Over two years ago, we wrote a two part series about SaaS Metrics that has continued to spark interest in the subject. Since that article was written, Scio has consulted with well over 50 SaaS and Cloud companies through our SaaS Strategy Sessions, Workshops and most recently a program headed by FUMEC in Mexico.

This background has given us a broad view of the issues entrepreneurs should consider to plan and operate successful SaaS businesses. There are four common categories that these issues fall into:

• Business Model Scalability - Finding a scaleable, repeatable business model is key and very often lowest on the list of priorities.
• Operational Requirements – Most companies are laser focused on end user functionality. This isn’t bad in itself, but the fact is that SaaS businesses have to plan to manage operations with the least amount of cost and friction possible if they want to reach their full potential. Understanding the operational aspects of their business that can be built into the application and services is critical to avoid situations where business growth and cost control is constrained by operations that cannot scale efficiently.
• Managing to Metrics – The idea of metrics is widely accepted, but in practice, very few early stage SaaS companies have build the data feeds and internal procedures necessary to have the data for reporting and management. Without planning, it is very hard to back the data out of applications that are not set up to provide it.
• Product Planning – SaaS product planning is part business roadmap and part customer management in a carefully orchestrated system that produces what users need rather than simply complying with their wants. When it is done right, it yields a service that can continue to grow with the user community over the long run and produce a competitive edge that is very hard to overcome.

Recently, one of our partners, Rich Chapman of Softletter (SaaS University) asked us if we had developed a spreadsheet people could use to model SaaS metrics. With our client experiences in mind, we realized that we have talked a lot about using modeling to test business assumptions, but hadn’t provided any insight into how someone could build a simple modeling system and what data feeds and metrics dashboard might include.

To solve that problem, this article includes the Scio SaaS Metrics Workbook. This is an Excel Workbook with two spreadsheets. The first sheet has sample data included to highlight scenarios discussed in this article. The second sheet is blank with just the formulas so that you can use it without having to go through the process of cleaning out the sample data. So – if you want to “play along” as we discuss these metrics, you should go ahead and download the spreadsheet now.

A few caveats apply to this example spreadsheet:

• Every business model is its own special case. These metrics and the formulas they use are generally accepted and useful for modeling purposes. They are not however, a “one-size fits all” approach. For a deep dive into SaaS Metrics – I strongly suggest you look at Joel York’s excellent articles on the subject and Bessemer Ventures PDF that came out last Fall.
• A spreadsheet is not a complete approach to actually managing a SaaS business to metrics. Unless it is integrated with actual data feeds, a spreadsheet will require far too much manual data management and will eventually be discarded in the ordinary course of dealing with day-to-day issues. The best approach is to build the data feeds and display them a dashboard in the application. Unfortunately, for most implementations this means feeding some information into the report either from accounting processes or manual input. But, automating the reporting as much as possible is critical if you actually want to use metrics for managing your business. This means planning to provide the data as a part of application requirements. If you don’t, trying to get the data without the “hooks” built in will often prove impossible.
• This spreadsheet uses a 12 period window. The length of the periods don’t have to be months, although the Customer Acquisition Cost Ratio is generally managed on a quarterly basis. In a dashboard approach, a walking window could be very useful to see trends over time. The width of the window used is a decision you have to make to fit your business model. Of course, in the best case, a dashboard would use graphs of the key metrics with drill down reports just a “click-away” for more detail.
• Green, Bold entries should be feed directly from application data. This means your application needs to be built to capture and report on this data. If you don’t have these feeds at a minimum – it will be very hard to manage to metrics. Line 44 may bring some questions. Isn’t total revenue the same as renewal revenue? No, not in all business models. If you have transaction based revenue or utility-based features, your total revenue is different than your total renewal revenue.
• Blue, Bold entries need to be entered either directly or feed from accounting processes. This includes sales and marketing costs and operational costs. It is “fussy” to have to do this manually, but if you can develop a process and flow, it can be just be part of regular cost reporting within your organization.
• Clients are the entities that pay for the service. In a business-to-business SaaS application, this will generally be a company with multiple users. End-users are just that – individual application users who may or not also be clients depending on the business model.

So – with that in mind – let’s look at some SaaS Metrics….

Committed Monthly Recurring Revenue (CMRR) and Average Recurring Revenue (ARR)

Because the SaaS business model is predicated on a steady flow of recurring revenue, having a clear picture of your current standing is key. Using this figure, you can also derive the Average Recurring Revenue per Client which is helpful to understand if clients are generally adopting larger commitments or the average size is decreasing.

You will also see in this section, a set of formulas we use over and over. This is the Percent of Change from period to period and the Average Change. This is not a true trend line analysis, but it gives you an indication of where the metric is heading over time. This is important because in the day-to-day management of a business it is easy to miss the trends that are actually driving your business. In the example you can imagine a sales team crowing about their 28% growth in the 8th period and their 15% growth in the 12th period. But in the end, the average change of 6% tells a more important story of how recurring income is growing over time. Average change or trend analysis is a good way to smooth out the spot variations and help the team concentrate on the larger picture.

Retention Rate (RR) or Churn

When CMRR is growing, it can be easy to ignore the reality that many of the new clients don’t stay around long enough to pay off the cost of customer acquisition that comes from sales and marketing expenses. Startup companies often ignore this, hoping “we’ll make it up in volume.” The truth is that churn represents a steady cash leak that can eventually sink a new company. Most companies try to manage to 90% retention or better. In the spreadsheet example, you can see that the company is bouncing along the bottom with an average RR of 88.9%. Although income may seem good enough now, if the situation continues the cash burn could become a constraint on continuing product development. If there is underlying user dissatisfaction with the service, this will begin a spiral that the company may never recover from.

In Trial (IT), Time to Close (TC), and Close Rate (CR)

While not every SaaS business has a trial option, since most do, it is wise to have a way to track effectiveness of trials in bringing new clients onboard. Trials do work as a sales tool. The truth is that most SaaS buyers are already actively using Internet-based services and expect to be able to “try before they buy.” In some cases, the sales team may set up special trials for key customers, but generally these metrics do not track those special implementations. The point of looking the data coming from trials it not just to evaluate how many sales come out of them. You can find out a lot about how well the application fills the needs for specific verticals (if you have a way to collect data from prospects), if the application has as much of a “rapid uptake” as you suppose, how many testers typically participate in evaluations, how much data is generated (which can quickly become a push to sign a contract) and many other facts about the decision process. So – if you have a trial option in your business plans – set up data feeds that will help you adjust the application and the trial process to be more effective in closing sales.

Average Deal Size (ADS) or Average Revenue per Client (ARPC)

It is easy to confuse this metric with CMRR. Depending on the options available, deal size can vary depending on the period covered by each individual renewal and changes in the package purchased (number of seats, feature selections, prepaid transactions, etc.). This metric can help sales evaluate if clients are buying larger packages, changing feature sets, etc. Because the SaaS model is heavily biased toward recurring revenue, this figure generally does not include first time sales.

Average Revenue Per User (ARPU)

This metric is valuable in business models where a client buys multiple user IDs. Users typically require available support resources and in some instances may have access to features that burden utility-based resources like storage and data transfer. If you don’t track ARPU, you don’t have any way to determine if your revenue per user is beginning to making the pricing base unsustainable. Where multiple income streams are involved, it can be useful to track that income separately and use data to determine what kind of users are contributing the most to these revenue sources. Multiple income streams, beyond a simple subscription model, can be very valuable to a SaaS business if the subscriptions contribute enough to provide the base revenue necessary to sustain the business. Depending on variable income streams (rather than subscription income) to provide necessary operational income and profit however can be very difficult.

Cost of Service (CoS) or Cost to Maintain (CtM)

The cost of services and operations to maintain the application and client instances. This includes hosting charges, hardware and software renewals, support, staff operations, and outside services – everything it costs to operate. In a traditional hosting model, the costs tend to match the highest level of operational needs expected regardless of load variance over short periods. In a fully virtualized model, the costs can vary on a utility basis if the application is tuned to take advantage of elastic infrastructure capabilities. Regardless though, the operational costs are what they are – and that is what we are trying to model and view here. Here the running change is a key indicator again because it can offer insight into trends you might not see otherwise.

Average Customer Acquisition Cost (ACAC) or Average Cost to Acquire (AtC)

This is a “front-loaded” cost because you have to spend money on sales and marketing ahead of revenue. In web-based sales, it is hard to know the “lead-time” from the first moment a prospect comes in contact with the service through to sale closure. Only in the case of special marketing campaigns that include promotional codes can you actually begin to see how the sales cycle works. In the spreadsheet example, we’ve taken the simplistic approach of counting the previous period sales and marketing costs as the contributing factor for the sales in the following period. You could modify this to set a period that reflects your sales model better, but until you actually know the cycle, this is a good starting point and modeling assumption.

This metric also points out another factor: Most business-to-business sales models for SaaS include different subscription periods so you cannot simply assume that everyone is renewing every period. If the option is available, some may purchase on a monthly basis, some quarterly, some yearly, etc. In these cases, a separate report for the tracking the renewal period choices made by different market segments could be very valuable. These reports can answer questions like, “are larger enterprises actually buying the longer periods as we suppose?” “Is this market really acting like SMB’s and cautiously buying every month?” “Do clients tend to buy longer periods overtime?”

Customer Acquisition Cost Ratio (CAC)

This is a complicated metric and there are several ways you could look at it. The point is to aggregate costs and trends to help determine how long it will take to pay back the your sales and marketing costs on based on your current customer acquisition. The aim is to reach a ration better than 1. This means your costs are being paid off in less than one year by the revenue driven from clients. If the ratio dips to .5, it means it is taking two years. If the majority of your clients aren’t staying two years, you are losing money while acquiring clients. In a startup situation, when you are still carrying your initial development costs, this may be a perfectly acceptable situation – as long as you have enough cash on hand to carry your off the “runway.” So, in that way, you have to know your situation to know how to interpret what it is telling you. The example we have given is good for a “running company” but doesn’t reflect a startup.

Other metrics to consider…

Customer Lifetime Value (CLV) is an often cited metric but one that is hard to model in a spreadsheet like this. We’ve intentionally left it off, but that doesn’t mean you should leave it off your list of requirements. I suggest you look long and hard at the literature before you attempt to implement it though. You need to understand what you can determine in your data model and what is useful from a business reporting point of view before you set this metric for reporting.

There are lots of other metrics you might want to use. Largest Client % can be very important, particularly in situations when the total client load is not large. If a single client provides more than a third of the total revenue – it is time to start thinking about how to acquire a lot more clients to offset the risk that client presents if they “walk.”

If professional services are part of the revenue stream, it is important to be able to capture their contribution separately and to see if the balance between PS sales and application sales is sustainable. I’ve seen several models where the two sides of the business operate hand-in-hand, but seeing the contribution of each separately can help you understand how much of your resources you should be devoting to each.

This is our current modeling tool. We are using it now in our consulting practice and will continue to improve it based on feedback from clients and responses we get from users. It is daunting to look at – so I suggest first playing with some of the green and blue inputs to see what happens. If you are serious about managing your business to metrics, you will soon find yourself on the blank sheet running scenarios. And if you have questions or comments - please let us know!

This is the third article in a series with excerpts from this year’s workshop titled, “How to Eat an Elephant – Developing a Real-World Product SaaS Product Roadmap.” Each of these articles will cover one part of core subjects in our Cloud Product Roadmap.  If you are just joining us – you can return to the first article in the series and find out more about the workshop background and other articles in the series.

Cloud Product Roadmap – Technical Architecture

Excerpt: Reviewing the Roadmap Template for Technical Architecture

In this installment, we going to look briefly at what needs to be in your Technical Architecture plan rather than review a part of the presentation from the workshop.    We provide MS Word templates for each element of the Cloud Product Roadmap, which can be modified and brought together to document your plan.

So just for the sake of understanding the outline – let’s review the major points of a Technical Architecture plan as for SaaS and Cloud products we see it:

• Technical Architecture Design Model
• Technical Architecture Design Process
• Architecture Design Elements
  • High-Level Architecture Requirements
  • Application Architecture Design
  • Tenancy Approach
  • Scalability Approach
  • Metering Approach
  • Security Authorization & Authentication Approach
  • Audits & Compliance Approach
  • Provisioning & Implementation Approach
• Gap Analysis & Third-Party Solutions
• Cost Estimation & Optimization

It is important to note at this point that this is not the complete technical plan. The roadmap also needs to include Development and Maintenance Processes, Operations and the Support Approach. You will also notice something it doesn’t include: Long, detailed descriptions of end-user functionality. This is because we recommend companies with SaaS and Cloud products use Agile development processes. Using an Agile approach means that the application is planned up front at a high-level using “user stories” that describe the main points of functionality needed by users. These descriptions will be broken down in more detail during the development process, but within the context of the evolving application. This allows the product manager to consider what the application needs to do, but spend less time on about how the functionality is implemented. Today developers leverage a wide range of tools and frameworks to deliver rich functionality more quickly and with better quality than in previous years. But each set of tools has its own implementation pattern. A product manager that spends too much time specifying HOW things need to be done, rather than focusing the outcomes, is likely to be wasting time on specifications that don’t leverage the frameworks properly or creating work-arounds with increased risk and development effort.

Another aspect of this plan are the elements included specifically for Cloud and SaaS applications. Tenancy, Scalability, Metering, Provisioning and Implementation are all architectural issues that concern online applications. In our experience, it is common for product management to focus on end-user functionality and leave the specifications for operational purposes until a later time. In many cases, this means the development team either ends up “back-porting” critical functionality into the application or tacking it on the side somehow. This usually means that important opportunities to do it right the first time are lost and in many cases issues like metering never have the flexibility they need. The point of our templates is to help our clients to consider these and other critical elements at the right time in the planning process – before choices are made and effort is expended that is hard to back away from.

The Design Process

If you have an existing product or assets in the form of technical assets (libraries, web services, algorithms, etc.) you can migrate, the first thought is of course leverage them to build the new Cloud or SaaS product. Using them provides a level of comfort and could lower the total cost of development. However, depending on what the assets are and what technologies are involved, they may also become a constraint that will prevent you from optimizing costs, performance, processes and the user interface. ISVs with existing products quite often consider ways to leverage their existing assets – even going so far as to just host instances of their application for clients ASP style to get something in the market quickly. Their basic thought is that the value of SaaS or Cloud all based in the delivery model. Typically startups design their applications from the ground up because they rarely have technical assets to consider.

Existing assets that are not already setup for the Cloud can also suffer from a lack of operational features to automate customer on-boarding and implementation, feature packaging and pricing, and usage metrics. Conversely, building from the ground up doesn’t mean you have to build everything. Using the Cloud model, you can leverage best of breed components to fill the operational gaps and allow you to focus on developing your core value.

You can also leverage specific SaaS and Cloud platforms that provide a many of the operational elements of Cloud products and usually enforce a level of code consistency. These can greatly lower the effort required and can offer capabilities that you can use immediately but would rarely put in your first product version. The build or buy decision in this case is usually a product of business priorities for budget, effort and the time required to bring a product to release.

So, in essence, the design process is a series of choices and compromises that finally arrive at the approach for the final product. The choices can be difficult but are usually made easier by making a series of strategic business and product decisions before you begin to consider the technical architecture. Making decisions on the technical architecture before key business and product decisions are made can lead to wasted development effort and increased risk that the development process will take longer than planned.

Special Attributes of Cloud Products

Current Cloud products, particularly those that take advantage of services like Windows Azure, can scale compute, storage, and delivery in direct response to needs in a specific dimension. That means if the application needs more storage, but doesn’t need more compute power, storage capability can be scaled up (or down) by itself. Conversely, if the application needs to process a great deal of data, it can add compute until it reaches a satisfactory performance for the job at hand. This ability to scale elements of the application separately provides opportunities to approach design problems in new ways. Where before we scaled simply by adding more servers, which included all elements whether we needed them or not, we can now scale just what we need to meet demand. This changes the design process to include considerations for issues like:

• What processes can be handled by a compute role, possibly from a queue, and processed in the background to reduce front end pressure?
• What degree of scalability will be required by each process?
• How will the application scale up and down? What will be monitored and how will it trigger change?
• What types of data will the application use and what resource can be used to store it?
• Are there content distribution needs that could take significant bandwidth?
• Does our scaling model fit within our pricing, packaging and overhead model? Are there better ways to accomplish same end with a lower overhead? What are the trade-offs?

Each cloud platform has its own capabilities and design patterns so there is a learning curve in deciding which applies to a specific product and project. But once basic decision is made for the platform, the next level is to consider how to design the application so that it can scale and leverage the platform transparently and make the best use of its strengths. It is best not to duck the decision and just go for a simple virtual machine approach because, with the exception of a few special cases, most of the value leveraging a cloud platform will be lost in the process.

If working with the interplay of decisions between your product strategy, technical architecture and business model is something you are struggling with – you should consider joining us for our workshop!  It will help you parse your priorities and bring together a roadmap for product development that meets your needs.

<Read the previous article in the series – Next article>

This series will be covering more in the days leading up to the event. But reading these excerpts will not give you all the material and is no substitute for attending and joining in the discussion.

How To Eat An Elephant

Developing a Real-World 
SaaS Product Roadmap

28th April 2011

from 8:30 am to 1:30 pm
  (including breaks)

The Venue

Embassy Suites – Southeast

7525 East Hampden Avenue

Denver, Colorado

Prices

• How to Eat an Elephant Workshop – Standard price – $499
• Register by April 1st for our Denver Workshop and take advantage of our Early Bird Pricing

Agenda

• The Business Case for the Cloud - Assess if the Cloud is for you by identifying the business opportunity, investment needs, risks, etc.
• SaaS/Cloud Product Strategy – Define the competitive and positioning strategy for your product within your context and your market.
• Your Cloud Business Model - Define how your product will make money and what is needed to make it happen.
Developing your SaaS/Cloud Product Roadmap – Develop a tactical roadmap to align funding, development and marketing objectives.
• Key Technical & Functional Requirements of a SaaS/Cloud Product – Understand the architecture and functional elements required to deliver your service smoothly and profitably
• Cloud Readiness Checklist – Identify key requirements of SaaS and Cloud operations, customer support, legal, financial considerations, sales and marketing that you will need to prepare for to make your product successful.

You can take the workshop by itself or in conjunction with

SaaS University

THE Industry’s Most Comprehensive Cloud Application Conference

At the Embassy Suites, Southeast – Denver, Colorado – April 26th to 28th 2011

Prices

• SaaS University Package – Regular Admission – $999
• SaaS University Early Birds – $799 (Registrations By April 1st, 2011)

Get an additional discount from Scio – Regardless of when you register

• Because we are participating in this event, you can get an additional $100 off your registration.
• Just enter the Scio’s Discount Code: SCIOsave100 when registering for SaaS University.

Go to SaaS University Denver Registration Page

Installment 2: Our 2011 Workshop Series

This is the second article in a series with excerpts from this year’s workshop titled, “How to Eat an Elephant – Developing a Real-World Product SaaS Product Roadmap.” Each of these articles will cover one part of core subjects in our Cloud Product Roadmap. If you are just joining us – you can return to the first article in the series and find out more about the workshop background and other articles in the series.

Cloud Product Roadmap – Product Strategy

Excerpt: Lean Product Development and the Customer Development Process

The Product Strategy section of our Workshop covers the Lean Product Development approach and how it leverages the Customer Development Process. One of the opening slides mentions this quote, “Product strategy is like a roadmap, and like a roadmap it’s only useful when you know where you are and where you want to go.” (McGrath 2001)

This is the core idea behind our Product Strategy presentation and our Cloud Product Roadmap – helping companies considering SaaS and Cloud products to find where they want and need to go.

Lean Product Development rests on a basic premise: The product features that customers will value are unknowns. In the case of a software, regardless of how it is delivered, that means the features and services the application will offer are simply a hypothesis until they have been actually evaluated by users in their own context and use. By using Agile development and practices and evaluation by key customers, product management seeks a minimum feature set that will provide the greatest value while reaching the widest customer coverage. The Agile development approach provides a system of relatively short development cycles or iterations that produce features that users can evaluate immediately.

The Customer Development Process provides the basis for customer involvement, particularly during early product development. The founding team seeks clients who can understand the product vision. These clients will become early adopters and customer development partners during application development. The Agile development iterations are used to test the feature hypotheses with the customer development partners to validate that the features developed provide real value and will drive sales. The point is to find a product that reliably produces value for enough customers to sustain a business model that can be scaled.

Based on Customer Validation, the process continues into creating market demand and scaling sales to reach positive cash flow. The product development doesn’t end however, it continues throughout the lifecycle of the application as the customer pool grows, continually feeding discovery and learning. At the same time, the company itself manages a process of transition from being a product development organization to an operational machine that can continue to execute and serve customers as sales scale.

The key starting point for this process of product and company building is finding the Minimum Viable Product (MVP). This is a product version with the minimum features needed to solve the core problem of the target market. In most cases, it is a lot less product than is necessary for a market release. This is an important difference from the traditional product development process where the aim is to bring together as robust and complete a feature set as possible that will fend off possible competitors and produce an apparently over-whelming feature advantage. This is possible because traditional product development processes depend on the assumption that the market is known and the needs of users are fully understood. It works well when the product line has a solid history of success and the product management team has been participating in the market for some time.

Internet-based applications and services, however, have the possibility of reaching new markets and customer segments that were out of reach in the locally-installed, licensed model – even for ISVs in the market with products. While a SaaS or Cloud product developed with traditional product development methodology could capture its existing customers, it could easily miss newly available market segments with unexplored problems.

To address this gap, Lean Product Development and the MVP approach are aimed at testing the value hypothesis and allowing the visionary early adopters to “fill in the gaps” when it is validated that the MVP is solving a real problem. If the MVP isn’t solving the core problem, the cost of re-evaluating and approaching the opportunity from a different direction is small and early adopters can aid in defining the issues contextually. In this approach, the risk of wasted effort and time are minimized, and the opportunity for clarity in solving the real problem is greatly improved. Once the MVP is proven, the vision can continue to be achieved in small increments without the waste of producing a laundry list of features that in the end no one will pay enough for to realize a profit.

The advantages of Lean Product Development:

• Reduces the risk in bringing a new product to market
• Reduces investment prior to positive cash flow
• Accelerates time to market with a viable product
• Aligns product features with proven customer needs
• Provides a rapid, dynamic feedback loop from the customer that drives product design, product packaging, price structure, and competitive positioning

The competitive positioning issue is one that is worth a few extra words. The Customer Development Process engages customers and creates a shared sense of product destiny. In turn this increases customer satisfaction, loyalty and retention. These are critical to success for online services like SaaS and Cloud Products. It produces a product that fits a client base tightly and is a barrier to competition. It has been shown that products with a Replace Strategy need to be perceived to be nine times better than the product they replace to gain market traction. The longer a customer is retained in a Lean Product Development model, the greater the barrier the competition will have to overcome.

<Read the previous article in the series – Third Article in the Series>

This is just one of many critical subjects we cover in our workshop.

This series will be covering more in the days leading up to the event. But reading these excerpts will not give you all the material and is no substitute for attending and joining in the discussion.

How To Eat An Elephant

Developing a Real-World 
SaaS Product Roadmap

28th April 2011

from 8:30 am to 1:30 pm
  (including breaks)

The Venue

Embassy Suites – Southeast

7525 East Hampden Avenue

Denver, Colorado

Prices

• How to Eat an Elephant Workshop – Standard price – $499
• Register By April 1st for our Denver Workshop and take advantage of our Early Bird Pricing

Agenda

• The Business Case for the Cloud - Assess if the Cloud is for you by identifying the business opportunity, investment needs, risks, etc.
• SaaS/Cloud Product Strategy – Define the competitive and positioning strategy for your product within your context and your market.
• Your Cloud Business Model - Define how your product will make money and what is needed to make it happen.
Developing your SaaS/Cloud Product Roadmap – Develop a tactical roadmap to align funding, development and marketing objectives.
• Key Technical & Functional Requirements of a SaaS/Cloud Product – Understand the architecture and functional elements required to deliver your service smoothly and profitably
• Cloud Readiness Checklist – Identify key requirements of SaaS and Cloud operations, customer support, legal, financial considerations, sales and marketing that you will need to prepare for to make your product successful.

You can take the workshop by itself or in conjunction with

SaaS University

THE Industry’s Most Comprehensive Cloud Application Conference

At the Embassy Suites, Southeast – Denver, Colorado – April 26th to 28th 2011

Prices

• SaaS University Package – Regular Admission – $999
• SaaS University Early Birds – $799 (Registrations by April 1st, 2011)

Get an additional discount from Scio – Regardless of when you register

• Because we are participating in this event, you can get an additional $100 off your registration.
• Just enter the Scio’s Discount Code: SCIOsave100 when registering for SaaS University.

Go to SaaS University Denver Registration Page

Introduction to Our 2011 Workshop Series

This is the first article in a series I will be writing over the next several weeks with excerpts of this year’s workshop titled, “How to Eat an Elephant – Developing a Real-World Product SaaS Product Roadmap.” Each of these articles will cover one part of core subjects in our Cloud Product Roadmap.

Background

First, some background on our workshop. The concept behind the workshops comes from our consulting experience at Scio. We provide Nearshore Product Development for SaaS and Cloud products from our Development Center in Morelia, Mexico. Our clients come from a wide range of industries and cover the range from single entrepreneur startups to multi-national corporations. We focus primarily on the Americas because that is where we can leverage our collaborative Nearshore model best, but we also provide services for companies in Europe and Australia where our background with SaaS applications is particularly important to the projects. Our services center around software development for SaaS and Cloud applications, but in the course of developing apps for our clients we also realize it is critical we contribute what we can to their success.

Over the years we have been providing our services we have found that clients repeatedly hitting the same “bumps” in the road to releasing a service. Some of the issues are business and some are technical. In response, we began to develop consulting services that could help our clients avoid those problems and have a clearer picture of the way forward. These services are strong and well-received, but basically focused on the needs of a single client prior to development by our team. They don’t scale in a way that we could easily provide them in a more generic setting to multiple companies. So – to fill that gap – we developed a more formal approach to what we began to call the Cloud Product Roadmap.

The idea of a Product Roadmap is not new and we’re certainly not the only ones to use the idea. Our particular focus however brings a concentration on the factors that are critical to success in the field of SaaS and Cloud Services. Broadly, our roadmap leverages the concepts of Agile Software Development, Lean Product Development, Customer-Driven Product Management, and the collaborative environment they require at all levels of the project. From our experience and a growing number of practitioners in the field, this is the secret sauce behind a growing number of successful SaaS and Cloud products. The elements of this roadmap are increasingly seen as the standard for product development and management in the field.

The workshop itself is an intensive, interactive discussion of the critical issues and decisions that need to be made to launch, manage and maintain a successful SaaS or Cloud application. It covers both the business and technical aspects involved as well as the iterative cycle of decisions that have to be navigated to arrive at a complete roadmap. The events are intentionally small to provide more opportunities for discussion and adjustment to the needs of the attendees.

So – what do we talk about in our workshop? Here is an except from two slides in our Business Model presentation:

Cloud Product Roadmap – Business Model

Excerpt: The Democratization of Entrepreneurship

A successful business model in SaaS and Cloud Products evolves from a series of iterations between the concepts for the product and the business that supports it while deriving income from the value it provides clients. The process has been best conceptualized in the writings of Steve Blank and Eric Ries and identified as the “Lean Startup.”

The key point is that the ideas behind business model development and the process of developing a successful software product have changed in the last few years. Experience and technology have come together in a way that makes it much easier for individual entrepreneurs to enter the field.

Consider the traditional barriers that confronted entrepreneurs:

• Long, technically-driven development cycles – A lot of the basic functionality required didn’t exist. There where no models or platforms to build on. Development required research and highly-skilled, technically creative development teams. Development cycles were long, feature lists were exhaustive, and the risks were high. Imagine a development cycle of more than a year for a platform that has a regular renewal cycle of three years. Add to that an implementation environment that varies from client to client because they are all isolated. There is a lot of risk to absorb in taking on a project like that and most individual entrepreneurs don’t have that kind of resources.
• The high cost of the first customer – In this environment, the first customer implementation carries tremendous cost and risk. If there is a failure in the implementation or the product fails to meet expectations, it becomes very difficult to recover. Is the product wrong or the customer a unique case? It is hard to know. If you go forward assuming this case is unique, you continue to carry the risk that you have spent a lot of money going down the wrong road. If you assume this is a clear indication that your product is at fault, you could increase your total cost and risk even more by spending the effort to fix the perceived problems. This is exactly the risk that high license fees had to address. The entrepreneur fronting the development of a complex product is taking a lot of risk in an installed environment.
• Limited financing options – The high capital needs and limited options available for a pool of thousands of new businesses created a focus on funding rather than the product itself. This was the era of the one-page business model and the endless cycles of meetings with venture firms in Silicon Valley.
• Expertise in entrepreneurship and product development concentrated in a few places – The skills and resources needed to form a successful team concentrated in parallel with the financial firms that could handle the risk and investment. Outside of Silicon Valley and a few other areas, it was very hard to find resources.
• High failure rate – Entrepreneurism is a process of failure. If you are averse to risk and failure, your upside is badly constrained. With the high investment required, only a few could stand the risk of a new project.
• Slow adoption of new technology – By its nature, the success of a software product depends on the adoption of the basic unit of implementation – the computer or platform that runs the software. If the initial cost is high, skilled resources are limited, and the knowledge of the value that can be derived is low – adoption is limited to the few brave souls with the vision and resources to take the plunge. When communication itself was slower and less driven by the individual, it was very hard to build acceptance of new technology.

What has changed?

• Compression of the product development cycle – Instead of trying to cover every possible aspect of a founder’s vision, current product development processes focus on the minimum number of features required to deliver value. Using Agile development techniques, a functional application can be evaluated much sooner and put in front of customers at a much earlier point. Add this to the ubiquitous delivery medium of the Internet and you have the capability to reach a wide range of prospective customers in a very short period of time. This allows you to leverage customer much sooner in the development cycle and correct your course while your risk is still manageable.
• Lower funding requirements – Over time the number of tools and services that lower the effort required to build and implement a product, especially in current cloud configurations, has increased geometrically. This lowers the time-to-market and investment needed, which creates an environment where investment can be forestalled until a ramp up is justified by market acceptance, positive cash flow and real customers.
• Funding tuned to encourage and manage the search for a sustainable and scalable business model – Smaller steps in the development cycle, success-based funding, with a focus on waiting for key investment until a repeatable and sustainable business model is found. In fact, in many business to business models, venture funding is not needed at all. Positive cash flow and traditional business instruments can carry the load.
• Entrepreneurship recognized as a management science - The overarching process and philosophy is well understood. A successful business model is not luck. It is achieved with a roadmap approach that can be repeated over and over.
• The consumer Internet paves the way – The acceptance of the Internet by consumers and the change in their perceptions of technology is becoming part of business DNA.

The Second Installment in this Series is now Available >

So – Are you considering or developing a SaaS or Cloud Product? Are you operating a Service that isn’t reaching it’s potential? Do you want to know more about how you can leverage the success others are having in the field?

• How are you going about the process of business model and product development? Is it serving you?
• What do you know about current techniques and experience in the field? Can you evaluate which ideas could work for you?
• Do you have a product roadmap?  Do you know how to put one together and use it?
• Do you know how to navigate your product to a successful launch while minimizing your cost and risk?
• Do you know what it takes to operate and maintain your service while continuing to respond to your customers needs?

…This workshop answers these questions and many more. It leverages our field experience across many projects and many situations

How To Eat An Elephant

Developing a Real-World 
SaaS Product Roadmap

28th April 2011

from 8:30 am to 1:30 pm
  (including breaks)

The Venue

Embassy Suites – Southeast

7525 East Hampden Avenue

Denver, Colorado

Prices

• How to Eat an Elephant Workshop – Standard price – $499
• Register By April 1st for our Denver Workshop and take advantage of our Early Bird Pricing

Agenda

• The Business Case for the Cloud - Assess if the Cloud is for you by identifying the business opportunity, investment needs, risks, etc.
• SaaS/Cloud Product Strategy – Define the competitive and positioning strategy for your product within your context and your market.
• Your Cloud Business Model - Define how your product will make money and what is needed to make it happen.
Developing your SaaS/Cloud Product Roadmap – Develop a tactical roadmap to align funding, development and marketing objectives.
• Key Technical & Functional Requirements of a SaaS/Cloud Product – Understand the architecture and functional elements required to deliver your service smoothly and profitably
• Cloud Readiness Checklist – Identify key requirements of SaaS and Cloud operations, customer support, legal, financial considerations, sales and marketing that you will need to prepare for to make your product successful.

You can take the workshop by itself or in conjunction with

SaaS University

THE Industry’s Most Comprehensive Cloud Application Conference

At the Embassy Suites, Southeast – Denver, Colorado – April 26th to 28th 2011

Prices

• SaaS University Package – Regular Admission – $999
• SaaS University Early Birds – $799 (Registrations By April 1st, 2011)

Get an additional discount from Scio – Regardless of when you register

• Because we are participating in this event, you can get an additional $100 off your registration.
• Just enter the Scio’s Discount Code: SCIOsave100 when registering for SaaS University.

Go to SaaS University Denver Registration Page

There have been some mentions in the press recently of the “platform strategy” of some of the leading technology companies. Generally it is a key part of planning a technology business strategy, but we’ve found the point is often lost when considering new SaaS and Cloud-based products.

First – what is a platform strategy? This question can be somewhat complex to answer because it is a term that is used in business, product development and technology. It can be a set of standards, a brand, and a group of common components used by several products. For our purposes, the last point is the most important for technical products, but all the uses of the term are important to leverage for any business. When you build a SaaS or Cloud product, there are operational requirements that you will find are common to all services of this class. This includes new account provisioning, user and account management, billing, settlement, maintenance – and all the other operational aspects of the service. In the best case, in addition to addressing this common functionality, a platform strategy can allow each additional product to leverage the client and partner community in a way that makes the entire suite and surrounding ecosystem of products more valuable.

But, it could also be said that a platform strategy is “wishful thinking” for a new entrant into the market. Without significant adoption of the first product, a platform strategy is a capability without a need. Consider the iPhone. Would the iPhone App Store matter if the iPhone itself was not a runaway best seller? The popularity of the core product drives a community of developers to wade through a somewhat opaque approval system to reach a very crowded field of applications with the hope of “hitting it big.” Can that kind of success really be replicated outside of a “hot consumer market?” Is it worth the effort to even worry about?

The reason this has been a subject of interest for us at Scio is that we work with many new entrants to the SaaS and Cloud Services market. Part of our consulting offering is to help them develop a product roadmap so they can develop a product in logical phases. What we want them to avoid is spending the effort to develop a risky “full product release” with a long list of complex functionality that has no proven market. A roadmap helps them to focus on bringing the product to market and reaching a positive cash flow quickly.  It can also result in a higher level of thinking when it comes to considering the necessary feature development. As an example – It is easy to consider a price and package management system as a “one-off component” for a product during early development. A product manager will say, “Which features really deliver value? Just develop some price levels for the service.  Is that complex?” It isn’t until sometime down the road, when marketing wants to add discounts, promotions, special market pricing, that it begins to put a drag on other priorities. If the pricing management system doesn’t allow for these concepts, each has to be coded into the application before they can be applied. If you take the logic further, what if you add more products or different mixes of capabilities to the service? How will your simple approach cope? Will it become a constraint on product development and marketing?

But, developing a pricing system that can handle a multitude of scenarios is certainly a lot of effort and “beyond scope” in early product development efforts. This is where the roadmap begins to play a role. You know you need a pricing system from the first day – but you have no idea of final requirements and how much effort you can afford to use to build it. Knowing that, you could chose to leverage a service that has broad market acceptance instead of building your own in the middle of developing critical end user functionality.  The service will have  enough options to cover a wide range of scenarios out of the box and will be billed on a pay for use (utility) model. If you have developed with that strategy in mind, you can always make the choice to develop a more specific component later, when you have a better idea of your product requirements.

The same is true from a “platform strategy” point of view. If you have developed with the idea that your client community has value beyond your first product, there are choices you could make that would make it easier to allow client data to apply across the platform at a later time. If you see an opportunity at some point in time to “open up” your user community to partners, it makes sense to architect in a way that you can control the asset, but also make it easier for others to use.

While it seems these ideas should just be “good sense” and standard practice to avoid costly restructuring later – it is actually difficult to convince most ISVs to think beyond the current product, towards a longer vision and roadmap that would align architecture and development with a business strategy.  If an ISV could adopt this longer view of capabilities, it would increase their options tremendously, but still, few consider their options.  Maybe this is because it is a part of the “continuing evolution” of SaaS and Cloud Services. Traditional products designed for a on-premise installation didn’t need to leverage a common operational framework and asking most client IT teams to set up a complex system is inherently risky.  Multi-tenant architectures lend themselves to this sort of thinking. Freestanding, independent applications installed individually do not.

So – this is our suggestion: If you are considering a SaaS or Cloud Service product, don’t skip considering a product platform strategy even if you don’t know if you will ever have the opportunity to use it. It will change the choices you make, standardize your architecture and improve your options no matter what happens in the future. It’s that simple.  In all honesty, we highly recommend SaaSGrid from Apprenda because of our experience with the product and because it provides both an immediate payback in reduced development time for common operational functions and a route to multiple products and suites on the same platform.

If you would like to hear more about developing your product roadmap – please consider joining me at SaaS University in Denver, Colorado April 26-28, 2011. I will be giving a presentation on “Lean Product Development for the Cloud” and a four hour workshop titled, “How to Eat an Elephant.” We will have information in the next few weeks including discounts (!) so watch for our next blog entry…

See you there!

How many times have you seen software marketing pursuing “feature comparisons” – either as a method to breakdown version options or as a comparison against competitive brands?  Does “thousands” or “millions” of times sound more accurate? Can you navigate feature list comparisons?

If we were really honest. I’d bet most of us would admit when faced with feature lists we simply resort to numbers. Product  A has X number, the alternatives have X minus. But then, who makes up the list? And who says which implementation of a feature is “better” or even real? The marketer making the table is the one making the rules of course. If I make a feature comparison table, you can bet my product or service will have “more” checks in the boxes against the list I make.

So, what really counts?

I was reminded of this discussion (which we at Scio engage in as a matter of course when we start considering development of a new product for a client) by two recent blog posts by SaaS and product marketing gurus, Peter Cohen and George Colony.  Peter’s post, “Too many choices aren’t necessarily a good thing” points out that most customers, when faced with a lot of choices simply freeze and don’t buy. We see this all the time. Entrepreneurs entering the field of SaaS for the first time are often overwhelmed by the number of choices they are faced with. In response, they either drop the idea of developing a product “for now” or simply make a few gut level choices and charge on hoping for the best.  Most put the idea on hold.  Considering the risk, if they can’t parse the choices or get someone to help them, maybe it’s for the best.

George’s short post, “Apple Versus Nokia: The Primacy of Design” contrasts the returns on the Apple approach to product options to Nokia. Nokia has 86 models of cell phones available. Apple has two. Nokia sold 111 million phones in Q2 for a net profit of $286 million (3%). Apple sold 8.75 million cell phones for a net profit of $1.1 billion (21%).  Which business would you rather own? Better yet, which business would you rather run on a daily basis?

Of course, there are many sides to the question of buyer choice. Maybe buyers do want the “cool factor” as some say of Apple products. On the other hand, if Apple had an additional 84 models – would it actually sell more phones at the same margin? The answer is – most likely no. The cost of development and manufacturing alone dictates that in a market with limitations (not everyone wants a phone, needs a new phone or can afford one with service) that significantly more models will inevitably result in a higher margin and lower profit, even on higher sales.

There is also another factor, perhaps more interesting for the SaaS market. To a large extent, Apple is selling to end users. They have only one carrier, AT&T. There are a limited number of calling plans available for the iPhone. Buyers don’t have a lot of choices to make beyond, “Do I want an iPhone?” Nokia, on the other hand, is actually selling to carriers. Carriers differentiate on the combinations of brands, models  and plans they offer. For end users, this makes their choice even more complicated. You want phone X because of features Y and Z? That is only available under plan B with carrier C in your area. In the end, most users end up making the choice simple by asking “how much can I afford and still get decent service?”

Considering this paradigm in the context of a SaaS product – I would point out:

• SaaS is by and large a “business-to-business” (B2B) market where purchase is funded by a business client but endusers ultimately determine value and client retention.
• The more options a pricing plan has the less likely it is the client can make a logical choice for their users. Faced with a wide range of options, most will simply pick the highest or lowest price depending on their immediate budget and perceived value. That choice may or may not work well for their users, which one way or the other will play out in adoption.
• Feature lists do not equate to usage. Experienced SaaS vendors with feature monitoring and metrics can tell which features are in use by which roles, by size of client, by time of the day, month, year and a lot of other factors. Vendors of premise-based, licensed software rarely, or never, have access to that kind of data.

Understanding these key differences in marketing, pricing and determining features for a SaaS product are critical. Starting out, a SaaS product is much better off focusing on a narrow set of features (the 80% of value is driven by 20% of features – the Pareto principal) with customer development leading the way to a product that meets real needs.

The simple facts are:

• Having a strong understanding of the core value your service can deliver to its customer is not the same as knowing what endusers need to utilize it.
• Most often core value is supported by process and decisions within the client operation – incorporating and integrating them in the application is key to retention. If you don’t – eventually client workarounds become solutions or existing solutions become barriers to adoption.
• Monitoring, embedded user feedback and client interaction can (and should) be built into the “application suite” from a user point of view and part of the product management/feature development process pre- and post-release. Progressing from the core product to a form that quickly and continuously delivers value to endusers does not need to be an act of black magic in SaaS.  The tools and methods are available, accepted and expected by users and clients in today’s market.
• Building from the “visionary core value” to delivering a service driven by user and client “pull” puts the vendor in a very unique and competitive position. The client’s perceived value increases beyond cost and if they understand the product development process, becomes a key factor in retention.

But all this brings up one question -

What is “Core Value” for users and clients?

To answer this question, I suggest borrowing from the Theory of Constraints and ask, “What limitations will the service remove for clients or endusers?”

• Will it remove questions caused by the lack of quality data or understanding?
• Will it remove costs that prohibited action?
• Will it remove long processes, strict controls, rules, workarounds, or assumptions that limited users or client capability?
• And finally – What value will removal of the limitation unleash for clients?

Notice that cost and value are not the same. A simple accounting of costs does not account for lost opportunity or gained speed, quality or competitiveness.  It is also important to consider that in many cases, the client cannot see what they are currently doing as a limitation. It is simply what they do to achieve a goal. Gaining adoption requires creating the vision of what would be different in the end while still accomplishing the goal.

Figuring this equation out and developing the vision isn’t light work. But it does put a different light on marketing, the features required and the pricing of the service. It is equally important for new services and existing offerings. It is an on-going activity – it doesn’t end on day one of the new product release or after the latest “version” is in front of users.

So, it might seem that “Keep It Simple, Stupid” (KISS) applies, but in truth, there is nothing stupid about understanding and acting on core value in SaaS. Clearly understanding what a client sees and can realize as value is the key to developing, marketing, pricing, sales, adoption, retention and success in SaaS.

I can think of many reasons to be at SaaS University in Washington, DC, July 20-22, beyond my session and Scio´s workshop. But I want to be clear: The sessions at SaaS University are always changing, always relevant to developing SaaS products and successful SaaS businesses. It is the only venue available with a focus on helping SaaS vendors navigate a complex business model.

This time I have the honor to be presenting a session on the second day titled: Increase Your Bottom Line Value with Multi-Tenancy.  Here is the session summary from the University agenda:

There is a lot of debate about multi-tenancy.  Most of us understand its value from a technical point of view, but what can actually translate to our bottom line?  How does it change what we are able to do to increase operational efficiency and customer retention?

Multi-tenancy is not a magic bullet, despite what you may have heard. Implementing your SaaS application with a multi-tenant architecture offers great returns, BUT ONLY if you understand how to leverage it along with metrics, operational automation, your ecosystem, and the network effect of your customer base – effectively.

This session will answer questions concerning the value of:

• Different architectures for implementing multi-tenancy and maintaining flexibility.
• Reliability, scalability, maintenance, and product evolution to your clients.
• Multi-tenancy in operations across your product organization.
• Implementing metrics in a multi-tenant application.
• Your customer and user network, delivery network and ecosystem under multi-tenancy.
• Methods of implementing multi-tenancy without breaking the bank or slowing product release

This session is strategic for C Level executives and product managers planning, implementing, or enhancing a SaaS offering. Participants will come away with a clear understanding of how they can leverage multi-tenancy at every level of their service and increase their bottom line potential.

This session is replacing a similarly titled session by planned Lincoln Murphy because of a scheduling conflict he has encountered. I want to thank him for his recommendation that I take his slot. I must say, although I want to keep the same broad focus for this session, my approach to this subject is different than Lincoln´s. My background with multi-tenancy comes from planning SaaS products with Scio´s customers and many years of working with companies on Internet-based business models.

In itself, multi-tenant architecture is not new.  The same could be said of the SaaS business model. What is still new is the broad market attention to on-demand services and the opportunities that virtualized infrastructure gives to business. The knowledge of how to leverage architecture and technical choices to impact product features, customer value and operational effectiveness is what is lacking in my experience. This is what I will lead discussions on in my session at SaaS University.

In addition, if you aren´t aware of it, SaaS University has a third day of full day workshops that provide a ¨deep dive¨on specific subjects. Our own session is Charting Your Course to SaaS, which will help it´s participants navigate all the choices they face in developing a SaaS product while they develop a road map that can get them to market and positive cash flow sooner.  I can also personally recommend Jim Geisman´s Right Pricing Your SaaS System: Beyond the Basics – Advanced Workshop. Jim and I had the opportunity recently to give a workshop together and I greatly enjoyed the experience, and I know our audience did also. Ideally, product teams should consider sending representatives to both workshops because they are complimentary points of view that are very important to understand.

So, with that background, here is the overview of our one day session at SaaS University for July 22, 2010:

Charting Your Course to SaaS – SaaS University, Washington DC, May 22

This is the third time we’ve offered this comprehensive workshop on SaaS and it continues to evolve as we respond to the needs of our participants. Following our joint workshop with Jim Geisman of Software Pricing Partners, we’ve continued to tighten the content and for SaaS University, will offer a more interactive format for this workshop, especially during the afternoon. The aim is to keep it small enough to allow everyone a chance to move the discussion toward the issues that interest them most.  It remains however, the only workshop that covers the business, operational and development issues that are critical to success in SaaS.

Companies that can benefit by attending this workshop:

• A new venture or as an ISV with on-premise products considering developing a SaaS offering
• A service company with significant vertical expertise than could be delivered and monetized in a SaaS model.
• An existing SaaS provider who made choices opportunistically that now constrain growth and cash flow.
• A SaaS entrepreneur with limited funding that needs to achieve positive cash flow early with products that evolve with the market.

Company challenges this workshop can help overcome:

• Building out a suite of products but are unsure of the strategies, metrics, and operational models needed to grow.
• Developing a framework for sorting out technical and strategic choices required to move to the SaaS business model.
• Facing significant operational problems including efficiency while keeping churn under control in an existing SaaS product.
• Developing a product roadmap and unsure of what can be accomplished and timeframes

Topics to be Covered:

• How is a SaaS Product and Business Different?
• Reference Framework for Creating Your Roadmap
• Making Strategic Development Choices
• Operating A SaaS Business by the Metrics
• 10 Ways to Fail at SaaS
• Applying Lessons Learned to Your Issues

Who Should Attend?

This workshop and seminar is important for anyone considering a SaaS product, in the process of developing a product or offering a product that hasn’t reached its potential, including: Entrepreneurs, CXO’s, product managers and key executives in startups, vendors moving to SaaS or existing SaaS companies.

About Your “Professor”

Mike Dunham, Vice President, Service Engineering for Scio Consulting, has over 25 years background in the development and introduction of new technology working with startups, government and the largest enterprise software companies. He has worked with Scio for five years, regularly authors articles on SaaS and the software industry and hosts a series of podcasts on SaaS best practices. Mike leads Scio’s professional services helping companies develop and bring to market new SaaS offerings.

The workshop costs $695, but you can get an Early Bird Price of $495 when you combine it with your SaaS University registration - total package price of $1290. As a way to bring together a great amount of information in a short period of time, the combined package is a great opportunity. As we get closer to the event, I’ll expand on the agenda, but this is a great time to start planning and get your team together to attend SaaS University in Washington, DC!  I hope to see you there…

At Scio, we’ve been working towards a goal of achieving a “standard” process and platform for developing SaaS products for a long time. Of course, when it comes to services, nothing is ever “done” – it just reaches a point where you know you are achieving goals, satisfying customers and can continue to improve over time.

We’re in the business of developing SaaS products. To develop custom products economically and reliably, you have to build or adopt tools, methodologies and repeatable processes that streamline the process, cut out unnecessary waste, and control risk. We, like many software development groups who have adopted Agile development processes, have realized that much of the business of “manufacturing software” aligns well with the concept of Lean manufacturing and product design.  In fact, the leading Agile consultancy, Poppendieck, has produced a book on the subject.

But what does this have to do with SaaS? Our move down the Lean and Agile road is not an accident. It is our core belief that customers will be more successful if they and their products and business processes are also Lean and Agile. We’re not alone in that thinking. Bessemer Venture Partners, in the latest release of their Top 10 Laws for Cloud Computing, covers the core concepts even if they don’t acknowledge them as Lean specifically. Steve Blank and Eric Ries recognize something they call a “lean startup.”

So – what is the core of Lean as it applies to SaaS?  The original concept of Lean was started in Japan and has been defined as:

• Build only what is needed
• Eliminate anything that does not add value
• Stop if something goes wrong

At Scio, we’ve translated this to:

1. Build only what is needed – Agile and Lean are customer-driven methodologies. Building what is needed assumes you have a customer and you can get feedback directly and honestly from users. This doesn’t mean focus groups however that are just about “improving the current status quo.” As has been said, “If you asked people in the early 1900′s what would improve their personal transportation – we’d all be riding better horses.”  SaaS products are also user driven, as we and others have said many times.  To know what is needed, a SaaS vendor needs to get their product in front of end-users as early as possible and go through a “verification of vision.” This means testing the hypotheses that the product provides value, users will use it productively and customers will pay for it. At Scio, we’ve acted on this idea  by standardizing on SaaS specific platforms, services and frameworks (like SaaSGrid) that eliminate the development of the operational aspects of SaaS and provide a consistent multi-tenant architecture that can be used across multiple products. This, coupled with Agile scrum principles allows our customers to get their core products in front of key customers in three to four months. Because these common aspects of SaaS products are available on a “pay as you go” model, they don’t contribute unnecessary costs to the needed capital to launch a product and they only contribute incrementally to overhead.
2. Eliminate anything that does not add value – Getting a product in front of actual paying customers as soon as possible means not developing features that do not directly add value for end users. This assumes you can field test the feature set early and is the next level of verification just below the first point. It assumes what is known in Lean as “pull-driven” features – features that users need and actively advocate. It also points to the “slow drip of new features” that users expect from online services rather than the “version-driven” approach of traditional software releases. It does not however mean the end-user “defines” the product vision. This is where the first point and the second separate. Innovative products rarely rise directly from customer requirements, but value-driven features can and do.  For us, translates to building on modern extensible architectures that don’t require extensive re-writes to implement new features over time and “post release.”  We also ask our clients to take their assumed feature sets and apply the “80-20 rule” – which simply says that 20% of all features of a product will deliver 80% of the value. In Lean, features that do not add value are considered waste, but there are two forms of waste recognized: Those that do not add value but are unavoidable with current technology and those that create no value and are avoidable with a better design.  This also leads to more concentration on “user-experience” and understanding of the user’s context and avoidance of risky, over-complex projects.
3. Stop if something goes wrong – SaaS products naturally reach different audiences based on marketing, vertical demand, market maturity and the delivery medium of the Internet itself. But, what happens if your development cycle for a complete product is the 12-18 months common projects in traditional software? Your initial cost and risk go up drastically and if your vision is off the mark, failure can be very costly. At Scio, we focus on developing a core product that can reach paid customer release in six months or less. This keeps risk low and insures new products have the potential to reach positive cash flow at the earliest possible point in the product lifecycle.  This also fits with the mantra, “fail early and often.” A product can be a complete failure of vision or there may be just certain aspects that miss the mark. Either way, you need tools to monitor product usage and user feedback and a roadmap that allows you to get market verification early and to avoid “big bang” releases that are costly and not led by “pull” from users.

Lean also leads into continuous improvement – which is part of the service-led concept of SaaS. There is no “perfection” – only continuous improvement over time lead by user pull and innovation. The steady drip of user-led improvement leads to better retention. lower churn and a longer customer lifecycle – key SaaS metrics.  Better understanding of the value stream, another principle in Lean, leads to better pricing and more value recognition by customers.

There is a lot more to cover in terms of the alignment between Lean, Agile and SaaS. Take this as your “introduction” and follow the references I have provided. I’ll be adding more articles about this important subject in the near term – so watch for the Lean tag in our cloud – but in the sprit of Lean – we’ll stop here for now.

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.