Don’t Vaporize…. XaaSify!
When venture capitalists warn on startup ‘burn rates’ and the potential for ‘vaporization’ tied to high burn rates—and growth-stage players postpone IPOs based on investor cash burn concerns—streetsmart CEOs at startup SaaS companies sit up and pay attention.
Because SaaS leaders know from their own experience that sustainable growth is rarely a free lunch, and is closely tied to sales and marketing spend.
Sober SaaS leaders also know that while customer ‘lifetime value’ (LTV) remains an intoxicating notion for your VC pitch—and a common justification for high sales/marketing spend—GAAP profitability can be elusive, even for pioneers with a 15 year operating history, e.g. Salesforce.
But there’s good news for SaaS startups seeking to avoid ‘vaporization’. A new generation of cloud-native ‘anything as a service’ (XaaS) innovators is on the rise—driving growth around a related but differentiated set of growth marketing assumptions and best practices than those being applied to end-customer SaaS.
And these XaaS best practices are not just for cloud infrastructure players. SaaS leaders are well-advised to pay attention to their cloud XaaS cousins—and internalize and (where appropriate) apply their best practices—i.e. to XaaSify your startup or growth-stage company.
The first step in the XaaSification journey is understanding 10 common distinctions between the two approaches.
1. Downstream vs. Upstream Focus
SaaS startups have consistently focused their growth efforts downstream— engaging end user ‘markets of 1' and/or SMB/enterprise customers in a direct sales model.
The growth starting point for XaaS startups and other ‘new stack’ players is upstream—with an eye toward monetizing their XaaS functionality inside of, or attached to, the app, cloud, network, system, solution, experience or practice of an upstream partner or partners.
Relative to popular anything-as-a-service innovators, think Birst in analytics-as-a-service, Kinvey in mobile-backend-as-a-service, Cloudability in cost management-as-a-service, Algolia in search-as-a-service or MachineShop in cloud-managed IoT.
These are just a few of the XaaS pacesetters that make it their business to forge strong upstream partnerships as a basic component of their growth strategy.
2. Incumbent Disruption or Symbiosis
Many SaaS startups consistently target incumbent vendors for disruption.
XaaS startups and growth stage players often see ‘disrupt or be disrupted’ as a false marketing choice relative to tech landscape incumbents. In fact, XaaS startups more often than not choose to practice market symbiosis with incumbents.
By intelligently positioning themselves within incumbent centers of market gravity, and embracing and extending incumbent platforms, they help incumbents better serve their customers while gaining permissioned access to the installed base, pre-existing networks, and asymmetric market advantage of these established alpha partners.
In the XaaS economy, think Apigee’s API management platform partnership with SAP. Or think Apprenda’s partnership with Microsoft to bring hybrid PaaS to the Azure cloud. Or think Mirantis providing OpenStack cloud services to market leaders in the Telco industry.
3. MVP or PVP
Downstream-focused SaaS startups targeting incumbents for disruption often embrace lean MVP or ‘minimum viable product’ models and iteratively strive to achieve ‘product/market fit’.
Because XaaS startups engage in upstream partnerships with incumbent vendors with an installed customer base — and must pass through a more rigorous adoption filter—an MVP just doesn’t cut it.
XaaS startups must create true ‘partner viable products’ (PVP) and consistently strive for ‘product/partner fit’ in order to scale their businesses and/or not be ‘designed out’ or unplugged as a critical ingredient of a given partner’s solution.
Think Okta identity-as-a-service, relied on by more than 3000 ISVs. Or think Amplience media cloud—-which transforms digital assets into rich, interactive omni-channel experiences for e-commerce platform providers and the brands they serve. Or think SnapLogic’s integration-as-a-service platform and their service catalog of pre-built application ‘snaps’.
4. Pricing Approach
Following many best practices set by Salesforce, SaaS startups often operate on a per-user or per-seat subscription model.
XaaS startups also leverage predictable subscription pricing models when their partners need them, but also offer ‘elastic’ pricing options based on pay-per-use, pay-for-performance and volume transaction models.
These options provide XaaS innovators with additional flexibility in driving upstream partner (and startup app developer) adoption.
5. Customer Success or ‘Platformula’
SaaS vendors focus on end customer success—-i.e. ensuring that their users both perceive and extract value from their product—-in order to reduce churn and improve their chances for long term customer relationships.
In order to drive their partner-advantaged, incumbent-attached go-to-market models, XaaS vendors must successfully operationalize the incentive practices and shared monetization frameworks needed for win/win partner engagement.
I call this a ‘platformula’. Platformula management has been a critical component of the success of Microsoft’s partner model and partner best practices over many years. Platformula management is also at the heart of the Apple app store’s successful revenue sharing practices and explosive growth. And when Amazon Web Services introduced its ‘Activate’ initiative for cloud startups, it was built around a set of incentive practices designed to turn early customers into long term partners.
In terms of new breed XaaS startups applying the basic principles of platformula-focused monetization, think Mashape’s API marketplace or AppDirect’s white label marketplace-as-a-service platform for leading cloud and mobile partners.
6. Inbound Automation vs. Outbound High Touch
XaaS players also leverage inbound automation platforms, modern content marketing, and emerging category thought leadership campaigns.
But XaaS players also know the value of high touch, outbound business development and specialize in it to grow their businesses.
Here are two representative videos breaking down outbound partnering best practices for XaaS innovators—-The first from New Relic—-a leader in application performance monitoring-as-a-service—-and another from CloudFlare, a CDN and security-as-a-service innovator.
7. Growth Hacking Team or ‘Market Hacking’ Team
With their focus on inbound-driven customer growth, many SaaS vendors have become adept at building digital marketing ops or ‘growth hacking’ teams.
With their focus on upstream landscapes, product/partner fit, and outbound business development, XaaS vendors excel at becoming full-spectrum ‘market hackers’—-harnessing the power and reach of the pre-existing customer networks and in-place ecosystems of their incumbent vendor partners.
For XaaS economy market hackers, upstream sell-through trumps downstream sell-to as a growth strategy.
Hence their need to build a converged, cross-discpline BizDevOps team with active participation from product management and partner marketing in addition to sales and developer evangelist resources.
8. Big Data vs. Big Signals
SaaS vendors creatively mine data from user interactions to enhance their products, optimize paid customer conversions, reduce customer churn, run market experiments and drive their feature/function/pricing roadmaps.
Salesforce.com’s “land and expand” model—a model that has driven their evolution to an integrated yet “unbundled” product set (Sales Cloud, Marketing Cloud, Analytics Cloud, etc.) is a good example of a big data driven roadmap that has evolved over time and 15 years of iteration. In contrast to this big data driven approach is something I call the “Big Signals” model.
Big Signals are landscape events and ‘open secrets’ that point to targets of asymmetric opportunity (TAO), i.e. gaps in incumbent vendor offerings that can be closed and monetized by XaaS innovators.
For example, when the leadership of DotCloud pivoted to re-launch themselves as Docker they were acting on market Big Signals around the ongoing problem of cloud application portability between rival public and private cloud environments. Furthermore, when they executed their first major Docker deal with RedHat—this deal itself was a Big Signal to every cloud superpower in the market to sit up and pay attention to the new containerization-as-a-service player and the open source community it was catalyzing.
On today’s highly contested market landscapes—from the cloud wars to the mobile wars to the enterprise SaaS wars to the marketing suite wars—Big Signals are firing all the time. The key is to tune your opportunity GPS to read them and act accordingly.
9. TALC Adoption Pattern or ‘Superpower Pattern’
There are two primary adoption patterns that describe growth in the tech industry. One is the TALC or the technology adoption life cycle which is focused on user adoption as its core metric. It segments users into Early Adopters, Early Majority, etc.
The other is what I call the ‘superpower pattern’ which is focused on partner adoption—-specifically how partnering with incumbent vendors as ‘ingredients @ the core’ of their monoculture enables explosive growth and permissioned access to an incumbent partner’s installed base—-as well as the attraction of new upstream partners via the market power upgrade or ‘DNA inheritance’ received from the first deal.
When Microsoft capitalized on it’s original PC OEM deal with IBM (and later the IBM clone industry) or when Google leveraged its home page search services deal with Yahoo—-it activated the superpower adoption pattern.
For XaaS startups, today’s ‘new stack’ or ‘future stack’ distributed architectures are ideal for activating the superpower pattern.
New stack architectures make it possible for XaaS and microservices players to see virtually ‘anybody as a partner’.
And as leading incumbents intensify their landscape rivalry with each other, gaps are created in their end-to-end ‘superstack’ suites that XaaS innovators can close and monetize.
10. Reduced Sales/Marketing Spend
For SaaS startups seeking to heed VC warnings on ‘vaporization’ one thing is clear. The single biggest contributor to a ‘direct to customer’ SaaS startup’s burn rate is sales and marketing spend.
And even SaaS companies that have had the opportunity to go public, e.g. Marketo—a leader in marketing automation—spent 70+% of top line subsciption revenue on sales and marketing in the first half of 2014.
And as I point out in the introduction above — even with a 15 year operating history — SaaS pioneer Saleforce.com still burns 50+ cents of every dollar of subsciption revenue on sales and marketing.
So distilled down to its essence, what prominent VCs are saying relative to ‘burn rate’ is this. Find a way to drive growth while reducing your cost of sales and marketing.
When one looks for platform ingredient ‘role models’ that realized explosive growth around the partner-advantaged approach outlined above you need look no further than the much-maligned Microsoft, which even today still has a sales/marketing spend that is less than 20% of revenue. And cloud players that followed an ‘as a service’ platform model from their earliest days, e.g. Rackspace and Akamai, are at 13.5% and 18.5% respectively.
It’s this kind of reduced sales/marketing spend that should be the goal of modern XaaS players—and how SaaS players that adopt XaaS best practices over time avoid ‘vaporization’.
There are multiple paths to growth for “as a service” startups.
Some growth paths run through a high burn rate—and others run through a lower burn rate—driven by an upstream-focused, partner-advantaged, incumbent-aligned, asymmetric marketing/sales model.
Given the burn rate warnings of prominent VCs, it may be prudent for SaaS CEOs and their marketing leaders to re-assess the overall performance of your direct-to-customer model, gain a little upstream focus, and begin the journey to ‘XaaSify’ your startup.
Joseph Bentzel is the senior consultant at Platformula1 and the author of “Asymmetric Marketing: Tossing the ‘Chasm’ in the Age of the Software Superpowers” available on Amazon.com. He can be reached at email@example.com.