People write a lot about SaaS and focus on the famous “no-software” phrase that Marc Benioff coined. What many people fail to discuss is that the SaaS model, even if one ignores the products themselves, brings real value to customers and puts them in the driver’s seat for the first time. So for once, let’s not talk about technology or delivery mechanisms, but rather focus on the change in the most basic rules of the game that the SaaS revolution is creating, with or without a planning hand from the SaaS companies side. Most of this change is affecting my favorite segment, the Small and medium businesses (SMBs), so let’s talk about how SaaS impacts the way SMBs treat IT.

It changes the power play: SMBs were always in an unfavorable situation: most of the software companies they interacted with were larger than them. Larger as in Mammoth and a penguin, not as in Magic Johnson and yours truly… IBM, SAP, Oracle, Microsoft, Symantec, McAfee… want more? How does it feel to be a 100-employee (or 1000 employee for that matter) business, negotiating and buying from a 100,000-employee enterprise? Because SaaS is so disrupting, virtually every SaaS company (Salesforce.com excluded) is still an SMB. Even Netsuite, with 100M in revenue, still cares dearly for a $50,000 a year deal and will go hand in hand with the customer to get the deal sealed. Don’t you miss buying from companies that ring the bell when they get your business? You may think it is a temporary advantage? You are right, but read the created natural checks and balances below.

SaaS companies need to earn your business again, and again, and again… When was the last time you felt that all your vendor wanted was to get the deal and forget about you? To be perfectly fair, it doesn’t happen because evil people go to work for large software companies, and the pure in heart find the way to SaaS companies. It happened because you wrote a check in advance for a product which is always more art than science. Let’s do the numbers: you paid $50,000 for a software product. Here is how your vendor looks at your business: Day one: $50,000; from day two to day 1825 (assuming you will keep the product for at least 5 years): about $20,000 more, assuming the average customer will sign up for support for about half of this period.
Now let’s evaluate how a SaaS vendor looks at the same customer (assuming $15,000 a year): Year one, 15,000; Year two: 15,000; year three… you got the point. For SaaS vendors the first year (and in many cases the second as well) means pure loss and a negative cash flow. If a SaaS vendor cannot keep its customers for at least five years, they may as well flip belly up now and save the sweat and tears.
How do you keep customers for five years and more? You make them happy. Every day. Very happy. Jack Welch said once: “you don’t get what you expect, you get what you inspect. We all expect that our vendors will treat us well even if we paid 70% in advance, but in reality, enterprise businesses are measured on the first transaction and this is where they aim.

Disclaimer: being perfectly fair, Intuit and Adobe proved that you could be an on-premise vendor and score high on customer satisfaction. The reason is the tiny size of the initial transactions they get from their customers, so upgrades for additional services act like renewals. When you sell a $150 package, you are doomed if you don’t get your customers to buy additional services from you and upgrade every three years.

Continue to Part 2…