase in traditional ISV’s – there’s an imbalance between Sales & Marketing – that MUST be corrected. Look at the breakdown:
Traditional ISV’s: Marketing buys targeted lists and generates leads through targeted campaigns (trade shows, Direct mail, etc.) Sales is broken into two segments: 1) inside sales: low cost “churn & burn” team dedicated to qualifying out the targeted list and passing the “qualified leads” to the outside team. 2) Expensive outside team dedicated to closing business.
Successful ISV sales & marketing teams are well oiled machines. They know ahead of time when they need to open the funnel and they know when the quality of the leads are going down. Each step of the pipeline is measured and monitored and has an OWNER that is accountable to a number.
Early SaaS Players: Simple apps with simple concepts that can be adopted at low costs by early adopters – i.e. Constant Contact or Vertical Response. The concept of e-mail marketing (as an example) is pretty simple and the apps are very simple and very powerful, so getting up and running is easy. Customers can see value within hours of “trying” – a sales team is not nearly as important as good customer support. Marketing’s job is to drive as many targeted eyeballs at the lowest cost possible. Easy and fun Saas model that makes VC’s silly happy.
New SaaS Players: Here, the apps are getting more expensive and more complex. There is a need for a “solution sales expert” to help explain the value proposition – and here is where the model breaks down. Marketing drives leads via SEM with “targeted keywords.” Inside sales is inundated with huge quantities of “targeted” leads that are not really targeted and not really qualified. The sales teams struggle to qualify the leads because the old rules don’t apply anymore. Everyone can afford a free trial and most people can afford the monthly rate (at least for a little while), so no one gets qualified out. Everyone is a potential customer! With no focus for sales or marketing, conversion rates plummet and companies have to start discounting deeply to drive sales.
The move to an outside sales team is not going to solve this. SaaS solutions can be sold very well with a high quality inside sales team, but they have to be ruthless about qualification. And marketing has to be held accountable for lead quality – i.e. just because they clicked on your generic keywords does not make them a good lead!
The Solution: Two trends that will lower COGS for SaaS players and bring profitability to new SaaS players:
1) Enterprise sales: High quality marketing & inside sales teams re-learning how to qualify leads in a SaaS world. Expect more content before registration to whet your appetite and a more onerous process once you’ve decided to “try”. (i.e. lengthy signup forms, credit card before “free trial”, phone call activation, etc.) SaaS vendors have to become ruthless qualifiers to figure out who to spend time with to raise conversion %.
2) Small & Medium businesses: Expect consolidation of marketing platforms. It’s just too expensive to try and reach a fragmented audience via SEM, so we will see an emergence of app marketplaces (i.e. what we’re building at Intuit). The SaaS offerings themselves will need to be drop dead easy to get up and running, but if the vendor can dramatically cut marketing costs, they can focus on conversion and customer support.
Tech Spheres 