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With so much uncertainty and emphasis on the economy at this time, it is no surprise that most of the “On-Demand” articles I’m seeing right now are about either the reaction of customers – SaaS adopters – or SaaS startups and vendors to the market. Jeff Kaplan wrote about it from an industry perspective this morning on Seeking Alpha. One of his key conclusions was:

“…many of the SaaS, cloud computing and managed service companies who were hoping to capitalize on the current crisis by increasing their sales and marketing efforts to promote their business benefits in a down economy are being forced to go slow or even cut back their spending instead. Many of these on-demand service companies are also facing longer sales cycles as customers delay their purchase decisions and demand more information about the providers’ operations and financial status as a part of their due diligence process.”

The simple fact is prospective clients are holding back on making decisions during this uncertain period. That in turn is putting plans on hold for many On-Demand vendors. Since that is a big part of our market – we’re seeing it too. However, there is another side to all of this – I’ve seen many write-ups recommending that millions of dollars in marketing are required for a new SaaS product. in point of fact, we have customers and friends that are succeeding for far less. How? Their apps are built on a flexible platform to a specific vertical market and they know the addressable portion of that market very well. When the economy turns, they will be well positioned to expand horizontally. As Joel York of Chaotic Flow wrote in his guest post on SaaSBlogs, “SaaS Business Profitability – Build for the long tail and get the rest for free (almost)” This paragraph says it well:

“Build for the long tail first.

If you create your business around the product vision of profitably servicing the lowest revenue customer, then you will have no problem servicing higher revenue customers. Once you have your basic cost structure in line, it is easy to add advanced product capabilities and services to move upstream profitably. However, it is virtually impossible to move downstream once are locked into a high-touch, high-cost operational model.”

Trying to build either a “Swiss Army Knife” that is full of features so it will solve every problem or the solution that the largest five players in the market need is likely to be an exercise in failure from the start. Either the number of features will dictate that the development cost and therefore the subscription cost will be high or the solution will be so specific that very few prospects will find the product appealing. And – while we’re at it – the features that are eventually built into the product for the higher value customers don’t have to be available to everyone or even available as part of a subscription. They could be transaction-based or just available to subscribers in a certain class (and different subscription structure).

So – there are two ways to survive as a SaaS ISV:

• Build to the long tail, serve the lowest revenue customer first. Build lean on a flexible platform that allows you to add features and new subscription models as you grow.
• Know your market (long tail again). Know the addressable portion and market to them effectively. Don’t try to “take over the world” from the start.

But, here is perhaps the most important issue – SERVICE. In SaaS and the on-demand model, customer retention is the key to survival. Gaining new customers has a cost no matter how automated your “onramp” may be. Retaining existing customers means understanding their needs, their processes and most of all being there (reliability) when needed both as an application and a customer support group. As easy as it is to adopt an on-demand application – it is even easier to drop. There is no software to uninstall, no hardware to dispose of, no resources to lay off, and no license to renegotiate. Just hang up. This article on ZDNet by Archie Black of SPS Commerce says it well.

When we’re all back counting our opportunities and smiling, the companies who have survived this downturn will have mastered customer service and the art of the long tail in ways startups can’t imagine. On the flip side, consider enterprise software vendors who have stalled and are trying to catch up in this market like SAP. They are seeing their market erode on two fronts – adoptions are slowing and existing customers are leaking away or reconsidering their expensive licensed software. Not Pretty.

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