Monday, November 2, 2009

SaaS, Social Media, and the Economics of Smart Buyers

There are a few trends in the industry that are worth commenting on in that they relate in a very interesting way.

Economics Shifts towards Renewal/Retention: Software-as-a-Service and subscription-based revenue models in other industries have shifted the economic weight away from the upfront sale and towards the renewal in those businesses

Information Access becomes Free: The information resources available on the Internet have put buyer education in the hands of buyers, allowing them to educate themselves more easily than ever before.

Brand Reputation Control Shifts to the Audience: Social media has taken brand reputation out of the control of marketers and into the control of the audience, both in terms of good reputations and bad reputations

So, what is interesting about this? If we look at this from a purely theoretical standpoint it begins to become clear why it is the right strategy to begin to freely provide education, insight, guidance, and help to the audience at large through social media.

Looked at simply, the social media investment we make in providing guidance, best practices, pitfalls to avoid, etc, is an investment in buyer education. It is not a direct cash investment, in the same way that we historically would have made large cash investments in marketing campaigns. However, as anyone involved in social media knows, it is a significant investment in time and energy. Many times this investment of time and energy comes from key folks within your organization.

Buyer education can be a double-edged sword. More knowledgeable, sophisticated buyers know what they are looking for, they can easily determine what is right for their business, and what capabilities they do and do not need. They are more able to look beyond flashy demos and slick brochures and dig into less sexy things that will really matter; service levels, community depth, ability to map to their precise business process. This can wreak havoc on businesses that focus heavily on selling at all costs, as it allows customers to only purchase what is truly going to fit their business, and avoid surprises after the sale. However, customer satisfaction among educated buyers is generally much higher as they avoided these post-sale surprises and bought solutions that were well fit to their needs.

Customer satisfaction makes more sense the more your business is dependent on retention. If your business model is based on a one-time sell, with a single up-front payment, you are much less tied to customer satisfaction than if your business model is based on a long-term, recurring revenue stream. Software-as-a-Service (SaaS), and many recurring revenue model businesses are well aware of this. Whereas in the historical, on premise, model of software sales, post-sale surprises were the norm, with SaaS, they have a much higher economic cost to the vendor.

Social media acts as a magnifier on this effect as it puts control of brand reputation squarely in control of the audience. Products that do not deliver on their brand promise are quickly discovered and communicated, whether through structured reviews, such as in the travel industry, or one-off efforts, such as the United Breaks Guitars song-writing crusade.

An investment then, in the product itself, becomes the best marketing effort that many organizations can make. With this, I am referring to the whole product experience, including the service elements around the product and after the sale. We’ve seen many examples of this, with Frank Eliason at ComcastCares and Tony Hsieh at Zappos being among the more prominent examples.

Looked at from a high level, there are two very distinct cycles. In today’s businesses, with a reputation is easily shared through social media, and many with revenue models that are recurring, it makes the most economic sense to invest in educating buyers and in the product experience itself. This way, although you may end up with slightly fewer new customers, due to educating some in a direction that does not indicate that they have a need, you will end up with more satisfied customers over all. Contrast this with a historical model, that was dependent on a flashy demo, and great marketing, but not satisfied customers, the investments would be in significant marketing promotions and demo-friendly features.

In today’s market, especially in SaaS and subscription-based businesses, the recipe for success has changed, and it has done so based on the underlying economic drivers as much as anything. It is a change that is for the best as it aligns the interests of software vendors and software purchasers more tightly than they ever have been aligned before.
Many of the topics on this blog are discussed in more detail in my book Digital Body Language
In my day job, I am with Eloqua, the marketing automation software used by the worlds best marketers
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