Although everyone already has read “Crossing the Chasm” by Geoffrey Moore, still most of the business management/ERP products are quite generic or adapted to very few broad verticals like “Services” or “Wholesales”. In reality, calling “services” a segment is nothing but marketing: there are hundreds of very different subsegments in this industry with different needs and requests: real estate agents will need good CRM and follow-up systems, and a link to MLS, and most probably will require a good BI system that can bridge both. Contractors will need great project management systems, and lawyers will need good billing capabilities. All of them are part of the service industry, but they have very little in common.
The common justification for horizontal products is targeting a wide base with a common problem. By definition, it forces the publisher to aim to the lowest common denominator and make very few customers really happy. In a way, by creating a very horizontal product you can make 90% of the market 30% happy. This is a lot of unhappy people whom you are missing as your biggest supporters. In real life, voids tend to be filled: in this case, the VARs (Value Added Resellers) or the SIs (System Integrators) fill the gap with customization and detailed implementation. It is not uncommon for an SMB company to spend $100,000 and more on implementation and customization alone. Still, the customers never have enough money to pay for the “perfect” implementation, and the outcome is a gap in the total solution fit–a gap that always translates into loss in customer satisfaction. In this simplistic diagram you can see that a horizontal product calls for higher investment in implementation and total project cost and is still creating a fairly wide uncovered space that translates into lack of real customer satisfaction. One should also take into account that more implementation means not only more money but usually massive stretch of the core product, sometimes to the point of failure.
So the industry got used to mediocre customer satisfaction, as if it was a fact of nature. Just like we treat the airline industry–anything beyond safe landing is a bonus…
What happens if your product becomes better segmented (both for customer size and vertical)?
The results are displayed using my ultra sophisticated diagram. With a better fit out of the box, less implementation is needed, the product is not stretched to its limits and the gap in customer satisfaction is smaller. I can draw more and more diagrams like this, but you get the point… This is why companies like PayCycle can report stunning net promotion rates: they are focused on very small companies only and on very specific needs. No implementation is needed and customer satisfaction reaches its natural top (no 100% in this business…)
This issue is even more important in the SaaS world. Say you put your eye on the new SaaS offering: Business Today (don’t google the name. I made it up). They offer an attractive package of $149 per user per month, no strings attached. For your 10 users you will be asked to pay a modest amount of $1500 a month. For the whole year you will need to budget only $18,000, a reasonable amount for your $5M company. The mismatch will come in implementation costs: your friendly partner will plan on 30 days’ implementation project that will cost about $50,000. If your demands are more unique, you may pay double this fee. In this premise world the high implementation fee did not stand out that much. License fees and consulting were all part of the big project and they felt balanced. In the monthly payment world of SaaS, the lump of implementation costs feels strange.
What to do? The software publishers need to invest in segmentation. It is tempting to think that you can attract 20M businesses in all industries, but it is an illusion. Go vertical, attract a smaller group, but attract them really well with a brilliant offering that will stand out, out of the box (or should one say out of the screen for SaaS products??). Partners should follow by becoming experts in vertical areas so they can productize their work to become more efficient.
This is a classic win-win: customers get more suitable products for a better fee, partners get more volume and better reputation, and the publishers get into an untapped market.