In our last article we have looked at the business model elements of Software-as-a-Service (SaaS). in relation to Research & Development (R&D) activities.
This is part 3 of our series on business model innovation tactics for SaaS.
And it focusses on sales and marketing (S&M) from a business model perspective, yes!
S&M expenses are often the biggest ticket item in the early years after product launch. See below the Slack's cost structure as an example.
This is a truth that not everybody may like because many SaaS co-founders are technically minded. They are likely programmers-in-chief rather than chief marketing officer.
It's important for innovators to learn about the areas that we are less comfortable with.
And interestingly, sales & marketing playbook elements reach all the way back to the design, hence R&D, of our solution.
Sample SaaS cost structure: Slack
Slack launched in August 2013 and had their IPO in April 2019.
As late as 2 years prior to their IPO their Sales & Marketing (S&M) costs still stood at 99% of their revenue which was ~$100m.
And it still consumed 58% in the FY ending 3 months before their IPO.
Note that we can’t use the post-IPO data because it includes large amounts of stock-based compensation for the sales & marketing folks distorting what was actually spent in that year.
You will see Sales & Marketing expenses in the vicinity of revenue or even higher for many startups in the first few years after revenue generation starts. If you needed evidence that S&M is really important from a business model perspective, this should give a strong clue.
SaaS Sales & Marketing business model canvas elements
Now, let’s use our popular tool, the business model canvas (BMC) to show the tactics related to SaaS Sales & Marketing (S&M).
What is a S&M BMC?
Well, trying to have an complete biz model canvas for any company would be very complex. By showing only key element related to one aspect - here sales & marketing - we can reduce the complexity.
I call each of the number below a business model tactic (or innovation tactic).
And the remainder of the article will refer to these numbers and elaborate briefly on each.
Let's start with channels - specifically Sales & Marketing channels.
Two important elements are the:
- Freemium pricing model
- Usability in common web browsers
It may sound strange but both these elements gain their importance for the same reason: to reduce frictions to the usage of the software.
The Freemium model is important because it allows users within corporates to get started without having to go through any procurement or purchase processes and approvals.
Equally, in many companies these days, employees don't have admin rights on their computers and thus cant install software without IT approval. By making our SaaS solution work in common browsers we avoid this friction as well.
Freemium vs Free Trial
We should be clear what Freemium is to start with. Too many other things get confused with Freemium (even in reputable sources).
First, let's distinguish Freemium from Free Trial.
ClickUp is an exciting team collaboration SaaS solution. Looking at their pricing table we see a clear example of a Freemium.
It has a free layer and paid layers.
It's important to note that:
- the free layer is for an unlimited period (otherwise it's not FReemium) and
- that - therefore - it is limited in some way or form in its feature set compared to the other pricing layers
The image only shows a small portion of the feature set. But you know how it works because you have seen it in other SaaS solutions.
Here we have a screenshot from Concur - also a great SaaS solution. It's now owned by SAP.
And it's in the enterprise software space (what was known as Enterprise Resource Planning software or ERP traditionally).
As you can see - they don't have a Freemium model. They have a Free Trial.
Two key difference from Freemium:
- It is time-limited
- It offers access to the full feature set (for the limited time)
Below is another example for a Free Trial from another exciting innovator: BambooHR and you see the same.
Always free (without paid layers) is not Freemium
Secondly, not everything that provides free access is a Freemium model!
I see authors claiming that Google and Facebook and many other are based on the Freemium model (ouch).
These and many others are monetising on advertising. Freemium is composed of the words (Free + Premium). I.e. there is always a "premium" (i.e. paid) layer involved. Google, Facebook and many other don't have this because they are monetising on ads.
(Note: Twitter announced just this week - what a timing! - that they will experiment with a subscription model. We will see more what happens in this space. But this doesnt change my statement above - at least not for the foreseable future.)
Freemium is not a silver bullet
I have a few closing comments on Freemium:
- It's a pricing or monetisation model - not a business model
- Freemium works for certain types of SaaS solutions and is not suitable for others, esp ERP-type software (which is why they use free trials)
- Freemium works in conjunction with other business model elements as we will see (and you need to understand these)
- Freemium is not a silver bullet and comes with risks (e.g. customer that never convert, very long sales cycles, costs, etc)
This article is not about Freemium model. It is about innovative sales & marketing business models in SaaS which the Freemium is one element of.
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Business Model Canvas innovation tactics
Freemium also enables a different type of customer relationships than traditional software / SaaS.
(2) The Freemium model and usability in common browsers and its dedicated app sets off a process of self-adoption from the bottom up.
We could say it's a pull rather than a push approach to customers.
Now, let's continue our tour through the innovation tactics in the business model canvas. Remember the numbers below refer to the blue bullet points in the BMC above.
This is an abbreviated and abridged version of one of our lessons in our course on the best business models in technology today.
(3) For this to work your solution needs to have certain characteristics pertaining to its design philosophy, UI & UX. Some of these are that our tool is
- Engaging to use
- Have various types of support functions and
- Provide immediate use
You can add more to this list depending on what field your idea is in. But if you tick these boxes, individuals and teams can get immediate use without significant investment which removes barriers to self-adoption.
(4) As we have said in the previous videos, we also want to leverage network effects with our SaaS solutions. This will help to stimulate internal word-of-mouth.
All of this relates also back to what we said in the previous part of this series on SaaS.
Key takeway: design your SaaS solution for marketability.
For your solution decide what these factors should be and how you are going to make it work (and find metrics that you can track your progress against).
Once we have powerful network effects in play we can add to our sales & marketing channels:
(5) Internal word-of-mouth and a bottom-up approach to entering company's IT portfolios.
This is important and powerful because the big players do it differently. They typically enter corporates from the decision makers who they know from selling software to them for decades.
Here is how the difference looks like.
But this doesn't mean we can let our great software do the marketing work and sit back and wait for the great results to materialise. It won't happen ...
Back to customer relationships we should realise that not all work is going to be done by our solution.
We need to support our potential customers with resources and our support teams (even before they sign up), examples are:
- Free, web-based help and educational resources
- Communities of users
- Customer success teams who support the super users
- and more
(6) The good news is that when we support the customer, they support us. Often there are extraordinary individuals within firms who believe so much in our SaaS solution that they become champions, super users or trailblazers of our tool.
Of course, they hope to improve their career through the benefits that our tool delivers. It's crucial to help these individuals to succeed.
(7) And that brings us to our key activities one of which is to help our customers to succeed.
It is also why the respective teams are called customer sucess teams (and not customer support which is a different function that is triggered by the customer whereas customer success should to quite a degree be initiated by us).
And even with all of this in place, we still have certain "traditional"
(8) marketing & sales tactics in our playbook.
The human contact is still one of the most effective ways to close deals (esp larger ones).
But we don't want to pitch to the decisions makers "cold".
The work that our SaaS tool champions within our customer firms have done is one of the best ways to getting the pitch to the decision makers started. These are highly relevant use cases developed organically and that now can be used to demonstrate the benefits to the respective managers. No need for a 6- or 7-digit consulting job for an evaluation project (which comes with its own approval process).
There are many ways to engage & nurture the decision makers. This includes things like: dedicated events, user conferences and of course good old salesmanship among others.
Key resources / assets
Sales & marketing includes of course also the latter:
(9) marketing and building a brand.
Marketing includes many different types of activities. This includes traditional marketing activities such as brand advertising mainly through digital channels.
The marketing team will also focus and support and public relations activities. Getting media focus can be a low cost way to achieve the equivalent of millions of ad dollars But it too requires support from within your SaaS organisation to arm the reporters/writers with data, materials, facts, newsworthy details etc. This can offer great returns on marketing investment.
The playbooks become more refined and you can see that well when you look at the funcational organisations within Sales & Marketing. See the diagram for how ClickUp is organised.
Netflix business model
Netflix is also a linear subscription business model like SaaS using content as their working asset
Subscription biz model
Enterprise SaaS solutions
I have already mentioned in initial our first part of categorising SaaS solutions that there are certain differences in the business models between those on the left and the right hand side of our mind map.
One of the differences pertains to the sales & marketing playbooks (and by now you know of course that sales & marketing does not live in isolation to the rest of the business model).
Take a look at the mind map. The ones on the left are more likely to be able to use the playbook that also leverages the Freemium model
Those on the right will - among others - offer free trials (and not freemium). This also plays with other elements of the business model.
One of the reasons why this is the case is that often the systems on the right hand side are more specialised and in many cases use confidential data. You would not want a system that host HR data or employee expense data or financial data to spread "virally" or through word-of-mouth (to the wrong people) within a firm.
This could backfire. This is one of the reasons why many of those systems wont have a Freemium model. This also means that the whole playbook is different.
I am explaining the detailed comparison in our online course. Looking at this comparison you will learn more about both: the Freemium (or "new" model) as well as the "traditional" model.
This was part 3 of our series on business model innovation tactics for SaaS.
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