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June 30th, SaaS Deal Basics: What Needs to Be in Your Software-as-a-Service Customer Agreements, Part I of II
By Gene K. Landy, Esq., Ruberto, Israel & Weiner, P.C., author of The IT/Digital Legal Companion, Syngress, 2008
The current licensing model used by software companies has been in place for over a quarter of a century and by the early 90s had stablized and achieved wide-spread market acceptance. But as more companies move to the SaaS model or incorporate SaaS systems within their product lines, the issue of licensing and terms of service (TOS) arise anew. This article is an overview of Software-as-a-Service (SaaS) customer agreements, with an emphasis on ways that SaaS agreements are different from conventional “on premise” software licensing and provides practical, timely advice on on how software companies can create effective TOS’s that protect both customers and your bottom line.
The SaaS Model is Different
The SaaS business model is different from traditional commercial software licensing. In traditional “on-premise” commercial licensing:Software is delivered and licensed to the customer. Licenses are granted for a term or, more commonly, are granted permanently. License fees are normally paid upfront. Software maintenance is normally sold separately, most commonly on a yearly basis. Software is updated with deliveries of updates and upgrades, which the customer normally has to install. It is the customer’s responsibility to obtain hardware to operate the software as well as the rest of the operating environment, security software, the Internet connection, etc. The data processed by the system is in the customer’s possession and control. more...
June 15th, Five Ways to Improve Your Software Sales Results With Better Quotes and Proposals
Scenario: You’re a busy software sales professional, working for an up-and-coming developer/publisher offering a hot application in the SaaS (Software as a Service) business model. Your company has spent their marketing dollars wisely, and has put world-class customer acquisition processes in place. The company has also really focused on customer retention, with terrific after-sale support and a glowing community of reference able customers.
All is well, except…you have a mountainous backlog of proposals to produce, and existing customers clamoring for quotes to expand their systems. Yes, a CRM system keeps you up to the minute on customer and prospect activity, but it doesn’t help you get your proposals prepared and delivered. Customer configuration options require care and attention, and you’ve got three deployment and payment options for customers to choose from—and every time you revise the proposal for a prospective customer, you’ve got to recalculate those payment options. Your company has thought about ways to automate the process, for example, letting customers create their own quotes—but your product is technical in nature and customers need your help. Besides, there are many up-sell opportunities and options to work through with the customer. Your proposal backlog (total number of proposals requested but not delivered) and average time to quote (the average time it takes to deliver a quote or proposal from request to delivery) are growing daily. You’ve got a great product to sell, but you’ve got competition as well. You’re in the “Quote/Proposal (Q/P) Chasm”, the gulf between well-controlled customer acquisition processes and well-understood customer retention processes. more...
May 31st, Softletter Case Study: Building a SaaS Reseller Channel
In our 2008 SaaS report, 41.2% of respondents reported they were using a reseller channel with another 11.4% stating they planned to build one. The trend is clear—for many SaaS companies, channels will be an important part of their revenue plans. But the current channel structure, in place for decades, is increasingly out of date in the developing SaaS model. To understand what a SaaS reseller channel will look like, we’ve been speaking to different software companies about how they’re building their programs.One of our best conversations was with Adam Ross, VP of Sales and Alliances at Infusionsoft, a CRM firm that started life in a strip mall in Mesa, Arizona. Now located just outside Phoenix, the company has reached over $14m in revenue and received $9m in venture funding from Mohr Davidow. Infusion software targets SMBs with its system and believes channels are key to the company’s future growth.
Adam, why did Infusionsoft make the decision to develop a reseller channel?For scalability purposes. We believe that for the company to achieve its growth and revenue goals, we need to create a reseller channel. more...
May 15th, Social Marketing Today: What Works, Where, and Why
Social marketing is all the rage these days. Twitter. Facebook. MySpace. “Comment sniping” systems. Digg, Technorati, et al. And of course, there are still the old standbys such as blogging, forums, and related systems. Social marketing is hot, hot, hot and many gurus are proclaiming that social techniques and tactics are the wave of the marketing future. We decided to speak with Rajiv Parikh, CEO of Position2, a leading search engine firm that doesn’t overpromise results (Rajiv will addressing using social and search engine marketing as it applies to SaaS firms at our Boston SaaS University seminar in June) on what’s new, what works, what doesn’t, and where you should consider placing your marketing bets and dollars.
Rajiv, at Softletter we tend to break social marketing systems into two basic categories; old and new systems. Blogging, forums, USENET we put in the old column. New systems include the various book marking systems such as Technorati, the social networks including MySpace and Facebook, and “cutting edge” technologies such as Twitter. What do you think?That’s a fair characterization but I’d take USENET out of the mix; USENET is dead in so far as social marketing is concerned.I also want to focus on what primarily differentiates these two classes of social systems.
“Old” systems such as blogging and forums operate on a very open paradigm, with anonymity normally protected and in some cases encouraged. And “old” systems are far from dead; blogs can be effective marketing tools (and yes, I’ve seen Softletter’s research on the topic) and old systems can mutate into new forms such as JuicyCampus (and I strongly urge your readers to avoid such sites like the plague).
April 30th, Avoiding the Shelfware Syndrome
The derisive term “shelfware” first seems to have appeared in the late 90’s during the height of the Internet boom. Shelfware is software that is bought, purchased, and in the most extreme cases, discarded, the process often being accompanied by screams from upper management, wails from IT, desperate gasps from software vendor sales attempting to placate customers and, in some cases, satisfied sighs from attorneys enjoying continued gainful employment during a lawsuit.
We sat down to discuss how software firms can avoid creating shelfware with Chris Dowse, president of Neochange, an IT consulting firm. In conjunction with SandHill, Neochange recently completed a study of software usage in the enterprise after the sale and its implications in the development of shelfware. With 159 companies participating, we wanted to examine the research results and develop insights into how you can avoid creating your own shelfware product line.
Chris, what percentage of software sales turn into shelfware?
Our research is oriented towards enterprise-class sales, so I’ll focus on the numbers in that sector. Our surveys found that fewer than 10% of buyers say their effective usage of their software purchase reaches 70% 12 months after the sale. Nearly two-thirds say their usage levels are under 50%; 16% reported utilization rates under 20%; at that juncture, we think you’re looking at a shelfware scenario more...
April 15th, The Windows Vista Positioning Disaster: Strategies for
Recovery, Part I of III
by Merrill R. (Rick) Chapman, Softletter
In the July 15th, 2007 issue of Softletter I wrote about the Vista positioning fiasco; as events since that article have unfolded, the Windows positioning fiasco has turned the rollout of the product into the most catastrophic marketing failure in Microsoft’s long, and mostly storied, history. At the time I was writing both versions of In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters, I made the statement that the chief reason for Microsoft’s success over the years was that the company had avoided making major stupid mistakes, in sharp contrast with most of its competitors. With Vista, this record of avoiding stupidity comes to an end. The marketing campaign supporting Vista was profoundly stupid and repeated easily avoidable mistakes made by MicroPro, Borland, Novell, and others.
Before going further, it’s only fair to address the technical objections surrounding Vista. In the main, these have been solved, and before much longer Vista will be a solid, useful operating system (though no compelling reason has ever been offered by Microsoft for using it in lieu of XP). But no one cares. Vista is massively tarnished and while many people are using it, in the main it’s because they have no choice. Using your monopoly position in a market to force feed people something they don’t want is not good marketing. And while Microsoft can survive one Vista-class mistake, even it can’t afford to make two of them.
Before we contine with this exercise, it’s important to accept that none of the options we’ll be discussing will easy to execute and pay for. Because a positioning failure impacts every aspect of a company’s sales and marketing operations, repairing or ameliorating the fallout is always ugly, painful, slow, and unsatisfactory in many respects. It’s why a company should avoid making them in the first place. Let’s work through Microsoft’s different options and discuss the pros and cons of each.more...
March 31st, Valuing Options While Running the Compliance Gauntlet, Part II of II
It is important to note again the differences between FASB 123R and IRC Section 409A as they appear to be similar but approach the valuation of options and securities from different perspectives. FASB 123R concerns stock option valuations for financial reporting purposes and is measured from the issuing company’s perspective. The objective is, in the case of privately-owned companies, to place a value on stock options in order to treat its value as an expense on an income statement.
IRC 409A is concerned with the issuance of stock based compensation—either in the form of stock options or other types of securities—by either publicly-owned or privately-owned firms. The objective is to ensure that the securities being granted, whether in the form of stock options or stock, are granted at fair market value. If they’re not, the individuals receiving the stocks may be socked with taxes, interest and penalties.
Under either regimen, the value of the underlying security—the common stock—is critical in determining the value of a stock option. For publicly-owned companies, obtaining the price of the common (share) is as easy as opening the Wall Street Journal (or going online). Privately-owned companies do not enjoy the same luxury.more...
March 15th, Valuing Options While Running the Compliance Gauntlet, Part I of II
by Edward E. Pratesi, CPA, Brentmore Advisors, LLC
Value, as we know is in the “eyes of the beholder.” Certainly we know that transaction value is important in “pricing” rounds of venture capital financing and is critical in determining exit multiples during an IPO or M&A event. But distinctions should be drawn between “transaction” oriented valuations and what is often called “compliance” based valuation. Compliance-based valuation refers to a business valuation assigned to such assets as:
The value of stock options or stock based awards issued by either publicly-traded or privately-held companies (FASB 123R, IRC Sec. 409A, SEC “Cheap Stock” review).
The allocation of the purchase price and determination of goodwill in the context of a business combination (FASB 141R).
The testing for impairment of goodwill acquired in a business combination (FASB 142).
Both publicly traded and privately traded companies are impacted by these compliance and reporting requirements. For financial reporting purposes (GAAP accounting), the Financial Accounting Standards Board (FASB) has promulgated reporting standards under 123R, 141R, 142 and 157 – which defines the concept of “fair value” for financial reporting purposes. The Internal Revenue Service, with Code Section 409A and its proposed regulations, impact any firm considering stock-based compensation. And finally the Securities and Exchange Commission (SEC) encourages adherence to the standards promulgated by the FASB and provides oversight on the valuation and issuance of stock-based compensation and stock options.
The cost of being out of compliance with one or more of the above rule making bodies can result in additional taxes, penalties and interest under IRS rules to a possible restatement of financial statements for additional compensation expense and possibly other sanctions by the SEC upon an IPO event.more...
February 29th, Converting From a Licensed to a Subscription Model
by Javier Rojas, Kenet Partners
The market for SaaS has gone mainstream. Corporations are increasingly open to buying software in this way. As a result, revenues are growing rapidly for the right sort of application vendor in virtually every segment. Aggregate turnover for stand-alone public SaaS companies has reached nearly $750 million annually. What is more, there are significant financial incentives for entrepreneurs to shift to a SaaS model. The public equity markets are placing a high premium on SaaS vendors, with market values averaging 5x forward revenues. A company with expected revenues of $50 million in 2007 and a median growth rate may well command an IPO or trade sale valuation of $250 million or better.
As a result of this dramatic shift, private investors are focusing on promising SaaS vendors and are highly selective regarding license software companies in which they are willing to invest. In both the private and the public markets, SaaS companies are being valued at a premium because of the visibility afforded by the recurring revenue model, the low marginal cost afforded by the multi-tenancy delivery model, and the reduced cost of selling on-demand solutions.more...
February 15th, Open Source and the SaaS Development Connection
In our last issue of Softletter we published research from our recent SaaS survey indicating that SaaS software firms, particularly smaller ones, were turning to Open Source to build their products. We were curious to discover more about this trend and spoke to Wayne Hom, CTO of Augmentum, a major outsourcer and development house focusing on resources from China. Augmentum recently finished a major development effort for Etology, a SaaS-based firm that creates a virtual ad marketplace for niche publications (such as Softletter).
Wayne, our recent Softletter SaaS survey indicated that almost 50% of SaaS companies under $1M in revenue were basing their products on Open Source software. What is your take on this trend?
Open Source can definitely assist a startup in getting to market faster. With SaaS, time to market and reliable delivery of services is key because of the extended ramp up to profitability.
Where Open Source truly shines is in its ability to function as a community-driven store of components that can drive a new product’s underlying architecture. In this sense, Open Source replicates, but on a non-proprietary scale, the platforms being assembled by firms such as Salesforce.com and Netsuite. A new company looking to get up and running can rummage through a vast array of Open Source projects and often find valuable resources that can substantially speed their initial development efforts.more...
January 30th, Gaming Innovation
Readers of Softletter know that we’re fans of business simulations as training tools. Alas, few companies take our advice; encouraging people to play games during work just doesn’t fit most corporate zeitgeists. But then most companies haven’t met Spigit. Spigit is a fascinating new simulation system that combines social networking, communities, reputation ranking, and the monetization of participation in the aforementioned into a coherent whole. We spoke with Paul Pluschkell, CEO of Spigit, to discuss the system and it’s purpose.
How do you define Spigit?
We call it social productivity software. Spigit is designed to allow companies to unlock internal productivity and innovation. Web 2.0 technology has generated a revolution in the ability of people to communicate within their immediate circle. Sites such as LinkedIn, Facebook, MySpace, Jive, etc., are all good examples of this.
But one of the problems with social sites is that they don’t really work well in assisting people to work with quality contacts outside your immediate circle. Again, take a look at LinkedIn and MySpace, for example. Both of these systems encourage you to build networks of “contacts” or friends but the truth is you spend very little time interacting with your virtual “buddies.” more...
January 15th, The 2007 Codies: Views and Observations
Since 2004 I’ve been a Codie Awards judge (technically, it’s not “Codies” though everyone pronounces it that way), a job which consists of sitting through twenty to thirty product demonstrations once a year and evaluating them for a Codie award (the name is derived from “code”). The Codie Awards are the software industry’s equivalent of an Oscar, and winning one does provide a definite kick to a company’s marketing efforts (though how definite is hard to quantify. The effectiveness of Codie participation will be part of our upcoming marketing effectiveness survey). Codie judges are not paid for their labors (sigh) and we do not determine the final winners of the awards, though our votes determine who will move on to the finals and also comprise 50% of the final tally that picks the winners more...
December 31st, SaaS “Banks”: The Right Solution to Funding Your SaaS Startup?
SaaS is hot and SaaS is growing and many companies are starting new SaaS companies but there’s one big snake in the SaaS paradise. That snake is cash and cash flow because SaaS can also be expensive (to start). Yes, we’ve talked to B2C and even some B2B companies that tell us SaaS is cheap if you want to reach “sale one” quickly. You can rent infrastructure with little delay. In some highly targeted application areas, we’ve seen companies grab some code from here, some widgets from there, do a quick mashup and voila! Instant application. Then buy some Google keywords, run a quick E-mail campaign, and you’ve got customers!
But then you have to scale your business and the picture changes. To implement a multi-tenanted data infrastructure requires some real programming and a serious development team. SaaS customers require white glove support (even your small ones, who won’t stand for being treated like second class citizens) and this by itself can quickly choke your financial growth (we’re talking to several SaaS companies who are facing just this dilemma).
And unlike licensed software, in most cases you’re not going to be able to rely on that big $1m dollar deal to bail you out; SaaS in most cases grows organically over time, but in the meantime you’ve got bills to pay. To discuss this dilemma in greater detail and discuss your options, we talked to Jeff Mills of SaaS Capital. Jeff launched SaaS Capital in 2007 and prior to that was a partner at Blue Chip Venture Company where he focused on investing in early stage software companies, many of them ASP/SaaS plays more...
Things are changing rapidly in the software industry, as our recent SaaS and upcoming virtualization surveys are demonstrating. SaaS in particular is having an immediate impact on the role of product managers (PMs). We recently interviewed half a dozen PMs at various SaaS-based companies, all competing in different market sectors, to get their take on how this model impacts their jobs both strategically and on a day-to-day basis. These are some of the highlights of our talks.
The Latest in Search Engine and AdWords Shenanigans, Part II of III
Most webmasters have become aware of “reciprocal link” programs, automatic importunings sent to you via E-mail offering to exchange links with websites that may, or may not be, relevant to your market. Google and the other major search engines formerly paid fairly high attention to these forms of links. But recent changes in the search algorithms are deprecating their value.
Despite the lack of clear regulations and inadequate transparency, we continue to observe rising deal values in the Asian M&A markets, with overall numbers reaching $360B. The anticipation of lucrative growth opportunities seems to outweigh the perceived risk despite expectations of higher interest rates that will increase borrowing costs and put pressure on capital and consumer spending. Nevertheless, Asian companies are targets of acquirers desiring access to the soon-to-be world’s largest economies.
It’s no secret that software is a product where list price is usually a myth; discounts, bundling deals, and short-term promotions have always been a key part of the standard marketer’s toolkit.
The Case for E-Mail Newsletters
The best way to build opt-in prospect lists and stronger customer relationships is by creating an e-mail newsletter.
Service Marketing: The Relationship Factor
As software companies shift their focus from products to services, service marketers will need new strategies for customer acquisition and retention.
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