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Summary:

Thanks to SaaS, the marketplace for business software in many ways reflects the way consumers have acquired web-based goods and services for years. The expectation is that by making the technology easy to acquire, early customers will use it and influence broader adoption in their organizations.

self-service

SaaS is driving a whole new kind of IT economy due to the ease with which you can acquire and deploy web applications and infrastructure. Now, the marketplace for business software in many ways reflects the way consumers have acquired web-based goods and services for years.

The SaaS self-service model is a key component of this trend because it reduces or eliminates the necessity of a direct sales team, thereby significantly reducing customers’ time and monetary costs of acquisition, as well as cost of the sale for the vendor. The expectation is that by making the technology easy to acquire, early customers will use it and influence broader adoption in their organizations.

A counter argument to the consumerization of IT theory is that, when it comes to software sales, nothing has really changed—the direct sales force is still a necessity and is still employed by many of today’s successful new companies.  In other words, the process of selling to the enterprise is not about to undergo radical change any time soon. Based on my recent experience, I would argue strongly that IT, as a consumable service, significantly changes the game in enterprise software sales, and it’s doing it today.

When I started my first technology company, Wily, in 1997, we were engineers first, solving what is, ironically, still one of the hardest problems in software development — application performance management (APM). We sold on-premise enterprise software to large IT operations teams. At its core, the product was a developer tool, but as the market and the product matured, we increasingly targeted IT operations and sold it primarily as an operations tool. Because the price point was high, we needed to sell to the senior IT executive rather than the end-user. We had a large direct sales force that sold the product well and was well compensated for its efforts. We were fortunate enough to be very successful, and we sold the company in 2006 for $375 million.

Three years ago, when I was considering a second run at this market, I realized that a SaaS-based APM offering could make a huge impact by delivering high value and rapid innovation with little of the sales and implementation overhead present in on-premise offerings. We could test ideas, push them out quickly and get feedback just as fast. I wanted to deliver an easy-to-use product that could be acquired and deployed within minutes, that eliminated virtually all the TCO headaches of enterprise software ownership. Our business plan was founded on those guiding principles of simplicity and ease, and all decisions from how to build it, how to sell it, and who is the best target customer and champion have all been considered based on those concepts.

We launched our first commercial release of our service in mid-2008 with no dedicated support staff and one sales representative to field inquiries. We created a free offering designed for adoption by a forward thinking champion, who would subsequently evangelize it internally until it becomes a standard tool. That model carried us through to 3,000 customers. Along with a low cost of acquisition, the time to value is also very low, enabling a significant portion of our business to remain self-service.

Fast forward to today: we are now serving more than 6,000 customers and we have a growing team of dedicated sales staff (inside sales). Our sales model is now a hybrid approach — half of the business is self-service and the sales team handles other half. Selling a product with a low price point that can be implemented in minutes to an individual developer is a significantly different proposition than selling a similar product to a CIO or VP of Operations, whom you expect will roll out the tool company-wide and consider a complex set of dependencies. Also, sales cycles vary widely under any business model. In many cases, the sale becomes a function of the customer’s size — smaller companies are often more apt to adopt quickly.

By largely eliminating the need for upfront selling, and by bypassing the traditional procurement processes, we have reduced the barriers for our target customers to acquire the product. And we expect these self-service customers to remain a large portion of our business. However, as the benefits of SaaS permeate through the organization, I have a new reason to be in CIOs offices once again – brokering win-win deals once they discover just how prolific the use of our software is throughout their companies.

Lew Cirne is Founder and CEO of New Relic.

Image courtesy of Flickr user I See Modern Britain.

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  1. Nice article. Let me say this. Your sales strategy doesn’t care too much if your product is a SaaS product or OnPrem. This is the biggest error I constantly see. It matters, but maybe bullet point 5 or 6.

    If your product is expensive and touches multiple divisions to be successful then you need a good sales team. If it’s relatively “cheap” and is a single division play then it’s small sales team and/or inside sales team. An OnPrem version that’s simple to deploy really should have no disadvantage to a SaaS model in this world – thus the reason it falls to 5th or 6th to me.

    As I read your article I felt you were proving this point. It’s just that sales is not respected as a discipline like other things like Engineering, Finance or Product Management etc. If it was much of this “SaaS vs OnPrem” debate would be much more tightly defined and thus understood.

    Good luck to you and continued success.

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  2. I agree with Lew’s observations: SaaS based solutions are inherently simpler to deploy than on-premises solutions, and in many case preclude the need for POC’s that require significant investment in time and effort from both the prospective customer and the provider. The “pay per use” and “pay as you go” model that is common to SaaS offerings further lowers the hurdle to adoption and allows for grass-roots adoption in the enterprise. Even though a direct sales approach may still be needed, these factors move the emphasis form field sales to inside sales and the support from on-premises to on-line. It also means increased importance for internet based “viral” marketing approaches.

    At Librato, we offer a “private” version of our service for organizations that require solutions to be deployed inside their firewall. We charge a one-time fee to support the deployment and a choice between the same pay-per-use pricing as for the “public” service or a more conventional subscription model.

    Overall, the cost of customer acquisition for SaaS solutions is quite significantly lower than for on-premise, and for self-service customers it is insignificant. This makes it possible to sell solutions to organizations of any size, which benefits SMB customers and increases the addressable market for the SaaS providers. Add to this the lower life-time cost for support (deploying and supporting versions and releases) and I’m convinced that SaaS is a fundamentally more efficient economic model than on-premise.

    David Skok of Matrix Partners posted an excellent blog entry on the subject earlier this year (http://www.forentrepreneurs.com/startup-killer/)

    Fred van den Bosch
    CEO, Librato

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