When I wrote the recent article “SaaS: 10 Trends for 2010” I used the phrase “Best Case SaaS.” I realized from feedback and some thinking afterward though that many people don’t share my vision of what it is.

What I was trying to say is there really is a path to success for SaaS products through the thicket of options out there.  But since we don’t all share an understanding of all the options – that becomes pretty nebulous.  We’ve written about the 10 Ways to Fail at SaaS – What about Success?

Whether you call it “best practices,” “optimum implementation,” or best case – to have a discussion of what it takes to field a successful product we need to have a common understanding of SaaS itself. One of the people who has been pretty clear about a vision has been Phil Wainewright – but there are several others who are advocating for various aspects. My concern is a lot of them tend to be involved in the technical side of SaaS and not a straight- forward business discussion.  Of course, it takes an understanding of technology to bring a SaaS product to market, but in truth, you can hire that expertise if you have a clear business strategy to back it up.

Before I list the six points I have outlined – let’s get our definition clear.  Software-as-a-Service (SaaS) is not as simple as, “A application delivered over the Internet on a subscription basis.” That definition is what most people think, but in truth it is far to limiting by itself. If you want to keep it simple, you could just say, “an online service” but that might be a little broad. To cover both sides of the fence, vendor and user, I’ve been using, “an application delivered across a network to a client in a pay for service model.” On reflection – even that definition has its faults.

The point of this little exercise in definitions is that we need to realize that what we once called “Business-to-Business (B2B or B-to-B)” or even the slightly more exotic sounding “B2B2C” would be called SaaS today.  Does that mean Priceline is a SaaS product? Well – Yes! The simple end-user travel services they offer are monetized on a transaction basis, but we should also understand that behind that stands an even more important service disposing of excess inventory for the hospitality and travel industry. Somewhere in the middle is an advertising platform that allows the “inventory customers” sell through Priceline directly. Does Priceline care which service you use? Not really, they make money from all sides of the transaction and with any service you select. It truly is a Long Tail offering in every way.  The same could be said of the Amazon platform only more so.

So – really we could just say SaaS is “an online service” or “service automation delivered in a pay for service model” and be accurate? When we do that we begin to realize there is a whole field of service companies that use applications to automate and deliver aspects of their services – but aren’t usually considered as “SaaS companies.”

With that in mind, let’s go forward and look at “Best Case, Successful SaaS.” The points build on each other – so follow along through them and it will make more sense.

6 Points for Successful SaaS

1. Expertise that can be sold to a reasonably large market segment in an online delivery model and can be scaled to meet the market potential over time.

This is of course the “reason for being” for SaaS.  Online services are sold on a “pay as you go model.” No matter how you look at it, if you don’t have a target market large enough to give you a positive return on investment in a reasonable period of time, you aren’t going to be successful in a SaaS business model. In a vertical, this means offering a service that is attractive to at least second and third tier markets. It could also mean “tagging along” with more general offerings that give your service more weight in an “ecosystem” model. Regardless, you cannot ignore the simple economics of online services. You cannot afford to run out of cash before you reach a positive cash flow. That means development has to be planned and controlled to yield just enough of a service to sell successfully as soon as possible. It means that you must have a understanding of SaaS Metrics and the critical Customer Lifetime Value Ratio (CLV). It means you need to have a “proof of market” investigation as a part of product planning and (for heaven’s sake!) development. It means you have to understand (and monetize) the value your end-users perceive. It means your online service must be planned to evolve after release (see point #2).

Now the second part of our first point is what brings up the application model of SaaS. To scale a service economically, it has to be automated. When you get right down to it – SaaS is service automation! We’ve been doing that for years – the most significant difference is that now the Internet offers a delivery vehicle that is pervasive and universally accepted. So – if you’re really going to deliver a service online, plan to automate your own business operations from day one or you won’t scale with enough efficiency to reach positive cash flow in time. You might be able to onboard your first 100 customers manually – but if your market plan says you need to take on 1,000 customers with 20 seats each in your first year – your operational costs will quickly eat your cash reserves – IF you are able to handle the work that involves. (See point #5).

2. A strategic roadmap that allows the product to be brought to market early in the design cycle and to adapt to user and market feedback.

Taking the first point to heart means really understanding you can’t do everything and you shouldn’t if you want to be successful. You need to have a plan, a roadmap. You need to provide a valuable service from day one the market will pay for, but you also need to have a strategic plan for where your service is going over time.  Within that plan, you need to be flexible (see point #3) and responsive to user feedback (see point #4) and market forces.

Bringing the product to market early also means not taking on development of features that don’t support the direct value to end-users. As mentioned in point #1 – you need to automate your service – but do you really need to build all your operational automation (see point #5) to bring a product to market? No. There are many operational services you can leverage to lower your development complexity (risk), time to market and total development cost.  The general rule of thumb is you will save as much as 60% of your development effort and about 40% of your total costs before launch. The services you use become part of your overhead and need to be part of your metrics. Can you develop them into your service at a later date when the cost is justified by growth? If you take point #3 into account – yes.

3. An extensible, service-oriented technical architecture that will support the expected growth and change over the long term, economically.

Before anyone calls me on it – the last word in this point covers a lot of sins that have been visited on the SaaS business model. Let’s be straight-forward. We’re interested in SaaS because we want to MAKE MONEY. If we want to do that we have to be able to operate, deliver and maintain our application economically and reliably over the long run. That means we need a multi-tenant database structure. I don’t know any other way to say it. You cannot scale on individual instances for each customer or maintain them over time and make money.

It doesn’t mean however we have one big spinning top that runs everything forever.  As your service grows, you will use several strategies to extend your application over multiple instances, and to balance your service among several applications perhaps. Do you have the idea that Amazon is one big application? Of course not. Your service might present one “interface” for users – but that doesn’t mean it is just one application. Architecturally, that is just the “presentation layer.” We have to have an understanding of the technical strategies that allow online services to scale, embed other services, extend our services outside the application, and change our service without extensive rewrites over time while continuing to make a profit.

With that understanding, we can plan our roadmap to help us decide the battles we need to take on and when. Do we need to buy infrastructure if we can rent it? Not if the market price, availability and reliability meets our needs. Do we need to build a pricing and settlement system to monetize our service? Not if there is one available at a price that can be incrementally applied as we scale and with the level of maturity we need.  Can we eliminate some maintenance concerns with virtualization? Yes – when it makes business sense – if we have a properly architected application that is built for the online environment.

What about “lock in?” they ask. There are two things to consider: #1 – Can you afford to spend thousands of extra dollars over some extended period of time before you put your service in the water, take on customers and begin making money?  For most of us the answer is no.  #2 – If your application is properly architected and you have developed a roadmap with proper risk avoidance, the services and platforms you use are tools you use to reach your maket sooner and with less up-front investment. Do you want to buy that store on the mall or rent it? If you rent – can buy or build when you have a proven market? In most cases – yes.

All this implies you or your team has technical background in online services. But if you are a entrepreneur or service company without a strong technical team – can you still survive in the SaaS world? Yes. There are companies with services that will fill that void – (shameless plug for the people who bring you this blog) Hello….

4. Customer and user collaboration tools embedded in the service and the business operations that surround it.

If you absorbed the last three points – you should have gotten one thing clearly: Release 1.0 day is not the end of the development cycle for online services. Because of Google, SalesForce, Amazon, and service portals like FedEx operates, we all expect, even require, online services to evolve. It should be no surprise that online services need to evolve dynamically to meet customer needs and stay ahead of the market. The question is how?

Just like nearly everything else in online services, the answer comes with some level of automation. Inside the application, monitoring must be embedded to help evaluate feature use in a user context. We need to know if user admins are able to use the tools they have effectively. We need to know what percent of their day our line of business users spend in the application and how often they use it to complete “high value tasks.” With that information as a baseline, we can evaluate the impact of new features, improved help, better support strategies. Without it – we’re clueless and we might as well be selling licensed software to silos behind firewalls.

To leverage our delivery platform even more we need to embed direct user engagement with blogs, forums and community tools like UserVoice and Get Satisfaction.  These are services you subscribe to (point #3) not build. These are not the endpoint for user engagement however, they are just the tools. As tools, they are used by product management, support, sales and marketing to help guide service development, to retain customers, up sell and grow best practice communities.  What you should be beginning to realize is this really means a successful online service needs to rethink the timeworn model of “key stakeholder engagement” and get directly to the end user. To do that the business organization behind the service needs to be aligned to leverage the tools and integrate what they yield into decisions. (Enter points #5 & 6).

5. Integrated business operations for the service itself embedded in the same delivery model used to deliver to end-users.

Once again – SaaS products are classic service automation. If you are going to sell a service – if you are going to build an application to deliver your services – shouldn’t you also automate the pricing, settlement, onboarding, user management and all the other operational aspects of your business directly in the application itself?

This is a point that seems to have eluded many service companies and ISVs with licensed products. You cannot scale to reach profit in online services with manual or loosely connected internal business processes. SaaS is all about making a profit from volume.  But, as point #2 cautions, you cannot build all the operational aspects of your service directly into the application without placing considerable risk on your costs, application complexity and time to market. If you have planned your product with the architecture discussed in point #3, you can leverage available services that will provide these critical aspects of business operations for you and embed them in the product platform itself. This gives you the best of both worlds – fully integrated business operations using the data and infrastructure you already have online and a cost that is applied incrementally based on use.

6. Agile business philosophy embodied in every aspect of product development, operations and services.

You nearly have it – successful SaaS is all about service automation and dynamic business. It delivers what we need, when we need it, at a cost that is measured by use on every side of the platform. That means you and your customer alike are benefiting from the investment in the application and involved in its continued success intimately.

To handle the continued development and change involved in SaaS, most technical teams use Agile methodologies. To feed development and manage the product roadmap then, we also need to consider an organizational alignment with agile philosophy. When we really consider the organizational impact of being an online service, we start to understand there is really no option. To be successful at SaaS, we need to be an agile business top to botttom.

This is a lot to absorb. It is a different way of doing business. I don’t want to underplay the significance of any one of these six points. We at Scio made a strategic decision last month – we’re alining our services to deliver best case SaaS to our product customers and nothing else.  To help people put this into their own context, we’re giving a workshop on January 28th in Dallas as part of SaaS University. I strongly encourage you to join us if you have any interest in developing an online service in the coming year.

So – what is your take? Did this list suprise you? I hope not – but I’d love to hear your point of view.

People say that marketing for “cloud services” are really over the top right now – selling a lot more promise than can be delivered. If that’s true, social media is somewhere out in the stratosphere of hype – pushed into orbit by leaders like Twitter and Facebook - I’ve heard many people say if they were trying to avoid reading yet another article on the wonders of connecting to “communities” on the web.

If that’s the case for you – I hope you’ll set your prejudice aside and listen to our podcast this month on Haut Tech Conversations. You can download the show and listen to it at your leisure. Our guest was Jonathan Hyland, the Client Relationship Director for iCIMS, a leading SaaS provider of “Talent Management Systems.” Jonathan is deep in the trenches of the user community at iCIMS because he is responsible for managing the client renewal pipeline, user satisfaction, user advocacy, and maintaining visibility of the value proposition their services deliver.

I enjoyed this conversation because social media is still a widely misunderstood subject among SaaS and Cloud Service providers. Many see everything social as an unnecessary and noisy “distraction” that is a waste of resources and time. I understand their point of view because if they come from traditional software marketing, support, and sales environment,  they are part of a legacy that rarely focused on end-users or tried to foster communications among them. And if you’ve ever tried to sip from the Twitter fire hose, you can probably understand their discomfort with jumping on the band wagon.

We covered the many sides of communities in SaaS including:

• Inbound Marketing – Getting found by vertical and best practice communities while building up a presence for your brand and the services it provides.
• Marketing to the Converted – Retaining subscription renewals, up-selling, and evangelizing your existing end-users and the key stakeholders that drive client adoption.
• Product Management – The balancing act that comes from involving end-users in driving product development without crossing into crowd-sourcing and losing your strategic direction.
• Support - Leveraging the community to provide best practices and support while continuing to be strongly involved in providing assistance and guidance.

And finally – how a community relations director can keep from looking like a product shill, serve user needs, retain subscriptions keep the sales funnel full and have time to take off for vacation in a 24/7 product world.

I think the take away from this conversation was very interesting and I don’t want to spoil it for you – but we found that “being social” is a lot more hands-on and face-to-face than you might think. It really is still true you need to be balanced between social tools and more traditional face to face approaches than you might think.

Joining Jonathan on our panel was Jessie Kliza, the Business Development Director for Apprenda and Peter Cohen of SaaS Marketing Strategy Advisors, who also happens to be one of our fraternity of Haut Tech Irregulars.

Our Special Guest -

Jonathan Hyland, M.A., PHR – Client Relationship Director at iCIMS. Jonathan has a background in Industrial and Organizational Psychology, graduated with honors from Monmouth and finished his graduate work at Hofstra University. He started as an intern at Questus but moved up quickly when he came to iCIMS. He now carries responsibility for managing the client renewal pipeline and upsell opportunities, ensuring client satisfaction with internal advocacy, and the development of marketing materials covering the value proposition of the  iCIMS platform.  In that role, he works with user communities at all levels for iCIMS. You can find Jonathan most days on Twitter and read some of his thoughts on his jaHRd blog.

Our Panel –

Jesse Kliza – Director of Marketing at Apprenda, the creators of SaaSGrid, a distributed SaaS platform that eliminates the difficulties of building and delivering Software as a Service.  Prior to joining Apprenda, Jesse was Community Evangelist and Product Manager at SaaS ISV, Autotask.  Among Jesse’s many contributions while at Autotask, he was responsible for the creation and oversight of the Autotask Community  – which won a coveted ITSMA Marketing Excellence award in 2008. Jessie can be found on SaaSBlogs, Appenda’s best practice blog for the SaaS community and his Twitter feed.

For those who are not aware of SaaSGrid, it is a service that greatly reduces the barrier to entry for SaaS by overcoming significant technical hurdles like multi-tenancy and grid scalability, while at the same time providing “out of the box” application services like metering and monetization, billing and subscriber management, and much more. Scio is a Premier Development and Implementation Partner for SaaSGrid.

Peter Cohen - Peter is the founder and managing partner of
SaaS Marketing Strategy Advisors. His firm provides expert guidance to help companies effectively market and sell software-as-a-service (SaaS) solutions to enterprises. The firm’s clients includes several large, well-established clients, looking to enhance their SaaS marketing practices, as well as smaller companies that need guidance in launching a new SaaS solution to the market.

Peter has more than 25 years’ experience developing and implementing successful marketing strategies for technology companies, including Computervision, Lotus Development, IBM, and Authoria. Peter has spoken on the topic of SaaS Marketing for the Massachusetts Technology Leadership Council, and written for widely-distributed publications including MarketingProfs. He publishes a monthly newsletter and a blog, both entitled “Practical Advice on SaaS Marketing.”

So – you can download the show,  you can subscribe to our feed on iTunes or use the widget below. And if you would like to comment here or catch me on Twitter – we’re always interested in extending the conversation.

In Part 1 of this list we covered the first five points – so if you haven’t read that already, I encourage you to go and read that first. For everyone else – here’s the remaining five points in my hit parade:

6. Plan a yearly release cycle in conjunction with industry trade shows.

For marketing, product managers and developers with any experience in the software industry – this is a natural tendency. For the past 30 years, release schedules have rode the waves of industry events like clockwork. Because of the close association with end-users, a subscription renewal cycle which is frequently 30 days, and the “standards” set by industry leaders like Salesforce, Amazon, and Google – SaaS users expect a steady drip of improvements that have no set schedule. Waiting for some arbitrary “release date” is unnecessary and counterproductive. If the application is properly maintained and architected, the update will take place without any disruption to service.

Unlike upgrades to locally maintained applications – where IT departments had to schedule and plan for application upgrades and possible failures – those issues are now considered to be the domain of the service vendor. It has been outsourced – this is a core part of the service clients are paying for. Frankly – end users don’t care how it is done as long as there is no significant business disruption. Instead they are delighted to find a new feature that solves one of their problems – assuming all parts of the SaaS operation are meshed and working properly. The steady drip of improvement builds user loyalty and increases application “stickiness.”

7. Provide customized versions and features for specific customers.

In software development, this is known as “forking” your development or branching to produce a different, but concurrent, version of an application. Developers try to avoid it like the plague because it greatly increases risk – later changes may not be compatible with the customization done for a specific instance. In traditional installed software, with long release cycles, it was often done by system integrators or vendor professional services. It is an expensive practice that necessarily limits the ability of the customer installation to take the next version. So – they “sandbox” new versions and thoroughly test them before deployment. This may put them several months behind the release schedule of new versions, but it has always been considered a necessary evil in enterprise software deployment.

In SaaS, the tactical reasons for allowing individual instances and customer specific customization become operational nightmares. Now the steady flow of upgrades (point 6) becomes a significant cost issue for service maintenance. It requires more resources, planning, and risk. With the narrow margin of most SaaS operations, it can quickly become an issue that impacts reliability and profitability.

Proper SaaS product management provides two ways to get around this potential bump in the road:

• SaaS applications are architected to be configurable (rather than one-off customizations) to meet the demands of their market. Available configurations are consistent across the application and limited (if at all) only by feature bundling and pricing. Configurations are tested as a part of the normal development cycle without any special conditions. If a new customer requires a new element in configuration, product development evaluates the market and development effort required and makes a decision at the strategic level as to when and if the new configuration might be available. When it is completed – it is available to all clients and part of the standard application.
• If the customization would be to enable integration with other applications in the client portfolio – this is handled at the API level and possibly by external services (like Boomi) that can transform data for specific purposes. This separates the client side needs from the application and allows them to be “loosely coupled” instead of tightly integrated. Product development has to insure that the API remains consistent or at least clients with API integration are notified before critical changes – but beyond that – the service is available to all users consistently – not a limited few who have special needs that have to be evaluated individually.

8. Start with a free version to test the market.

This has been a common mistake by SaaS vendors – led by the many general consumer services available from companies like Google. Few vendors have the income of a Google and advertising-led income is really only possible for the most successful consumer applications.

Let’s say it clearly - The initial assumption of worth is equal to what you charge. If you charge nothing, you will get a lot of drive-by users who have no interest beyond trying to see what the service is all about. Taking input from free “hanger-ons” that have no intention of becoming paid subscribers is very dangerous. Where they want to lead you has nothing to do with profit and user retention at the subscribed end of the market.

That doesn’t mean a 30 day free trial is not a great way to onboard users initially. But – there still has to be a limitation and a stated worth. Users may decide it isn’t worth the price after trying for a few days. They will allow their test subscription to lapse and they will drop off. The rate of conversion from trial to subscribed becomes a clear indicator of the effectiveness of marketing (funnel formation) and product development (trial conversion and subscriber retention). It also doesn’t mean that “Freemium” packages can’t work – where the basic application is free but key services have a cost.

Pricing is a delicate dance between value received and money paid. In service offerings, the best case is always to provide more perceived value than the service costs. At worst, they can be roughly equal – but if they are out of balance to the cost side, subscriber retention will suffer greatly.

9. Build the richest, most complex offering for day one.

This approach is symptomatic of technical marketing and traditional software sales. For years, applications have been sold as technology with comparisons of feature lists. So, the natural tendency is to say – “We do it all! We’ve got all the bases covered!”

This approach leads to several issues in SaaS:

• Long, costly development cycles that produce a large feature set with no user-driven demand. How do we know the features we’re building are critical? What tells us the money and time spent will be returned in subscriptions? Go back to point 2 in this article. 80% of value is derived from 20% of features. There are always features that are necessary regardless of value, but as they rise, they increase cost and complexity for end-users.
• Developing new features into a very complex application becomes increasingly difficult over time. A smart SaaS vendor will generally break out potentially complex new capabilities into additional but separate services as Salesforce has done with Force.com. This keeps the core application focused and allows the new offering to “stand on its” own and seek its own audience.
• Complex applications require more time for users to become productive, training, and support. These are all costs, whether they are borne by the vendor or the client. They reduce adoption and put retention at risk. If the complexity is truly necessary it needs to be compartmentalized so that users can either take it on gradually or upgrade to “professional” versions when they are comfortable with basic functionality. Time to initial productivity with a service needs to be as near zero as possible.
• Complexity doesn’t sell itself. In fact – it drives people away. Think “Evolution – Not Revolution.”

10. Ignore change and agility.

Taking the sum of all the previous points, you should be able to see one thing stand out – A SaaS business is not your father’s software business. It is driven by change and renewal. It responds organically to market and user demands. It grows based on successful market adaption. I call this an agile business and so do many others. It is nothing less than a complete rethinking of how a business organization “works” at every level. It is both cultural and process-led.

This is not the Agile Manifesto – while still acknowledging it comes out of the same guiding principles. Putting a homily up in reception will not make it happen. Ignoring the issue will not make it go away. You can let the issue grind you down over time or you can accept it, plan for it and execute strategically.

So – that’s my list. What’s yours? What’s tops on your agenda?

In this article we’re picking up where we left off in Part 1 on our expansion of the podcast we did with Steve Plunkett, CTO of Servitizer and our panel of industry experts – Luis Aburto, CEO of Scio Consulting, Mikael Blaisdell of MBlaisdell & Associates and Lincoln Murphy of Sixteen Ventures. If you haven’t read the first part of our series already – please start there – because the background for the conversation is there.

Going back then to where we left the conversation – Mikael Blaisdell weighed in saying that although he believes the industry is strongly moving towards servitization, vendors still see themselves as selling a technical product. From a business perspective, because of the license-forward sales model of traditional licensed software, vendors realized all their profit “up front” in a sale (although it has to be said, post development and marketing). All following costs, which might be services, were avoided as much as possible. ISVs build a lot of expertise in building software and internal operations to fit that model – expertise in managing the development, marketing and sales processes to match the cyclical nature of licensed software sales. Moving to an incremental revenue model is one aspect of SaaS and many ISVs have made the transition – however difficult that might be. But when it came to marketing the product – they are still selling it as a technology – even if they see it as embodying special expertise for their market and not as a service.

As Mikael pointed out – a true SaaS product needs to embody the relationship between the vendor and the end-user community they are serving. But – unfortunately – very few vendors have figured out how to market that service-based relationship successfully. Not just because it is hard for established vendors to do – primarily because it is just not a part of their strategic view of their product. They still see themselves as technology vendors, not as service providers.

Further, the standard model conveniently supported a split set of payments to the vendor. The vendor set license fees for the product and a separate set of support and maintenance fees to provide ongoing services. In other words, the support services were almost an “optional add-on.” Those same vendors, moving to a “as a Service” model, have to rethink their cash flow and put services in all its various aspects up front while still maintaining enough bandwidth to support ongoing development.

Even more important, transitioning to an “as a Service” model requires a deep reconfiguring of the basic understanding of the product within the vendor organization. This is why it is often (rightfully) said it is easier to start from scratch than “turn a corner” and move from a traditional licensed model to a incremental sales model like SaaS. In the “as a Service” model, focus of the customer relationship shifts to the end-user experience, the expertise embodied in the application, the productivity it enables and the value it delivers. If any one of these areas slips in relationship to either market competition or the experience of users without the product – subscription renewals will decrease and the vendor will feel it immediately. For the vendor organization, their window of reaction time to address customer needs has decreased dramatically and the need to communicate with end-users has increased many times over. A traditional ISV’s expertise and business organization is simply not set up for this transition. As Mikael pointed out – SaaS vendors have to understand this from the core of the organization outward if they are going to succeed. This is a process that is in many ways just beginning in the industry.

In the same way – the industry still uses a “feature-led” technical product approach when selling as a Service offerings. Using a feature list is still considered to be the key way to compare SaaS applications. Do people use all of those features? Are they implemented in a way that users find productive? The industry is not at the stage where this kind of detail can easily be communicated.

Luis Aburto summarized the approach of many vendors when he said that often the first thought is “We just need to get a web version of our application set up and let people subscribe – that’s it.” But after a while they start start to realize the business implications of putting an application on the web:

• Users expect 100% uptime – no “maintenance windows,” no upgrade weekend, no outages
• Users expect consistent performance in the browser and in the back end processing of their data. Having a “end of the day” slowdown is just not acceptable.
• Users expect the vendor to take responsibility for their data security and be able to articulate how they provide security.
• Users expect all aspects of the application stack to “just work” – integration, payment processing, database updates – all working seamlessly and without interruption of the business cycle.
• Users expect the vendor to have plans and tested procedures for disaster recovery and operational contingencies. If there is something the end-user organization needs to do, they expect the tools and processes to be available upfront.

When you consider all the issues this includes, it can become a little scary for existing ISVs coming into the as a Service field. None of these services are part of the expertise they carry in house. There are aspects of these services that can only be handled effectively if the application and its delivery is properly architected from the beginning. Yes, you can get up and “operating” without addressing all of these issues, but in the end, customers will demand full transparency or they will leave.

Of course, as the old ASP model showed, these services cannot be addressed in one off implementations for each customer organization. The delivery model must address customers in a way that allows economies of scale to be passed through. Using multi-tenant architecture and cloud technologies, it is possible for vendors to be more efficient at addressing these issues than the internal IT resources of their customers would be. With scale, the vendor can afford to have more professional expertise at their command than their customers can carry individually.

Addressing these issues effectively also translates into the struggles of sales and marketing in SaaS. Feature-led, version dependent marketing and sales cycles will only work for a short window of time for a service-based product. When the cost of acquisition and operation exceeds the lifetime value of an average subscription – the burn rate will quickly overcome the vendor’s ability to cover losses. And why? Because after a short period of time, the “new car smell” wears off and the end-users start questioning what the value the service is providing. If it isn’t enough – they leave.

Steve Plunkett said it well when he added that vendors today need to be able to articulate the value of the responsibility they are taking on – in addition to actually being able to perform in this environment. Of course, if a vendor hasn’t really considered all the costs of all their new responsibilities they are taking on – it is hard to express the value to their customers and harder still to manage them as effectively as they need to. Going to another aspect, sales teams now need to go from being “hunters” to working hand in hand with product management and becoming farmers – growing their garden of customers and maintaining the relationship with them over the life of their subscription. While many focus on the straight-forward change in their compensation model, this change in the sales relationship may in fact be much harder for sales teams to negotiate.

Even if vendors realize the responsibilities they are taking on – they should be careful as they decide to take them on directly. SaaS vendors, new SaaS vendors particularly, should consider taking some of their own medicine by deciding what parts of their service are core and must be handled internally and what parts can be outsourced to other service providers with appropriate service agreements. This means a big change in the industry. The SaaS vendor is now orchestrating the outsourcing relationships on behalf of his customers. The whole industry ecosystem is turned on its head. Instead of pursing enterprise IT departments – in a “as a Service” model, ecosystem venors are responsible to the service provider that is linked directly to the end user. This should result in better service to the end user and frankly SMBs have the most to gain. The service provider has much more leverage and efficiency than a customer with 100 seats or a line of business group with ten seats.

With all that said, the investment and expertise needed to develop and field a successful service in this market is significant. As Mikael Blaisdell added, it becomes even more important in areas where competition exists. While a vendor might get by with a mediocre user experience or shaky infrastructure by serving the “under served” SMB market – once a competitor appears, all bets are off. Integration and customer assurance demands that user data be addressable and extensible in modern services. Customers can and will “jump ship” and can do so with increasing facility. Leveraging the ability to tap into user experience at this point is critical. If the cost of operations and acquisition is equivalent to the subscription for an average size implementation at ten months and the customer leaves at the end of 12 months – there are only two months profit “in the bank.” That is a recipe for failure. When vendors assess their subscription losses, if the answer that appears is the users’ business needs changed or their assessment of those needs altered – a red flag should fly up in front of them. Why didn’t we know? What can we do to be more “intimate” with our customer’s operations? What do we need to do to be able to adapt our application smoothly to meet the expectations of our users?

So – we come full circle. XaaS is not a technology. It is a business model delivered and enabled by carefully planned technology. The successful vendor needs to manage technology and technical services to deliver their service to their end-users. The extent to which they can do that and continue express the lifetime value they provide in a user experience will equal their success in the market.

Planning the technology to allow the kind of change and growth needed is key. The application has to be properly architected to allow the mining of necessary metadata. The customer support and feedback mechanisms need to be integrated fully both in the application and in the product management function itself.

It is the orchestration of all these aspects of business and technology on behalf of the end user relationship that finally changes every part of the service vendor’s organization. Traditional product management approaches are woefully out of step in this environment. Sales and marketing are poorly equipped at best. Technical services don’t exist. Finance has to rethink every aspect of cash flow and when profit is “realized.”

And as more services come online and reach acceptance – integration of data and the services themselves will be even more critical. Some vendors will become the “system of record” and handle several services on behalf of their customers, while others will remain part of a larger ecosystem used by those “master services.” No customer is going to want to try to manage a mash-up of many services for long if a vendor appears that will manage the relationships for them.

It was here our guest and panel reached an interesting conclusion. The term “Independent Software Vendor” in this market is no longer useful. No vendor is likely to exist in a vacuum and the customer doesn’t care. Users just want the service to work. As a group we toyed with various permutations of the ISV term but I think we finally arrived at “Interdependent Services Vendor” as the more logical evolution. It describes a new relationship between the vendor, the end-user and the larger ecosystem which ultimately must be in place if the industry is to be successful in the long run.

Just remember folks – you heard it first on Haut Tech Conversations

That sums up our first podcast. Once again I want to deeply thank our panel – Luis Aburto of Scio Consulting, Mikael Blaisdell of The HotLine and MBlaisdell & Associates, and Lincoln Murphy of Sixteen Ventures – and of course our guest, Steve Plunkett of Servitizer. I think this podcast did a lot to better describe what becoming a service provider means and where the industry is going – in fact has to go – in the coming years.

If you would like to download the podcast – it is available here and if you would like to subscribe to the podcast feed – it is available here. We’re already planning a very interesting show for next month – so please watch this blog for more information next week when we announce our guests. The conversation continues here, on the blogs of Lincoln Murphy, Steve Plunkett, Mikael Blaisdell and I’m sure others. You can also join our LinkedIn group and continue the conversation there as well.

The question I pose in the title of this article is the theme of the podcast we did this month for Haut Tech Conversations. It turned out to be quite a conversation and you can download it and listen to it in its entirety here. Our panel and guest brought up so many excellent points that I’m going to take the time to summarize and extend them in this “post interview” so they are not lost.

Giving credit where it is due: Our guest was Steve Plunkett, CTO of Servitizer. He has studied the concept of delivering services over the Internet and has a depth of understanding and experience few in the field can claim. I recommend his blog as a continuing series of insightful articles on the business of delivering services in an on-demand world.

Giving more depth and points of view, our panel was stellar. Luis Aburto, CEO of Scio Consulting provided a clear summary of the intersection of technology and business concerns that make up service offerings in this field. Mikael Blaisdell of MBaisdell & Associates brought up a range of issues that are rarely if ever considered in planning and developing a service. Lincoln Murphy of Sixteen Ventures broadened the business side of the discussion many times over.

The conversation exceeded my expectations and I encourage you to listen when you can. But I felt that the key points can be easily lost because an hour seems like a long time when you just think about it – when listening to the conversation there is a lot of information coming all at once. So – this series is an attempt to summarize and extend the wealth of insight and ideas we covered.

First – let me cover the title of this article with a few words. The subject of this article is service offerings on the Internet – broadly. This means not just Software as a Service (SaaS) or Platforms (PaaS) or Infrastructure (IaaS) – it includes all the various types of service products available now on a subscription or fee for use basis. This is often referred to as “X”aaS – whatever you might want to put in front of the words “as a Service” and includes the various cloud services and application services extensions for things like billing, metering, integration, etc.

The Gartner Group has recently said we’re at the peak of the hype cycle for these offerings. I agree and I also believe that many services today are “immature” at best as pointed out by a independent study mentioned in a recent article by Dave Rosenberg. That leads to the “trough of disillusionment” as Gartner calls it – when early adopters find the services are not yet where their marketing said they should be and they “push back” against the vendors to deliver at a level consistent with critical business needs.

It is the realization that much of the promise in the XaaS market is still to often just that – a vague promise – that I think united all our guests. The “Service” in many service offerings on the Internet is still poorly defined and poorly delivered, even by major players. And I think i can speak for everyone when I say we are not just standing on the sidelines booing when we say that – we’re all all personally and professionally committed to helping our clients and the industry get to the level of maturity that is necessary for long-term success.

Steve Plunkett kicked off the conversation with some background on “servitization” in industry and an example that struck me – Rolls Royce Aviation provides jet engines for much of the commercial aircraft fleet in service today. But they don’t do it by “selling” the engines – they provide them as a service-based on the number of miles flown, along with all the maintenance and support necessary to operate them, to their customers. When you take an example of a service like that you immediately see that there is more to it than just putting engines on planes – this is the entire operational assurance that goes with the operation of an aircraft and the critical service it is providing its customers. As Steve pointed out – our industry is still very naive when it comes to providing this level of direct services to customers. In the past, it was enough to provide a CD and an install script. It was someone else’s responsibility to properly size, secure, and provide access to the server where it was installed. Service was limited to second or third-level calls to the help desk. But as Phil Wainewright of ZDNet recently pointed out – this isn’t because a service-based approach is new to the industry. If nothing else, it could be said that licensed software started in earnest because of US anti-trust actions against IBM.

The core issue for the industry and SaaS vendors is there is a great lack of understanding when it comes to approaching the business of becoming a service provider, especially for companies that started out as straight-forward “product providers” – meaning those who provide software and a license but don’t provide any of the delivery and operational mechanisms that allow people or other systems to use the application. In fact, it could be said that it is much easier to be a XaaS startup than to transition from being a traditional ISV to SaaS. Going back to the quote from Gartner, if we don’t address this problem, it will greatly impede – if not sink – XaaS as an alternative in the market.

This leads to another point Steve made quite strongly. We are talking about the industry as a whole when we say this. There are a lot of vested interests, that as always in the face of disruptive change (like the current debate on healthcare), will advocate for the least amount of change if not avoid it altogether – the “do nothing option.” These objections come in a lot of forms:

• Product managers will say you can’t control a product development cycle driven by direct customer involvement – as customers expect on the Internet.
• Your Value-Added Reseller (VAR) will tell you there is no way you can sell direct in your market – and maybe they are right – but did you ask if they were ready to become Value-Added-Service Providers? What value will they add to a service-led offering to assure their place in the chain?
• Your IT department will tell you they are not ready to provide the level of service and reliability customers expect for critical line of business applications. But – have they identified the requirements so they can figure out what it takes and who can?
• Your sales group will say they cannot transition from large up front license sales to incremental subscriptions.
• Your marketing group will tell you they cannot imagine how they will operate without the “big bang” of a new feature list for their next trade show.
• Your outsourcing group will tell you they can help you get to where you need to go but they can’t offer a model of interaction and reliability that reflects a more service-led approach.

These same issues are echoed across the industry by naysayers who say security and reliability problems are too great, integration or customization is beyond SaaS, and the business model is too hard to make a profit with. The issue is getting them all to acknowledge that providing a service instead of a packaged application is yes, inherently different from the current “norm” but in many ways just part of the larger business push toward “servitization.” On balance, I think our answer is, “Get over it.” This is a business opportunity and you will either find ways to take advantage of it or get left by the wayside.

In the early days of the industry companies like IBM and HP provided much, if not all the IT services needed by major enterprises. The aforementioned anti-trust action along with the rise of commodity desktop computers and servers provided an alternative that allowed a lower point of entry brought a great deal of disruption that companies like Microsoft took full advantage of as they moved into a place of dominance. Just like today, there were many changes and many players who felt a sense of entitlement in their roles who were ultimately displaced when they couldn’t make the transition.

A big part the change is the place and role of the service provider (the former software vendor). Now end-users look to the service directly when they have questions about how the application is “supposed to function” and internal IT resources (rightfully) expect their direct support role to be measurably diminished. This is the service that is being paid for after all. Gone are the days when the IT service desk made the decision to push the call “up” to the second or third level support with the vendor. Now the IT department expects the calls to come from the vendor and then only when they cannot resolve a local communication or desktop configuration issue. In fact, increasingly the role of the IT department is to set the standards and expectations that fit the business case for a line of business service and then hold the vendor accountable.

Lincoln Murphy pointed out that within servitized products, it is the service that keeps commoditization at bay. A successful vendor becomes more directly involved and responsible to the end-user both as the service provider and the subject matter expert in the field they represent. As Lincoln pointed out – we can go to our personal computer and start “Word 2003″ and it will work just fine – just as it did in 2003. But if Word was online, we would expect it to seamlessly evolve and be something more that it was six years ago – just as iGoogle is a clear line of evolution from the iconic single search box we all came to love when it first began. In the same way, “Infrastructure as a Service” needs to be more than a commoditized server. If it is not – it isn’t going to displace local servers.

And to extend the concept – a service on the Internet has a “responsibility” to carry the model to include the level of communication the delivery medium allows. Is a platform or infrastructure service benefitting you enough if you can’t leverage the ecosystem or community that revolves around it? What is left “off the table” when the community around a line of business application cannot leverage a forum or even list server to communicate best practices, voice concerns and answer questions? These things certainly exist for premise-based products, but they aren’t baked into the business model and certainly not part of the application itself. The question should be – why aren’t they in a XaaS offering?

Moving yet deeper, Lincoln pointed out that XaaS offerings must leverage their ability to monitor their customer interactions with their product to ensure features are of value and meeting customer expectations. Security concerns aside, generalized usage metadata allows service providers a level of understanding of user interaction. Rather than shying away from monitoring customers, it is a responsibility to users to ensure the service will continue to deliver value and to the brand to ensure it stays ahead of competitive offerings.

This means an XaaS offering has to be much more than a new technology. In fact, I would have to say marketing any XaaS product as a technology alone is an error. Of course, the delivery system itself is technical. The expertise and services that are on top of the delivery are enabled by technology, but if they do not stand on their own, they cannot go beyond simply surviving and move to thriving. An excellent product without the technical underpinnings that provide reliability and scalability will fail to reach its potential. In the same way, the mediocre product with excellent technology will be replaced by competitors in no time, especially when that product is delivered on the Internet. There is simply no real barrier to prevent it.

With that we have set the stage to get deeper into the conversation with Mikael Blaisedell taking us into another aspect of the question – what does “as a Service” really mean? But, this article has reached as much length as I think readers can handle so you will have to join us in Part 2 of our series or – download and listen to the podcast. And – feel free to extend the conversation in your own way – here in comments or on your own blog. We’ll be listening…

This month on Haut Tech Conversations we kick off our series of best practice shows with a look at the core feature of SaaS, Cloud and on-demand applications – Service. As we explored in our last article, we’re going to discuss how current vendors are dealing with their service offerings, what is often lacking, and what is on the part of the vendors and the industry as a whole

>>Here is the archived show as an mp3 file <<

Our guest will be Steve Plunkett, CTO of Servitizer. Steve is a technologist and innovator with eighteen years experience. He has worked with and held leadership positions in large enterprises, service providers, network operators, product manufacturers and government agencies. Specializing in solution and service innovation he has architected systems, networks and products and worked with customers, companies and partners around the world. Steve has lead initiatives within large organizations to transition from a product to a solutions and services model. He has a strong track record of identifying emerging and disruptive technology trends and harnessing them through solution and service innovation. Steve blogs for Servitizer on – what else – the Servitizer Blog. I’ve already had a talk with Steve prior to the show so I know this is going to be a great conversation.

Joining us will be our panel of industry insiders:

• Luis Aburto , CEO of Scio Consulting- A veteran of international technology and engineering consulting for corporate and government clients in the U.S. and Latin America, Mr Aburto brings to Scio a passionate commitment to smart business planning and meticulous development processes and project management. A native of Morelia, Mexico who has traveled and lived across the globe, Mr Aburto holds a master’s degree in engineering from the University of Texas at Austin, as well as a master’s in computer-aided engineering from Strathclyde University in Scotland.
• Mikael Blaisdell of Blaisdell & Associates – Mikael runs his own consultancy, Mickael Blaisdell & Associates, and writes for his Hotline Magazine and Customerium. For over 25 years, Mikael Blaisdell has been closely involved with the strategy, process, people and technology of customer relationship architecture, retention and profitability management. As a consultant, he has advised organizations across a wide range of types, locations and sizes on designing, building, re-engineering and optimizing their customer contact centers and programs to align with strategic goals. Working with technology manufacturers, he has contributed to the design of contact center products and implementation procedures. He has served on the boards of professional associations, delivered presentations on all aspects of CRM at industry gatherings, and written extensively for various print and online media.
• Lincoln Murphy is the Founder of Sixteen Ventures and blogs on his business site. You can also find him on Twitter here and here. Lincoln Murphy brings over 15 years experience in on-demand software product development and Business Architecture, focusing exclusively on SaaS since 2004. Working with clients of all sizes, and both SaaS pure-plays and ISVs transitioning to SaaS, Lincoln helps companies recognize and execute on opportunities to generate or enhance revenue through the SaaS Business Architecture.

I know each one of our panelists and I’m sure they will bring more points of view and questions to our conversation than I can manage alone. Our show will stream live on Wednesday, August 19 at 10am CDT from our BlogTalkRadio home page and be available as a podcast shortly after. The bonus for joining us live is you get to pose questions to our guest and panelists and hear their take directly.

The show is scheduled for 10am, Central, Wednesday, August 19, 2009. You can also download the show as a podcast after airing.

I hope you will join us. And by the way, I am always looking for guest and panelist suggestions so if you have one – don’t hesitate to mention it in comments here.

In addition – we also have a webinar titled Leveraging Cloud Services, coming up with Rick Nucci – CTO & Co-Founder of Boomi, Rick Chapman, CEO of Softletter & SaaS University, and our own Luis Aburto, CEO of Scio Consulting. We will be covering the broader aspects of “integration” and why using cloud services rather than trying to build connections to both outside functionality is a key consideration for SaaS vendors. I can tell you personally as I’ve worked in the field of enterprise integration – it isn’t a simple issue. Keeping track of all of the shifting pieces can be quite a challenge for a company with a line of business focus. If being part of the broader SaaS ecosystem is on your radar, I hope you will take advantage of this opportunity. Please take a few minutes and sign up for this important webinar:

Leveraging Cloud Services – Thursday, August 20, 2009 – 1pm-2pm CDT. Registration is free and open to all.

AND – Our survey of product managers is closing soon. Are you a software product manager? Would you take a few minutes to join our survey? Check the details on our blog.

Although in reality, business services provided through the Internet are nothing new, the number and breadth of services now available is certainly worthy of note. As a Gartner report recently opined – we are most likely at the peak of the “hype cycle” which in “Gartner speak” leads to the “slope of enlightenment” and eventually to mainstream adoption in the enterprise.

But as asked by Mikael Blaisdell in our LinkedIn Group, Haut Tech Conversations -

“Service certainly appears to be the key element, at least in the name of the business model — but to what degree is that actually manifested in the strategy, organizational structure and behavior of SaaS companies?”

In response to his comment – I would only expand that SaaS vendors are well named but Cloud-based and “on-demand” services in general should also be counted in that basic business question. Is the “Service” we’re offering actually part of the product itself? is it something loosely bolted on – a CRM afterthought? Do we understand the real paradigm shift that is taking hold and we are a part of when we offer an online service? or are we just putting our software up for a subscription sale without a thought as to how the relationship with our end users has changed in the process?

This is more than just a passing question. It is key in the transition to a service-based business model both for individual vendors and for the industry as a whole. To be successful as a service business, every part of the company needs to be examined for strategic alignment and tactical responsiveness. Knowing where to start and where you are going is critical. Fully considered, responsive and properly executed service is the most important element in customer retention. Customer retention in turn is what keeps the cash flow on target in a subscription-based business model. No matter how much hype your marketing department is able to generate, at the end of the day it is the value of the services the subscription delivers that keeps the customer coming back.

So – here’s the rub: We’re moving into a service-based business model when all our recent industry experience is more straight-forward vendor to purchasing relationships. As Steve Plunkett, CTO of Servitizer recently pointed out in his two part blog series – this is an exercise in going back where the industry came from. Companies like IBM and HP made their name from providing the infrastructure, hardware and support, bundled as services, to enterprises before the ubiquitous personal computer and commodity servers entered the picture. When personal computing became the reality, those service providers transitioned to being hardware and software vendors – divesting themselves of accumulated knowledge, services and consultants along the way. Now they face an army of new entrants in the field that are quickly “eating their lunch” as they try to transition back to being service-led. Just like I mentioned at the individual business level – every part of the industry is having to rethink their roles – Software vendors, infrastructure providers, VARs, and outsourcing organizations all face tectonic shifts in their business models and customer relationships.

I’ve been in the business long enough and in the right areas to see the transition and in some cases to have made a little money helping companies get from service to simple vendor relationships and from being an organization that was dependent on outside services to one that could operate entirely on an internal resources. We’ve gone full circle. We’re back to helping companies and vendors cross to service-led models.

But – quite honestly I don’t have all the answers. Regardless of the fact that we are circling back, there are still a lot of differences both in customer expectations and the capabilities services can offer. So comes to this: The first in our series of Haut Tech Conversations and best practice blog entries around the issues and technologies involved in running a SaaS, Cloud or on-demand service.

This is the kick off blog post. In a real way I started this post by opening a Linkedin Group called Haut Tech Conversations. I invited a lot of my friends in the industry and am continuing to plow the field for more. I posted some starting points as discussions and the links from the first paragraphs of this entry come from the conversations that grew out of those. I didn’t write this alone and I don’t intend to carry the ball alone either.

The name for our LinkedIn group is not a whim. We’ve set up a podcast feed on BlogTalkRadio that is not coincidentally also called Haut Tech Conversations. The real value of BlogTalkRadio is that we can host a podcast that can be streamed live, with guests, panelists and listeners chiming in. We can release it via iTunes so people who could not join us live can download the podcast and listen at their leisure.

As the title of this article proposes, our first subject is the core of the exploding Internet services market broadly – Services as a Product. Our guest will be Steve Plunkett, CTO of Servitizer. whose core business is helping companies that are moving into this market manage their service-based products. We will also have three panel members – Luis Aburto, CEO of Scio Consulting, Mikael Blaisdell of The HotLine Magazine, and Lincoln Murphy of 16 Ventures. As the name suggests – this is not intended to be a webinar or canned presentation. This is a conversation – first between myself, the guest and our panel, then with members of our live audience and finally – with the broader social media sphere that we all leverage as a part of our efforts.  Our show is scheduled for Wednesday August 19 2009, 10 am CDT. You can find show details and our call in number  on the BlogTalkRadio show page for Haut Tech Conversations

What I hope will happen is for others to present their own take on the subject in their blogs, on the LinkedIn group and here so we can sum up before the next podcast in our series. I encourage you to join us on LinkedIn, Facebook, Twitter, your blog or here to continue the conversation. As has been said many times – no one of us is smarter than all of us.

In addition – we also have a webinar titled Leveraging Cloud Services, coming up with Rick Nucci – CTO & Co-Founder of Boomi, Rick Chapman, CEO of Softletter & SaaS University, and our own Luis Aburto, CEO of Scio Consulting. We will be covering the broader aspects of “integration” and why using cloud services rather than trying to build connections to both outside functionality is a key consideration for SaaS vendors. I can tell you personally as I’ve worked in the field of enterprise integration – it isn’t a simple issue. Keeping track of all of the shifting pieces can be quite a challenge for a company with a line of business focus. If being part of the broader SaaS ecosystem is on your radar, I hope you will take advantage of this opportunity. Please take a few minutes and sign up for this important webinar:

Leveraging Cloud Services – Thursday, August 20, 2009 – 1pm-2pm CDT. Registration is free and open to all.

In the third segment of our four-part series on The Long Tail, we’re exploring successful SaaS aggregators who have effectively mastered the concept and dominate their field.

Once you have grasped the concept behind The Long Tail and begun to integrate it into your thinking, you are going to find yourself looking for good examples of its use. As I started on this article, I found that it was fairly easy grab strong examples, but when it came to putting together a list – I realized that in the SaaS context, it becomes a little more difficult. The first question became – what really is and isn’t SaaS? Or more critically – when is a platform just eCommerce (as we used to say…)? And finally – does it really address a wide range of needs in specific ways – or is it just generalized Software as a Service?

Let’s start with a fairly easy one – Google Docs. Google Docs is an online replacement for a desktop word processor, spreadsheet, calendar, email client, photo sharing, personalized websearch – and a whole lot more. There is an ad supported (“free”) individual version that is pretty much a front end for all the web-based services Google offers. There is also a Premier Edition that has some additional features and guarantees for $50 per user per month without the ads. Because the Premier Edition is business-focused, it includes the core business productivity applications like the word processor, email, storage, and scheduling.

It is certain that Google Docs is SaaS application. It is a straight-forward replacement for a number of desktop applications many people use everyday. You can run your “instance” of Google Docs from computers other than your own because all the data and functionality is accessible from a web browser. Does the individual version qualify even though there is no subscription? Yes. No one ever said SaaS had to provided by a cash-based subscription. If Google can afford to offer the whole suite by leveraging advertising on some parts, you “pay for it” in effect by being an audience for the ads.

But – is it a good example of leveraging The Long Tail? No, not directly. To be clear, Google does offer many applications that can be leveraged for special uses and customized in various ways, with services like Google Gears. But there is nothing about the document features that is specifically attractive to a group like authors and accountants would find many functions missing from the spreadsheet application.

Google does have some excellent Saas business models that leverage The Long Tail however. Google AdSense allows web publishers to add advertising to their sites without developing a system to acquire advertisers, manage content placement or receive payment. The software picks ads based on the site content and the user base of the publisher’s site and pays based on “clicks” – the choice made by users to go to view the advertiser’s content. Because of its ability to be highly targeted and to adopt a “pay as you go” model – it is one of the best examples of SaaS and The Long Tail.

With that example – what about Amazon? I followed a series of “conversations” on Twitter the other day about what is and isn’t SaaS. When I mentioned Amazon, the opinion seemed to be – no, it can’t be – it just an online store. Certainly, from an individual buyers perspective – it is an online store. But, from that same person’s perspective, it does “suggest” items to its users based on their purchases and search history. It allows them to save their information for future purchases, post “wish lists” that will allow others to ship gifts to them, and participate in product feedback. So, in return for being able to show you advertising for products, it does offer services that would be hard for an individual to duplicate. That may not fit everyone’s definition of “Software as a Service” – but it is a service online.

However, think about it from a vendor’s perspective. Amazon provides services to vendors that allows them to integrate their inventory into Amazon’s “store front.” The vendor doesn’t need to build in customer preference, search, wish lists, shipping, or even build a website. Amazon will do it all for a “transaction fee” on sales. If Amazon didn’t exist, all the vendors on that platform would have to provide the services directly, use someone else, or not sell online. The fact that Amazon has the largest online audience, a good interface, and personalization for customers makes it an unbeatable service. Add on their data storage, application services, and off platform advertising and it becomes apparent that Amazon has many services for online businesses delivered in a strong mix of SaaS, eCommerce and infrastructure that is well positioned to leverage The Long Tail concept.

From that strong example, let’s consider Netflix. Netflix offers DVDs and now movie feeds as service to subscribers. On one level, it is tempting to describe Netflix as “Movies as a Service” rather than software. But, consider what the service provides online for its subscribers: They can browse real-time catalogs of the titles in the library and their availability. They can keep lists of what they have seen and what they want to see when it becomes available and their is a slot in their “queue.” Users can leave and check reviews of other users, see previews of movies and check the status of their returns and movies being shipped. They can choose to stream movies and show them in their home theater systems if they are computer attached. What provides these services? Software. It isn’t software others could leverage to provide their own rental services and it doesn’t provide access for others to share in the Netflix customer base. But it is a service, and it is software doing the work – end to end – right down to the system that queues DVDs for shipping, labeling and receiving.

Finally, let’s consider one of the most discussed SaaS offerings – Salesforce. Salesforce has gone so far into SaaS, it has truly crossed the line to cloud-computing, no matter how you define it. Salesforce is a CRM system at its heart, but it has been integrated and leveraged many ways by its AppExchange and AppStore, where other companies can offer value-added services, and its partners to become a full suite of related services. Does Salesforce leverage The Long Tail in providing its services? Yes. The ecosystem provided by the AppExchange and AppStore serves ISVs who leverage the Salesforce software and infrastructure to provide vertical services and customization. Salesforce CRM has diversified its offering to verticals, provides ways for customers to customize the process flow and presentation of the service to their users, and there are several integration tools that allow data to flow to other applications in a business. Salesforce is trying very hard to serve a small to mid-sized market as well as the largest enterprise customers. It isn’t an easy balance, but it is succeeding at many levels.

For those that hoped this article might be a list of the top Long Tail leveraging aggregators – I have to say that is something you will still have to define for yourself. From this overview, you should have a good grasp of the concept to analyze what you find, but it is a growing field and there are many viewpoints. Regardless, my point in writing this article is to say that the leaders in SaaS leverage The Long Tail in many interesting ways – but most effectively by being the head of a broad range of services that continue to be of value to many users with specific needs.

In our next article, we’ll close this series by considering how Social Media drives the power of The Long Tail down to the individual.

Helpful? Copy, Paste, then Tweet it!

SaaS: Top Long Tail Aggregators http://bit.ly/RXdM

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.