Category Archives: Business Model Canvas

How to become successful with your Channel–a case study to learn from?

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In my yesterday’s blog entry, I gave a few hints of channel development and what kind of things the software vendors should avoid.

Today, I thought to share some perspectives on a case study that David Skok gives in his excellent blog entry.  Like in my previous blog entry, I will give my perspective on the findings of this case study.

The case study software company is SolidWorks and this company is specifically known within modeling for mechanical design. This company grew rapidly and one of the key reasons was an effective and well-managed VAR channel. According to the blog, the success of the channel was based on three distinctive phases:

  1. Hiring an executive that had been part of the channel in the past, so this person really understood the channel and how a VAR business works.
  2. Understanding that the success of SolidWorks
  3. Realizing that the VAR channel as an un-optimized  resource and how decide that it was worthwhile for SolidWorks to educate its channel on business skills. This meant every aspect of the business, almost like a mini-MBA

During the spring/summer 2012 I did some research in the VAR/MSP channel and one of the findings was that a key obstacle for many VARs and MSPs specifically in moving the cloud business is lack of expertise and the business model was seen to be unclear like can be seen in following picture (Source: CTTA 2012):

Obstacles in moving to cloud-2012

The latter is specifically relevant to the discussion of SolidWorks and what they did to make the channel successful. What happened in the case of SolidWorks was that the channel account teams became business mentors for the VARs and educating them to run a better business. In retrospect, I think this is exactly what ConnectWise CEO Arnie Bellini is trying to do with its resellers in its annual User Group Meeting IT Nation in the beautiful Orlando, Florida in November 2012.

He even brought in my favorite author Jim Collins that has written many bestselling business books and the latest book “Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All” was given to all conference attendees.

I had the opportunity to hear Jim Collins keynote and I think it was one of the best speeches I have heard in my life. He brought up things in an interesting way and without every loosing the audience in the session.

In the next few blog entries, I will review what a good VAR channel program should look like and what kind of VAR development program did SolidWorks have to run its VAR business. I will also give my own add to this by looking it from a Business Model Canvas perspective which we use every day for everything we analyze in respect to Business Models. Stay tuned for more!

An Independent Software Vendor (ISV) moving to the cloud – what are the financial implications of this?

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I have to say that I am living in a nirvana from a researcher perspective (even if I am an entrepreneur on daily basis working with practical execution). Nobody of us will have the chance to experience too many profound transformations in our lifetime. I was asked to write a report on ISV transformation from traditional software business to cloud business from financial perspective and I loved the nights and weekends that I spent on the Internet doing research. Coffee, music in the background, two large screens side-by-side and the feel of really learning and assembling pieces of information together is a feel that is hard to explain. No wonder I like to write books, dissertations, and reports…

My personal background is that I came from school when minicomputers such as HP3000, VAX/VMS and later UNIX computers where the ones that software was built to. The next era was the move towards client/server architectures where I really made my personal career in product development. Then we all remember the short period of web-enabling solutions and the huge investments in hosting facilities which many have now disappeared. This new cloud/SaaS era is much more than just making your solution web-enabled. It will change not only the way you build software, but it will change the way you run your business. Let me explain how by reviewing the picture:

The Cloud ImpactI will start with the business model in this blog entry and continue with the others in later blog entries. The change from perpetual software license model to subscription-based model will change the way the ISV sells its solution and it will change the way the ISV structures its partner channel. It will also change the way the ISV markets its solution. The main driver for this is that the ISV will not be able to sustain its cash flow with a traditional sales model as the sales team needs to keep much higher pace in sales when moving to the cloud environment. The sales model for an ISV has to be either fully automated with customer self-service or it can be highly transactional where you can have some human elements but the amount of transactions will cover the cost of maintaining people to close the deal. The ISV has to be able to control the Customer Acquisition Costs (CAC) as that is one of the key drivers to be able to achieve break-even point and start generating pure profit. This does not typically happen in less than a year, whereby the ISV has to maintain a happy client so they sign up for a new contract period assuming that the contract period is 12 months. I will analyze the metrics in my later blog entries. This just gave you an example of the operational changes that an ISV will experience.

How does an ISV manage to plan appropriate scenarios that it can take when moving to the cloud? Obviously, the assumption is that the Board of Directors have made a decision that the ISV has to make the move to survive in the new global competition where anybody from anywhere in the world can enter the competitive field. There are no geographical borders that will keep the ISV from competition. If you are an ISV from Italy, you can expect to get somebody to enter your territory from France, Germany, Brazil or Bolivia. Once the strategy has been set, you will have to use a model to operationalize your strategy and I am used and thrilled about Dr. Osterwalder’s Business Model Canvas that provides all of the needed elements to analyze and “paint the picture” on a high level. I have witnessed several experienced senior management team members to become enlightened of the power of the canvas and it really has become our number one tool when working with ISVs. The Business Model Canvas consists of nine building blocks: Value Proposition, Customer Segmentation, Revenue Streams, Cost Structure Key Resources, Key Activities, Channels, Customer Relationships and Key Partnerships.

Business Model CanvasThe power of a business model framework such as Business Model Canvas is that the management is compelled to take a position on each of the nine building blocks on a Business Model Canvas. Each building block can also have its own key metrics and these can become the foundation for a dashboard that the management team tracks on the monthly basis.

Besides the question whether the ISV has the right core competence to move towards a cloud business, the key question that any ISV has is how this change is going to impact the financial model and the canvas above shows how the Revenue Stream building block has to be in balance with the Cost Structure block. In the perpetual software business model the metrics on the cost structure and Revenue Streams are completely different.

To summarize, the ISV and its management has many different questions to answer in its journey to the cloud. The first is to make sure that the owners, the management team and the Board of Directors have a common understanding where to go with the strategy. The role of the Business Model Canvas is to help the ISV to lay out a few possible operational scenarios that it can take in its cloud transformation. In my next blog entries I will explain in more detail the financial impact on an ISV when moving from traditional perpetual software license business to subscription-based business model. Stay tuned for more.

 

 

 

 

 

Do you know how to work and build a software sales channel?

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If you are a software business, sooner or later you have to consider a sales channel for your growth. It does not matter whether you are in traditional software business or considering a cloud business, you will probably end up having a channel in some shape or form. Some cloud solutions might be simple enough to be able to deploy without a local consulting practice getting involved in the delivery, but most enterprise level software solutions will still require a middle-man that knows the end user client and is able to do onsite consulting. There is no substitute for local support and partners that have access to an ecosystem that the software vendor would never have access to.

Is your current organization capable of supporting a channel?

Building a sales channel will have to fit into your strategy and my recommendation is to use some type of strategy framework (like Dr. Osterwalder Business Model Canvas) to identify how each functional area in your company plays in a possible channel scenario. Do you have the right people supporting the channel? Is your product strong enough for a channel and do you have the right skills to penetrate new geographical areas that could possibly include other language versions of your product? Do you know how to manage 24/7 support if you sell cross different continents?  Does your current management and operations understand international business? How does your current software/solution delivery model aligned with a channel sales model? Does your product support the correct compliance rules of the geographies that you are going to address?

The questions above are just the beginning of the questions that the software ISV has to respond to when entering new markets. Each of these markets could potentially lead into additional complexities that the software vendor did not know at the time of decision making of the new market. However, the potential resellers in these markets will eventually ask the questions and you’d’ better be prepared to have the right answers.

Do you have a robust channel program for your prospective resellers?

Do you have a good and profitable program for your channel partners? We are seeing a transition from traditional software business model to cloud model, but the foundations of channel rewarding will still stay the same. If the channel does not see enough of an opportunity to invest in your software solution and in its sales, you are out of luck in trying to convince the reseller or distributor prospect to take on the product into their solution portfolio.

There is no success without showing success yourself. As an ISV (Independent Software Vendor), you have to show how to make money to convince the channel that it is worthwhile to put effort into the sales of your software solution. This was something I learned very early in my sales career as a young CEO of a US-based software company. One very experienced reseller on US West Coast asked me bluntly how many deals I had personally closed when I approached him to resell my software solution.  Had I said none… the discussion would have been very short.

My recommendation to all ISVs, regardless of the software domain, is to demonstrate your own sales success before trying to solicit channel partners to replicate your success. It is naïve to think that a pure channel sales model would bring you success. It has to be a combination of direct sales and channel sales that bring either success or failure in your efforts. If somebody claims otherwise, ask them to provide evidence of a model with only channel sales as revenue source.

Having a channel sales strategy could become very effective specifically in cases where an ISV wants to broaden its sales to new markets/geographies. Typically, the ISV has already some experiences in its own native country of the sales and the sales processes and what it takes to become successful. This is also a basic requirement in trying to get others to sell your solution. The success in local ecosystem should be easier and also become the “beta site” for any other markets. If you can’t demonstrate success in our own backyard, why would you be able to do it in a remote geography?

Do not underestimate the resources a reseller has to invest in selling your product

In many of the cases, software vendors forget that setting a reseller or distribution business will require the very same resources as the ISV would have to have in its own sales operations. If you have pre-sales resources in your organization, it is to expect to have the same requirements for your reseller. If you have a need for inside sales force, the same requirement will apply to your reseller partner. In cases, where the solution requires solution delivery, the reseller has to provide resources in solution delivery or create a partnership with a local partner organization that enables a successful delivery of a solution.

Do you know how to reward your channel?

How much should you pay your sales channel when closing deals? How much commitment do you expect your resellers to put on your product? It still amazes me to find software vendors (ISVs) that assume the distribution channel to be OK with commissions such as 10% with the assumption that the distribution channel will invest in the sales of the product. How many companies do you know that can live with 10% and create an organization to support the ISV’s product for 10%? I do not know any. Many reseller partners expect commission ranging from 30 to 50 percent to be able to create an organization that delivers a solution and promotes the product. If the commission is 10%, we are typically talking about referrals, where an opportunity name is given to the software vendor and the vendor is running with the sales effort without any interaction from the organization that gave the referral. What the ISV tends to forget is that there are tens of other solutions that the very same reseller community gets solicited on and therefore your value proposition and attractiveness has to appeal from get-go.

The cloud will change the channel models sooner or later

There will be new rules in software channel sales when working in the cloud era and I will be addressing these in later blog entries. Jeffrey M. Kaplan from THINKstrategies makes some predictions of what is going to happen in 2011 in the cloud era and one of the key elements will be the implementation of new channel programs with new channel partners that will compete of the same space as the more classic resellers that we have seen in the more traditional software sales business models.

I would like to emphasize that it is unrealistic to expect the channel to disappear, but what every software vendor in the cloud arena needs to figure out is to create enough value proposition to channel partners (like resellers and distributors) to be able to build a solid and profitable business. The componentization of the software and new models of software consumption will have ever lasting impact on software ecosystems.

I have to say that this new cloud era excites me tremendously as we get to see new exciting innovation and new business models from new players.  Some players are trying to eat into more established vendors such as BranchOut trying to take on Linkedin as a new way of business networking. BranchOut uses the huge database of Facebook to build a new view to business connections. I expect this type of new innovation to continue and Facebook to also become a greater platform for other social functions besides “connecting” with friends.

Law #10 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –Cloudonomics requires that you plan your fuel stops very carefully

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I have so far reviewed nine laws of Bessemer Top 10 and with this last one is almost like a summary of the other nine laws. The reality of SaaS-based companies is that the biggest question they have is how to finance the growth and how to ensure that the Committed Monthly Recurring Revenue (CMRR) is going to be enough to fuel the growth and how the company should plan its capital infusion both short-and long-term.  Every ISV leader needs to understand the financial drivers of the operations and I wrote about this in my blog entry by referring to the 6C’s of Cloud Finance that Bessemer has defined on their site.  

Law #10: Cloudonomics requires that you plan your fuel stops very carefully

What makes a SaaS company so much different to a more traditional software company?  To put it bluntly, a SaaS company needs to be better funded when compared to a traditional software company. The funding is not necessarily different when viewing the overall capital need, but funding will be needed specifically during the first few years when the company is building its revenue stream. The reason is obvious when analyzing the financial model.

A SaaS company has to fund the research, development, sales and marketing well upfront without receiving the payback immediately like was possible in the “good old days”. It was  not unheard of getting 300k software deals that funded additional development and marketing for a small company but now this money will come gradually and only if the SaaS vendor is able to retain the clients.  I did this in the companies I worked with, my colleagues did this and this is why one could build a nice and sustainable software business without having huge amounts of cash. What was needed was a good idea, a couple of good programmers and a product that was sold to a hefty price tag with a traditional licensing model.

Getting a healthy inflow of CMRR transactions is that will keep the company afloat but like Bessemer puts in its blog entry, it could take more than 4+ years to get a SaaS company cash flow positive. Bessemer concludes that SaaS companies typically need multiple rounds of financing and some of the well-known are Netsuite ($126m),  Salesforce.com ($61m) and SuccessFactors $45m. These investments are obviously considerable when measured in typical startup scenarios, but the lesson that we can take from them is that regardless of what the ambitions are, the SaaS business model will require more upfront investments when compared with traditional model and that the return of positive cash flow will take more time.   

Summary of our findings in respect to Business Model Canvas

Like in my previous blog entries, the objective of this blog was to view the current Bessemer law with Business Model Canvas from Dr. Osterwalder. Like I stated prior in this blog entry, the impact of this Law is dependent on each and every Business Model Canvas building block.  However, if we need to pick one or two of these, it would be Revenue Streams (RS) as that dictates how well we run our business from revenue perspective, but also Key Activities (KA) which measures how well we understand and run our core business. It is also very important to understand that SaaS business will change the Channel (C) structure as well. ISVs can’t expect to have similar channel structure as they used to have in the past. Vendors such as Microsoft will open commercial app stores (The Dynamics Marketplace) for its development platforms such as Microsoft Dynamics CRM 2011 that has a landing page to learn more. Similar objectives exist for upcoming Windows Mobile 7 with app store like was reported by MobileCrunch.

The question that each ISV will have is how to utilize these app stores and what kind of impact do they have on the existing channels. In some cases, and typically in quite a few of them, solutions are complex and require system integrators to integrate these solutions to backend systems. In some cases the apps might be lightweight and can be deployed without any external help. Should ISVs in these cases rely purely on its own resources and marketing to end user clients, or should they still try to build a channel? I think it will be a combination of both whereby there is nothing new. Traditional software channels need to see the success of the software vendor, there is no way around it. SaaS will be just another way to deliver the solution and gives a broader exposure to ISVs as the whole world can find it through Internet.

This blog entry concludes my journey of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas. This journey of blog entries has been very educational even for me, as it has included a bunch of research of what is known of these topics and what people have written about it. I do have to admit, that there are so many variables to the SaaS world specifically from a financial perspective that I recommend every manager that is part of any ISV business to spend time around these topics. It is worth the investment and can save you from many mistakes; some of them could be disastrous to you from a financial perspective.

Law #9 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…

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The ninth law in Bessemer’s Top 10 Computing Laws is all about accounting and how to recognize revenue. In the traditional software business, the software license revenue is recognized at the time of delivery, while in the SaaS world the scenario is very different. I mentioned in my prior posts that I have been/I still am in enterprise software sales (besides SaaS), and have to deal with both of these models. Let’s review this law in greater detail what it means for a SaaS company. In my prior blog entries about Bessemer Top 10 Cloud Computing Laws and the Business Model Canvas, I have opened the financial side of a SaaS vendor, but in this case we will be looking at how the overall revenue recognition is seen in the SaaS world.

Law #9: Mind the GAAP! Cloud accounting is all about matching revenue and costs to consumption…well, except for professional services!

With enterprise software, revenue is recognized at the time of the delivery (like for example with a CD/DVD) and the software vendor can immediately have that sales in the income statement. This is both good and bad for software vendors. The good side of the thing is that large deals can fund further development and some of the money can be funneled back into marketing. The bad thing is that large deals can also put the software sales organization to sleep, almost paralyzing the entire organization. I have been part of this so many times so this statement is based on my own experience. The other negative side of these large deals is that enterprise software sales is very cyclical with long sales cycles: A software company might be going without deals for months and then gets a large deal that kind of saves the entire year. Yet again, I have personal experiences of this as well. In the enterprise software deal, the support/maintenance revenue is typically recognized on monthly basis based on the length of the maintenance contract. So if you have an annual contract, the support/maintenance will be recognized each month for the entire year. In similar manner, services revenue is recognized after delivery of the service and the common billing cycle is either biweekly or on a monthly basis.

Let’s look at the revenue recognition of cloud computing revenue. There are typically two types of revenue streams in a cloud computing: subscription revenue and professional service revenue. The subscription revenue is recognized based on consumption, whereby the SaaS vendor can start recognizing the revenue when the end user organization starts using the software. What is very different in the SaaS world when compared with the enterprise software world is the revenue recognition of professional services. Based on best practices and audits by the top for auditing companies, revenue recognition of professional services should be recognized with the length of the contract, and some recommendations say that even over the lifetime of the customer. The practical amortization time for these types of contracts is 5-6 years if the customer churn is reasonable. Within the GAAP (Generally Accepted Accounting Principles) world, the SaaS vendor should match revenue with the corresponding costs and this might not be the case in this kind of 5-6 year amortization scenario.

Also, there is an exception to any rule in life. In cases where the software company trains the end user client either 3 months before the delivery of the solution or after the renewal date of the contract, this revenue can be considered as it can be said not be tied  or associated with the delivery of the solution. This rule of 3 months seems to have been approved by the top 4 auditing companies as best practices based on the Bessemer blog entry.

The final mention from Bessemer is to exclude deferred revenue from Quick Ratio calculations as this is booked as liability in the balance sheet. Quick Ratio is calculated by dividing total assets with total liabilities. This ratio shows how quickly the company can cover the liabilities with cash or quick assets that can be quickly liquidated.  Another term “Acid test” is when you add up cash or cash equivalent, marketable securities and accounts receivable and divide these with current liabilities you get a number that shows you whether you can cover you current liabilities… when the ratio is 1 or better it is considered to be a feasible ratio. Less than 1, you have more debt that you can currently cover.

This makes sense to me as it is revenue that the company (excluding customer churn) will recognize throughout the lifetime of the contract whereby the liability /deferred revenue gets smaller by being moved to income statement whenever the revenue is recognized. Obviously in high growth cases, the SaaS company deferred revenue should only grow as new contracts are signed. This suggestion is specifically important for companies looking for venture funding to avoid financial covenants. Getting paid from customer in advance is a good thing and should not be seen as liability. Let’s review how this law impacts the Business Model Canvas.

 Summary of our findings in respect to Business Model Canvas

This law has a direct impact on both Cost Structure (CS) and Revenue Streams (RS) as the law has to do with money and how it is recognized. When you review the Business Model Canvas, the two building blocks are side by side to remind us that the costs of running and serving the client needs to be aligned with the revenues that are generated from the end user client. The only big thing in my mind, and slightly surprising, is the need to recognize the revenue from professional services for the entire lifetime (or 5-6 years) of the contract. In the old software licensing world, this type of thinking would be out of question and the invoice for the entire install is expected to be paid and recognized at the very latest when the work has been performed. Not so in the SaaS model.  Some SaaS vendors have made their contracts shorter to be able to get around this issue, but if the entire lifetime of the client is taken as foundation, it really does not matter if the contract is split in my mind.

I wonder how many starting ISVs recognize this and know this rule. Phil Wainewright discusses of this issue in his blog entry  “Auditors backtrack on SaaS revenue recognition” by giving the example of Taleo’s restatement of financials that made auditors nervous in the SaaS field. The Taleo case was widely reported by Reuter as well as other news sources such as Barron.

There is a set of blog entries by Jeffrey Werner of questions that were posted after a web-cast concerning revenue recognition. These five blog entries and topics were as follows:

Blog 1 – Upfront Fees

Blog 2 – Estimated Selling Price

Blog 3 – Monthly User Fees

Blog 4 – Stand-Alone Value for Delivered and Undelivered Items – Part 1

Blog 5 – Stand-Alone Value – Delivered and Undelivered Items  -Part 2

These five blog entries demonstrate extremely well that the area of revenue recognition is not easy and there are lots of possibilities to different interpretation on this issue. Also, based on the information in the blogs, one of the key things that seem to be important is whether the item that has a price tag is needed as part of the SaaS solution delivery. If so, it is considered as part of the revenue recognition rules set for SaaS delivery. If not, then one can always argue that it is a separate item that can be recognized at delivery.  This has also been the case in traditional software delivery. Auditors have always wanted to know if something that was delivered was needed for the software to function properly and in these cases it was about tax laws (could be even state specific in the US) that kicked in some scenarios. What I have learned from the past is to talk to auditors to make sure that you do everything according to the book.

The purpose of this blog entry is to demonstrate that there is still lots of room for best practices and only time will tell how auditors and practitioners will interpret the accounting rules/revenue recognition of different types of revenue in a SaaS delivery.

Law #8 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –Leverage and monetize the data asset

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I am now in the eight law in Bessemer’s Top 10 Computing Laws with an emphasis how to be able to monetize and utilize the data asset that the SaaS vendor is accumulating by users that are generating a wealth of information and all of this information is accessible for the SaaS vendor if the contractual agreement allows the use of this data. 

When reading about this law my memories from my youth crept to my mind when studying in the Swedish School of Economics in Helsinki (Hanken) where each student in the accounting/management accounting class had to analyze public financial statements from Finnish companies as part of the advanced classes. This analysis was then used to compare different companies in the same vertical and to create some base-line standards for analyzing and comparing companies. This analysis gave me a perspective on accounting and how it really works. This learning has helped me throughout my life and especially now as an entrepreneur. The power of cash-flow statements can’t be underestimated which has been a reality for many software vendors the last couple of years.

However, during that time (1984-1989), the data was stored in Lotus Symphony spreadsheets, so most of the analysis and data entry was manual and very labor intensive. Companies at that time were still using green screen terminals and only a few companies started deploying personal desktops, but laptops were still not on the market as far as I remember. The first real PC with MS-DOS that I used was Italian Olivetti with two floppy stations. I can’t believe how far we have come since then.

This law (#8) is a reminder to me of the changes in business models and how cloud can provide new business model opportunities for organizations. Ten years ago, the notion of “data asset use” was very rare and if you had the possibility to accrue information from companies in the same vertical, you had a tremendous asset in your hands. I know a company owner in the US that sold his company for a few millions by having collected financial data for financial institutions over time and then sold the assets to a larger company as part of an exit. Let’s view how this law impacts software businesses and business model canvas overall.

Law #8: Leverage and monetize the data asset

Imagine having access to a massive amount of data that your clients are generating in your cloud application. Image to have access to performance metrics for a given vertical market segment such as banks at large and their performance. Wouldn’t it be valuable for somebody to be able to compare banks with each other from different perspectives and maybe even sell this data to external parties? Imagine being able to service this through Microsoft Dallas service that enables developers and information workers to easily discover, purchase, and manage premium data subscriptions in the Windows Azure platform.  Maybe this collective information serves as benchmark information for other companies in the same vertical and enables these companies to compare how well the perform in their respective business?  The Bessemer blog entry gives examples of this kind of benchmarking by referencing the leading expense management software company Concur where companies in the same peer group can compare for example expense costs such as travel with other companies.

Another successful example is the company Mint.com that used to compete with Intuit Quicken by providing a free SaaS solution for consumers to track expenses automatically. The Mint story is very interesting; it was started by Aaron Patzer, Matt Snider and Poornima Vijayashanker in Mr. Patzer’s apartment. Two years later the company was acquired by Intuit for $170 million. The story is simple and amazing at the same time. The founders felt that it was too difficult to track personal finances online and that people had to spend far too much time in setups and entering data. The founders felt that once the Mint.com is linked to the credit card statements and bank accounts, most of the daily stuff should happen automatically. I found out about this service as part of my own research and decided to test it out. It is as easy as Mint.com claims and today I get updates from the system on regular basis. The business model that Mint had initially was to use the consumer data to propose better credit card deals etc. to generate leads for credit card companies etc. It is obvious that Mint.com became a threat to Intuit so they decided to acquire them. Mint.com success has led Intuit to replace Quicken Online product in favor of Mint.com. Let’s analyze how this law can be viewed from Business Model Canvas perspective.

Summary of our findings in respect to Business Model Canvas

This law (#8 of Bessemer’s Top 10 Computing Laws) can be linked to any of the nine Business Model Canvas building blocks. The success of any SaaS company utilizing data assets effectively will be based on:

  1. How well the company can define its Value Proposition (VP),
  2.  How well the information assets can be linked to a specific Customer Segment (CS)
  3. How the company can generate revenue (Revenue Streams-RS) from these information assets.

This law extends the use of information that the SaaS vendor can utilize and gives a business opportunity for the SaaS vendor. This model has not been possible in the past as the data has typically been secured by the end user client organizations and their data centers.  Companies such as Concur, Mint.com and many others have identified the opportunity to sell information/service instead of selling software and I think this will be the key differentiator in many of the future SaaS innovations.  The time of having lots of features and functions in a software package might be over and people appreciate solutions that are easy to use and do not require lots of training to maneuver.

The SaaS vendor needs to have an understanding of the analytics behind the data in selected Customer Segment (CS) and this relates back to the need to have the right Key Resources (KR) and Key Activities (KA) that are well aligned with the SaaS vendor objectives.

Law #7 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, Support, Support!

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I am now in the seventh law in Bessemer’s Top 10 Computing Laws and law is about the change of how SaaS companies needs to view software. In the past, it was all about delivering a package using CD/DVD and the software was installed and the software vendor typically had no idea how it would be eventually deployed and used. Today, in the SaaS world, the SaaS vendor can potentially have access to everything that the user is doing and this type of intelligence is something that we could only dream of in the past.  Let’s view this seventh law and how it relates to the Business Model Canvas.

Law #7: The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, Support, Support!

The biggest mindset change that software vendors have to make is not to think about software, but to treat the SaaS solution as service to clients. In my blog entry of Bessemer’s Law #5 of building employee software, I concluded that the biggest mistake that software developers can do is to ignore the client and fall in love with the solution from either technology perspective of some other perspective that has nothing to do with the client needs or wants. SaaS solutions are built for end users and the success of the solution will be based on the adoption of the solution. The question that each SaaS vendor needs to pose is how to minimize the customer churn and how to really understand how the software is used?   A good sales person can sell anything for a year, but it is another question whether the customer will continue the use of the solution if it does not find the value for that. A good comparison to this is from my own business intelligence domain.

Throughout the years, business intelligence vendors have sold user seats that have never been used and these software vendors have kept billing for the annual maintenance fees even though these seats are never used. In the new SaaS world, nobody can escape this scenario anymore. If a seat is not being used, the company will not renew the seat for following years. This is where the customer churn kicks in.

In the SaaS world, the software vendor can build in usage statistics of the solution and this information will then be used as foundation for really understanding how the solution is used. In the old enterprise software world, software vendors tried to build similar functions, but as most of these solutions are installed and run from client’s own data center, the software vendor do not have access to the usage data. With a SaaS solution, the vendor is able to see all of the usage patterns such as how many times each user logs into the system and even automate report generation of cases where a user has very low usage pattern. This could be a result of having usage issues with the solution, or even worse, not having any use of the solution. This type of user will then turn into churn statistics when it is time to renew the contract.

In my past, I have built business intelligence software solutions and we used to build different types of tracking mechanisms of software use, but as these solutions were run at client sites, we as software vendor did not benefit from this. The client/customer got intelligence of what report/cube was used and what could be demolish due to non-use. In today’s SaaS world, software vendors can use this information also internally to see how each client/consumer uses the solution and whether some part of the solution stack is getting less usage.

Bessemer’s Cloud Computing Law #7 gives advice for SaaS vendors to be very open and transparent when there is a system outage of the system. My company is running everything from the cloud and sometimes there are outages whether you want it or not. Recently, Quickbooks Online has been down multiple times with an outrage from users in forums and it was also widely reported in the news. The emails that we got from Intuit were apologetic, but did not really give options to the ones that use their Quickbooks Online Payroll service. This is what I received in my email:

“If you normally pay your employees via direct deposit, we have extended the direct deposit deadline for today only, Wednesday, 7/14/2010, until 7 p.m. Pacific time. If you are unable to process your direct deposit payroll by 7 p.m. Pacific time on 7/14/2010, you will need to pay your employees with paper checks in order to pay them on or before Friday. Otherwise, you can process a direct deposit payroll when the system becomes available and your employees will be paid two banking days later.”

When you really think about it, many organizations had to scramble to go back to the regular check payment routine, which is both antiquated and cumbersome. According to one user, 17 hours of not having access to QuickBooks Online was just not acceptable and I do understand that if QuickBooks Online is used to service clients. Even in our case, we had to postpone some invoicing the day when QuickBooks Online was down.

Any software vendor working in the SaaS world has to manage the client relationships in a different manner when compared with the traditional world. In the past, a client that was not satisfied did not have that many options to do anything about it as they had already paid for the solution. In the new SaaS subscription-based world, the software vendor could lose a client easily when compared to on-premise solutions. However, if the client is happy with the solution, moving to something else is not that simple as everything lives in the cloud and moving the data from cloud to either on-premise or another cloud is as easy or difficult as with any changes of solution.

Based on a recent Information Management article, SaaS adoption is increasing and end user organizations are less concerned about security, response time, and service availability according to Gartner. Business and computing models have matured and adoption has become more widespread. A recent press release from IDC state that SaaS Revenue is growing five times faster than traditional packaged software through 2014. What is interesting in the press release is that by 2012, nearly 85% of net-new software firms coming to market will be built around SaaS service composition and delivery. Furthermore, according to IDC, SaaS-derived revenue will account for nearly 26% of net new growth in the software market in 2014.

Metrics in the SaaS world are still evolving as we discussed in my blog entry about Cloud Financials. Besides the more traditional cloud metrics, cloud vendors are constructing efficiency metrics for account management where the Bessemer cloud computing law #7 states that the most favorable metric is the margin renewed in the quarter divided by the costs of those renewals. The overall equation of this is as follows: MRR dollars renewed/grown in the quarter x GM x 12 (to annualize the revenue), divided by all account management costs incurred in the quarter for these renewals.

I am pretty sure that the metrics will evolve for the next few years as more SaaS vendors get exposure to the best practices and it becomes “business as usual”. The next question for me to pose is how this law can be seen in the light of Business Model Canvas from Dr. Osterwalder.

 Summary of our findings in respect to Business Model Canvas

In the SaaS world, software vendors should view the software as service with excellent support. The main criterion for success is about usability of the solution that reflects in the customer churn (Customer Relationship-CR). It will also impact of how appealing the solution is for a possible Channel (C) that would like to market the solution.  With this, we obviously take it for granted that the solution has the right kind of Value Proposition (VP) for the given or selected Customer Segment (CS)

The Channel (C) needs to know why it should be interested, how much it will make money and how the solution will benefit anything else that the channel prospect is doing. The churn impacts the Revenue Streams (RS) of the company, as bad SaaS solution leads to high customer churn and this will eventually be a downward spiral for the SaaS vendor as online forums and other viral social media mechanism will destroy the reputation of the vendor.

The reliability of the solution reflects also how the customer sees the vendor ability to provide service, not only short term, but also long-term. During the past 5 years, I have used a few SaaS-based services to only realize later on that all of the data and work put into the cloud has disappeared, either by the vendor going belly up or other reasons such as the company being sold to somebody else.

A good example of a service that I am no longer that much interested is Jigsaw as they are now part of Salesforce.com and I can forget the dream that I had to have an integrated solution for our Microsoft Dynamics CRM that we use internally. I am sure Salesforce.com won’t be supporting any competitive solutions even if Jigsaw is a subsidiary of Salesforce.com.  The list of CRM partners does not do any good for Microsoft Dynamics partners.

One could also argue that this law #7 (Bessemer’s Top 10 Cloud Laws #7) has an impact on Key Resources (KR) and Key Activities (KA). The reason for this argument is that any SaaS company has to have the right kind of DNA to be able to build software in the SaaS world with the attitude that is different from the more traditional enterprise software sales world. Building software into cloud environment is not the same as traditional on-premise as there are factors that has to be taken into consideration such as latency etc. Whatever your ambitions, do not treat SaaS as business as usual if you currently work for an established software vendor. It is not business as usual, there are many factors that have changed and you have to change with it.

Law #6 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –By definition, your sales prospects are online

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I am now in the sixth law in Bessemer’s Top 10 Computing Laws with an emphasis in identifying the prospects that you are going to sell to. The old-fashioned way of selling software is changing in a fundamental way and this also reflects how you view software channels like I described in my previous blog entry and that reflects to Bessemer’s forth law (Law #4) of forgetting what you have learned of software channels. Let’s look at what this fourth law really means for SaaS companies.

Law #6: By definition, your sales prospects are online – Savvy online marketing is a core competence (sometimes the only one) of every successful Cloud business.

The reality in today’s world is that people are searching for products and services using search engines and making their buying decisions based on not only the information in the Internet, but also how other people are rating your product/service. Ten years ago when we were selling software for hundreds of thousands of dollars’ worth, CIOs and decision makers of the buying process did not necessarily go to the Internet and search for your track record of delivery and other key factors that are part of the decision making. I remember vividly that some our clients called organizations such as IDC, Gartner and Forrester to ask about the quality of our product as the digital footprint of a typical software vendor was very minimal.

This trend towards lead generation using search engine optimization (SEO), viral marketing, search engine marketing (SEM), email marketing are things that B2B marketers have been using for a while and traditional software vendors are only now trying to figure out to leverage it. Bessemer refers to organizations such as IBM, SAP, Oracle and their traditional ways of sales and how smaller challengers have a better opportunity to achieve visibility when compared to the large players. There are lots of good books about how the marketing and PR is changing like David MeerMan Scott and his book The New Rules of Marketing and PR: How to Use News Releases, Blogs, Podcasting, Viral Marketing and Online Media to Reach Buyers Directly.

What is changing is also that your web-site is no longer about your great looking graphics, but more about the content and relevancy to your audience. What really matters is what you have to say on your web-site and what type of action the site gives for the prospects that have an interest in your solution. Does your site let the prospect to take action? Based on some studies, even some SaaS companies are failing to lead the prospect to take action or even have something to act upon. This is amazing to me and one wonders if these companies just do not have the DNA of a SaaS company and therefore rather just execute on the traditional enterprise software sales methods. These companies will not survive in the long run and need to get new people onboard that have the right type of mentality.

Even email marketing is in a flux and during the last couple of years, I have seen people getting upset with email blasts that are not relevant to them and this will result in recipients becoming angry at your brand. Some people just do not get it, especially if your email addresses are not based on opt-in policy. This morning I was cleaning my email box from a person that seems to be sending crap to me every second day about topics that I do not care about. What gives him the right to do it? I have never requested him to send me anything and neither have I opted in to any of his web-sites. I hope he reads this blog entry and maybe shifts his thinking about his email marketing strategy.

Is email marketing dead? Probably not, but it is changing as we speak. Email marketing companies such as Exact Target and Constant Contact are acquiring social media solution providers to enhance their solutions with social aspects. Exact Target has acquired CoTweet and Constant Contact acquired NutshellMail. I personally believe that this is not only necessary, but it has to happen as the traditional email marketing needs to evolve to something that benefits the recipient and  gives  readers the ability to opt-in in a way that they want to such as using Twitter “follow” functionality.

Sales in the SaaS world have to do with getting your brand known in the social media space. That is where you are most likely going to be finding your new leads and that is where you need to convince your leads that your company and your solution/brand is something that they need to be paying attention to. Also, due to the change in revenue model in the software world, SaaS companies can no longer afford expensive inside sales teams like I discussed in my blog entry about sales learning curve and also about the financials in my blog entry of the top 6 financial metrics  in the SaaS world that you have to be paying attention to.

Finally, the new way of marketing and creating awareness for your company gives you a tremendous opportunity even if you are a small player. Large companies just aren’t there yet with their social media strategies and if you are small and nimble, you can really make it big. Your SaaS sales have to be high from get-go, you have to generate leads and the old marketing methods are just too slow, so you might want to adjust to the new world of using social media.

Summary of our findings in respect to Business Model Canvas

Like in my previous blog entries in the Bessemer’s Top 10 Cloud Computing Laws, my objective is to relate this current law to Dr. Osterwalder’s Business Model Canvas.

When reviewing the nine (9) building blocks in the Business Model Canvas, the most obvious impact that the new sales models in the SaaS world has to do with Key Resources (KR), Key Activities (KA), Cost Structure (CS) and Revenue Streams (RS) but also indirectly on Channels (C) and Customer Relationships (CR). Let me explain my logic behind this.

First of all, the company has to look at their own core competences and if the Key Activities (KA) and Key Resources (KR) do not reflect the new world of SaaS and DNA of SaaS (like I stated in my blog entry), the company will not be able to drive leads using the Internet as a vehicle. You can’t externalize social media to outsiders as each individual in the company have to be carrying the message in the cyberspace of the product. The old-fashioned way of “giving the authority to somebody else” is gone and these types of individuals will sooner or later realize that they are out-of-sync from the rest of the world. This might sound very radical, but it is already happening, you might want to look around that see if for yourself.

With the renewed approach to market using social media, it will have an immediate impact on Cost Structure (CS) as some of the more expensive traditional marketing methods such as having a booth at a conference, press, TV and other outbound activities are less appealing and effective for companies and inbound marketing is getting more relevant. It is not to say that SaaS marketing is free as can be seen in the financial results of companies such as Salesforce.com.

With effective sales and marketing online, the company will see an impact on Revenue Streams (RS) as expected, but the point is more about whether the company has really understood that SaaS sales has different impact on the annual financial results than in former world; a deal closed in February looks radically different from earnings perspective than a deal closed on November for the specific financial year. This is something that is hard to understand if you have only been in traditional software business.

When you are successful in driving leads, this will have an impact on your Channels (C) as well as they might expect you to be part of providing leads for them (if it supports your sales model). The Channel (C) will be different in the SaaS world and most probably you will be looking at organizations that provide domain-specific skills to the solution and these types of organizations might not have an interest in the recurring revenue that the solution generates, but more in providing consulting services.

Finally, the Customer Relationship (CR) is the key to your success and if your target segment is known not to be online users, then you have to take this into consideration as well.  However, I would argue that the new generation of users is also changing this landscape where you can’t really ignore any vertical/market from your online sales initiatives. It is just a matter of time when it will happen and you will have to be prepared to cater your Customer Relationship (CR) the way they expect you to do.

Law #4 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas-Forget everything you learned about Software Channels

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I am now in the fourth law in Bessemer’s Top 10 Computing Laws and this has to do with software channels. I have so far addressed in my blog entry that a SaaS vendor needs to really live the life of a SaaS company, be part of the SaaS DNA, I have looked into the financials of a SaaS company and sales operations/sales curve for a SaaS vendor.

In this blog entry, I will be focusing on software channels which in the traditional world have enabled software companies to get scalability to address new markets, new verticals and new geographies.  As with everything that I write about, I want to put context into it and the reference framework from which I am looking at this. First of all, I have run software companies with both direct and indirect (channel) sales. I have built software channels in Europe, US and Latin Americas. I have sold personally large enterprise solutions to end users around the world.

Let’s get to the statements from Bessemer and their view on Software Channels and their applicability in the SaaS world.

Law #4: Forget everything you learned about software channels.

Bessemer views the software channels very black-and-white and I do understand why they are taking that perspective. All of the years that you have built your relationships to major integrators such as IBM, Oracle, HP, Accenture and similar organizations, will not be of use for your SaaS business as the bottom-line is that there is a chunk of revenue that is missing from the SaaS business model when compared with the traditional software business model where the solution is installed either onsite at the client location or in an environment where a third-party organization such as Unisys takes over the IT infrastructure and management of the solution itself.

If we look at the SaaS business from System Integrators perspective (SI) and Independent Software Vendor (ISV) perspective, you have two different worlds. The system integrator lives and dies with the work that they get by customizing solutions for end user clients, tweaking and working with the infrastructure to optimize the performance and all of this is going to be more limited in the SaaS environment. Why is this the case? First of all, the SaaS solution will in most of the cases live in a public PaaS (or IaaS) platform and the SaaS vendor is not letting a system integrator to customize things as they wish, customization will have to be implemented via published application-programming interfaces (APIs) that gives them some flexibility, but not to the extent that traditional enterprise software vendor applications have given them in the past.

The other issue that these system integrators will have is about the customer relationship with the questions about ownership of the customer. Is the ownership of the client run by the ISV, the PaaS platform vendor (such as Windows Azure etc.) or is it the system integrator. What kind of view will the customer have on this? Will they see the ISV as the savior of their issues, or will it be the SI? How about a situation when the ISV files bankruptcy? In the early days, some of the large end-user organizations I sold to wanted to have the source code in escrow. How would you do that in a SaaS vendor scenario? What would the enterprise really be able to do if the software vendor would fold up?

Let’s look at this situation from an ISV (SaaS vendor) perspective. First of all, the ISV needs to become a credible player for people to trust their data into their SaaS solution. Secondly, the SaaS vendor is expected to be able to have direct sales to show success and understanding of the solution. Ten years ago, I got a lesson of this in the US. One successful channel partner told me when I became CEO for the software company to demonstrate our success in selling directly and when I had enough cases, he would then consider representing our solution. The message was very clear from him: show me that your value proposition works and I will be happy to see if I can make some money as well. 

If you think about this type of scenario from a channel perspective that I mentioned above, how would I get this person/company to be interested in selling the SaaS solution? First of all, this person/company expects to get a 30% cut of the revenue as he is a traditional VAR reseller that makes money in selling value-added solutions to his channel. Secondly, he is the one that owns the client relationships that he has been building for years, nurturing them and feeding them with the latest of the greatest. How would that work in the SaaS scenario? Do you think that these types of resellers will be interested in growing a monthly recurring revenue channel for themselves? From a financial perspective, it could be painful as these resellers have a fixed OPEX to manage, telesales people to pay for and office rent to pay for. How would they be able to turn a $30k software licenses commission to a 30% cut on the Committed Monthly Recurring Revenue (CMRR)? That remains to be seen. I am pretty sure there needs to be some extensive financial modeling that has to happen for these VARs.

In the traditional software channel model, you can have many different types of relationships, everything from being a distributor to reseller or even having a practice around the product/solution. The common denominator for all of these relationships is that the customer relationship ownership is by the partner, not the manufacturer of the equipment or the software vendor. In a SaaS setting, this will not be the case anymore as these regular/typical resellers do not have any control of the relationship as the customer will typically get the same level of service directly from the SaaS vendor. I am sure that some of the readers of this blog entry disagree with me on this, but think about it. How much value does an average reseller provide for the delivery of a solution, delivery that will not have any physical elements to it? I am not including the resellers that have built a business practice around the solution and charging for the customization/training of the solution use.

So, what type of resellers/partnerships should a SaaS provider look for? Based on my research, and my discussions with lots of different vendors, SaaS companies should look for what Bessemer calls for “Business Service Channels” that could be accounting companies providing an add-on service for their clients and what is interesting to note here is that these service providers are not that interested in making money in the possible monthly recurring revenue, but more on the services that they can build around it. The Bessemer gives an example of ADP payroll provider, some marketing agencies and accounting firms.  This is an example of emerging, new generation of smaller cloud-based system integrator (SI) companies such as Appirio that provide a solution for integrating systems in a cloud environment. 

Phil Wainewright provides his view on where the channel is going in his blog entry. He sees opportunities for what he calls for “intermediaries”, organizations that take a platform (PaaS, like Window Azure) and add features or extensions to it. These types of applications are then sold on each of the PaaS vendors commercial site where the PaaS vendor gets the benefit of having more people subscribing to the software platform (PaaS) itself. Wainewright gives examples of NetSuite and Force.com combination (SuiteCloud Connect) that enables organizations to build vertical solutions, business processes on the platform itself. Lincoln Murphy gives similar examples in his blog entry Change the (SaaS) Channel Please, it’s a Rerun.

Summary of SaaS world and Business Model Canvas

Based on the experience from many SaaS organizations, a traditional software channel does not necessarily work. That is something that might be hard for many to accept, but that is the reality that software entrepreneurs, venture capitalists etc. are seeing on the marketplace.

Your channel development efforts have to be directed to new types of interest groups that can benefit of your service when providing their own service for clients. Do not expect this type of Channel (C) care about the monies that your solution could bring to them, the SaaS vendor should just care how the Value Proposition (VA) benefits the end user organization.  The Business Model Canvas will be impacted in multiple ways in respect to Channels (C).

First of all, the SaaS vendor has to have a good Customer Relationship (CR) to the end user client or have an effective sales engine that provides leads to be fed to the possible Channel (C). Secondly, the Channel (C) discussion will typically be based on the Customer Segmentation (CS) strategy as I put in my previous blog entries, one of the biggest mistakes a software vendor can do is to try to address the whole world. It will not happen unless you have endless pockets of money to spend and not even Microsoft’s of this world can always do that. As entrepreneurs, we want to believe that we are going to change the world; some do like we have seen in many cases with Skype, etc.

 

 

Law #3 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas –Study the Sales Learning Curve and only Invest behind Success

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This is now the third blog entry of Bessemer’s Cloud Computing Laws and in this I will be focused on sales and sales learning curve as Bessemer puts it in their blog entry. I have had the opportunity to personally sell software around the world for the past 20+ years, hire sales people (and yes, sometimes fire) and also dealt with a myriad of different issues that has to do with sales. However, in this blog post, I will be focusing on SaaS sales and issues related to it.

Law #3: Study the Sales Learning Curve and Only Invest behind Success.

Software companies live and die based on the success of the sales. I learned very early in my career that technology by itself does not make the company fly, even if I as head of development at the time thought would be the case. Sales people did not have to know anything, they were just sales people. Little did I know, until I was put in the driver’s seat in sales, and it wasn’t in my native country, but here in the United States of America? 

I did not have a rolodex, but I was appointed as CEO for a US-subsidiary of an European software company. That is when I was put into huge test and my view on sales and sales people has never been the same. I love the way good sales people run their business and I admire how they close the sales. It is not easy to hire good sales people, and it is even less easy to make them go when you have lost confidence.  I got some advice from native US entrepreneurs how to look at sales people and their performance and I also learned how to build a compensation model that would make it beneficial for both the sales person as well as the company. Well, that is history now; let’s look at what we can learn from sales in the SaaS world.

We learned from my previous blog entry about Besssemer’s 6C’s Financial Laws that Committed Monthly Revenue (CMRR) is what drives the company. The question that you have to ask yourself is what type of recurring revenue can we expect from sales people in the SaaS world. In the more traditional enterprise software world, the measure that I used was that a sales person would have to sell for at least a million dollars to be called a real sales rep. Some did less, some more, but that was roughly the measurement. The sales quota has not changed since those days and the blog entry from Bessemer suggests that within the enterprise sales business model, the CMRR number should be around $80.000-$100.000 which is around $1-1.2 M in annualized revenue.

According to the Bessemer, telesales numbers can be lower, from $60,000 to $70,000 MRR ($720,000-900,000 annualized). Furthermore, Bessemer suggests that until at least 2 of 3 sales people hit these quotas, the SaaS company has hit some type of repeatable business model and are close to hitting $300,000 in CMRR. Also, the blog warns of scaling too quickly with new hires as the new ones might bog down the more senior ones and take down the sales numbers for the whole team. It is a chicken and egg and this is nothing new from the past. When you have a good sales rep, you have a temptation to give this person a promotion to be sales manager to manage the sales team. Sometimes this is the road for failure. I have seen it so many times. I have even seen sales tank completely by hiring incompetent leadership and get the sales team to quit. This is a certain path to destruction.

Bessemer also separate “hunters” from “farmers” and I will get to this topic in later blog entries, but the idea is that the company has a separate set of sales people for new sales from the account management roles with the objective to renew the contract year after year. The CMRR includes churn every year, so the net impact of your new sales will be impacted by existing clients that do not want to renew. This is why some SaaS companies have dedicated sales team that focuses solely on customer service, renewals and up-sells. Also, this of course drives the behavior of the sales people depending on what their focus and sales drivers are. The new account team should be paid on new CMRR with a standard deal structure and incentives if the customer pays with more favorable payment terms.

The final element of Bessemer’s advice is the internationalization of the solution that is a key element for making it big for the SaaS vendor. How big should the company be when entering international markets? The blog entry from Bessemer gives a US-based perspective with the framework of US business. The claim, which I believe is true, that US is much advanced as a market for SaaS solutions and the company can grow tremendously just in the US home market. Bessemer gives some idea of when to break it from the US market and it is when it hits $1M CMRR ($12M Annual Contract Value) which in European terms is a pretty sizable company already. I know much smaller companies that have been able to create international presence, but I am sure that Bessemer looks at this from an investor/venture capital perspective. If you asked entrepreneurs about this, the numbers would be very different.

Bessemer advices US-based SaaS companies to view European markets as a pre-IPO market and growth strategy and Asia as the company has IPO’d. I do disagree with this view or perspective, specifically now with software vendor having access to PaaS, IaaS platforms covering the entire world and having data centers in all major regions (EMEA, Asia, US, Latin Americas). I want to emphasize that Bessemer’s perspective and view is from a venture capital perspective and I am sure that when you want to make it big and have your investment come back sooner rather than later, their approach seems feasible.

When you are an entrepreneur, living with your own pace and agenda, the approach can be different as have been seen in many cases. You do not have to have huge CMRR to get international access and with current social media methods and viral marketing, you can build a growth story that creates users around the world. Bessemer has a good point in their blog entry about cultural and language related issues when deploying multi-language version of a SaaS solution. Large organizations are known to have issues with this, so smaller ISVs will run into same issues regardless from where you are.

So how can SaaS sales be viewed from Business Model Canvas perspective? In my previous blog entry about the financial models and the 6C’s, the CMRR impacts directly the Revenue Streams (RS), but I would be tempted to say that this Law impacts Customer Relationship (CR), Channel (C) and Key Resource (KR). The reasoning behind this is as follows:

  1. The SaaS company’s success is dependent on its ability to understand the DNA of SaaS business and the Key Resources will be the sales people that get this and are able to deliver the Value Proposition (VA) that the solution is claimed to have.
  2. The sales people are also key to the Customer Relationship (CR) at least initially until separate “Farmers” are hired to maintain the customer relationships. Regardless of this, a SaaS company will live or die with the customer relationship as there is a direct connection between CMRR, satisfaction of the use of the solution and the renewal rate (or churn).
  3. SaaS and Channels (C) is a concept that is causing the traditional VAR (value-added reseller) to wonder how they will play in the whole SaaS field. The margins for the SaaS are not what is expected in enterprise license sales and this will cause many VARs to reconsider their future.
  4. Satisfied customer impacts directly Revenue Streams (RS), unhappy customers impact both Revenue Streams (RS) and Cost Structure (CS) and CAC.

 The combination of effective sales, effective product development with leadership team that understands the SaaS DNA is a key for success. One has to remember that venture capitalists are also expected to understand the SaaS business model, and if they don’t, I would not want to be the CEO of that SaaS company.