Why On-Premises Business Software Vendors Should Give Their Products Away

Traditional on-premises business software vendors are facing challenges on multiple fronts:

• Published financial results for the second calendar quarter of 2009 from 10 of the major vendors reported license revenue declines in the 20-40% range year-over-year.
• Buyers continue to show increasing interest and preference for Software as a Service (SaaS) business software.  SaaS business software vendors reported an average of over 20% increase in new subscription revenue for the same year-over-year period.
• On-premises vendors now derive 50% or more of their revenues from annual maintenance fees, but are facing increasing dissension from customers over increasing costs and perceived lack of value for the annual maintenance fees.

Licenses are the lifeblood of on-premises business software vendors – it’s what drives current revenues from services and long-term revenues from maintenance.  These vendors must sell more licenses by acquiring new customers and/or selling more products and/or user seats to existing customers.  While most on-premise vendors have announced plans for delivering SaaS solutions and some have already delivered some SaaS applications, their on-premises licensed products are still the core of their businesses and SaaS may not be the preferred delivery for many customers.

Some vendors are responding to the challenge by offering ‘buy one get another free’ type of deals to increase the number of licenses and users for which customers will require implementation services and pay annual maintenance fees.  IMO, this is a flawed marketing tactic as discussed in last week’s bog post.

On-premises business software vendors have to get more licenses to feed their continued existence as viable businesses.  A review of their business models reveals some interesting points:

1. Based on results for the 12 months through second calendar quarter of 2009, License revenues now account for approximately 20-25% of total revenues.
2. These vendors spend approximately 20-22% of total revenues on sales and marketing, of which over 90% is usually targeted at license sales.
3. Taking cost of goods and other expenses into account, license sales are at best a break-even proposition.
4. On-premises vendors are known to deeply discount product licenses to get a sale.  Discounts of 75% or more off list are more common than most are willing to admit.
5. These vendors now derive 50% or more of their total revenues from annual maintenance fees with 80% or higher gross margins on this revenue source.
6. Services account for approximately 25% of revenues with gross margins typically in the 25-30% range.
7. License sales currently contribute little or nothing to profitability, but are the lifeblood that drives maintenance and services revenues and profitability.

Given all the abovementioned circumstances and other factors, why not give the product licenses away?  The end game is to get more customers and users using more products for which they pay implementation services and annual maintenance fees.  The business of selling licenses is tough and hardly profitable.  Why not change the game and focus on creating value for customers rather than selling them licenses.

A proactive move by on-premises business software vendors to give their product licenses away can produce several positive results:

• Bolster current services revenues and longer term maintenance revenues.
• Compete more effectively with SaaS vendors.  Negate a big selling point of SaaS vendors because there would be no initial license cost for on-premises products.
• Change the relationship with customers from selling them stuff to creating value for their businesses.
• Get rid of the licensing fee and discounting practices that customers view as a farce.
• Realign a leaner sales organization focused on creating lifetime customer value.
• Change the way customers view the annual maintenance fee to be more like an annual license fee that includes support, enhancements and maintenance.

I would go as far to argue that if these vendors don’t do this proactively now, they will have to do it reactively later anyway to survive.  They can do it on their terms now and make this a win-win situation for them and their customers.

Depending on your role from a vendor or customer perspective, what do you think about this situation and the recommendation?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Buy One Get Another Free – Is this a Good Marketing Tactic for Business Software Vendors?

A major business software vendor recently offered buyers at midsize companies CRM product licenses at no charge when they purchase a particular version of their ERP product.  There are qualification requirements to get the free CRM licenses.  The catch – customers must pay the regular annual maintenance fee on the no cost CRM licenses.

Other business software vendors have made this type of offer either directly with buy one get another deals or indirectly through product bundling deals.  The real objective is to get more of their software and more users in a client site which produces additional implementation services and annual maintenance revenues in exchange for foregoing the initial license fee.  I’ll discuss the business perspective of doing this in next week’s post, and focus on the marketing aspects of this tactic in this post.

From a strategic marketing perspective, considering that everything a company does is marketing and impacts marketing, I think there’s more downside than upside to this tactic for the following reasons:

1. This type of offer smacks of a wheeler-dealer approach to marketing and selling.  We’re talking about serious business buyers, and major industrial strength business software from major well-established vendors.  Do they really want to project a wheeler-dealer type of image for their company in that market?
2. There are a number of qualifying requirements for these types of offers and there’s always the back-end implementation and annual maintenance costs.  Even though the vendors may be upfront, open and honest about disclosing all these terms and conditions, there’s always the risk of the customer perceiving they were taken in by a bait-and-switch type of tactic.
3. The vendor is debasing the product they’re giving away by openly declaring that it has no license value.  The product they’re giving away will be viewed as adjunct or subordinate to the main product customers have to buy.
4. Is there any going back?  Although it may be a limited time special offer, buyers will remember that they attached zero value to this product, and may never be willing to pay for it again.
5. How do you explain this to existing customers who paid for the product that is now being given away?  If I were a customer who previously bought ERP and CRM, I would be on the phone with my sales rep asking for a refund or credit for the CRM I paid for and others are now getting for free.
6. What about customers who previously bought the core product (ERP in this example) but didn’t buy CRM, can they now get the CRM at no cost on the same terms?  If I were a customer in that situation, I would certainly ask for it if I need a CRM system.

While I can see this type of offer generating some activity and sales, I’m struggling to find anything positive from a strategic marketing and market positioning perspective.  I think the product being given away will be forever devalued or debased.  Is that a fair trade for the annual maintenance and short-term service revenues in the vendor's business and product plans?

What do you think about this marketing tactic for major business software vendors?  Have you tried something like this and if so, how did it work out?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Why are Marketing & Sales Forecasts Usually Wrong?

Because forecasts attempt to predict the future they will always be wrong to some degree.  Problems arise with forecasts that are usually far off the mark and the resulting impact on a business.

Not that Marketing and Sales can’t or don’t attempt to produce a good forecast, but mostly because the process many companies use is the reverse of what it should it be to produce a good market-driven forecast.

“I skate to where the puck is going to be, not where it has been.” – Wayne Gretzky

The above quote from Wayne Gretzky succinctly describes the fundamental problem with the way many companies do forecasting – it’s primarily derived from what happened last year – what was sold based on where the market was, instead of where the market is going to be and what customers plan to buy.

Take the current state of business software companies as an example of this continuing wrong-headed forecasting by business, sales and marketing executives:

• Traditional on-premises business software vendors’ license revenues are down an average of over 30% for the most recent 12 months.
• Software as a Service (SaaS) business software vendors’ new subscription revenues are up an average of over 20% for most recent 12 months.

The announcements from on-premises vendors about their results are that the shortfall is due to the economic conditions.  But, the SaaS vendors are growing in the same economy and markets.  It seems that the on-premises vendors have deeply flawed forecasting and planning processes given the size and claimed unexpectedness of the shortfall.

Now there’s a flurry of announcements from on-premises vendors about plans to bring SaaS solutions to market.  But, marketers at these on-premises vendors have seen this trend toward SaaS coming since 2007 or earlier and many urged their companies to make investments and commitments for SaaS solutions some time ago.

So what happened?  More of the same.  The forecasting process usually starts with C-suite executives adding a percentage growth number to the previous year’s actual sales numbers.  Usually with no or minimal regard for market forecasts and changing conditions.  The Sales organization in turn is required to commit to make the number.  Sales then distributes the number through their hierarchy until everyone owns a piece of the commitment – the individual, team and organizational quotas.  After some negotiations, the numbers are locked in and marketing now has to somehow produce leads to support sales quotas produced by a flawed process.

And that’s where things begin to go wrong – right at the start:

• C-suite executives want more revenue with minimal incremental investment and pressure Sales to commit to these arbitrary forecasts.
• Sales want to do what they’re comfortable with and what worked in the past – sell more of the same stuff in the same manner.
• Marketing and Sales work hard to produce leads and sales, but they’re swimming against the market currents.
• Marketing knows that markets and buying preferences are changing, but it’s tough to get the right attention until the changes leap out and slap everyone with bad results from doing more of the same old stuff.
• R&D has a huge backlog and can’t tackle any new projects for at least 2 or 3 years.

Producing good market-driven forecasts is not rocket science.  Manufacturers do it well with robust forecasting, planning and scheduling processes that drive the business from end to end.  B2C companies have a much more robust and statistically accurate process that starts with Brand Managers developing market-driven sales forecasts and business plans which become the playbook for all areas of the business.

Seems to me that the fundamental problem is that many B2B companies, especially Information Technology companies are not really market-driven – see the Marketing in a ‘Market-driven’ company article for more information about what it means to be market-driven.

How do you deal with this forecasting issue and do you have any recommendations on what has worked for you?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Time: An Overlooked Difference between Marketing and Sales

Most of us in marketing have experienced this scenario – your company misses the just completed quarter’s sales targets – marketing and sales leaders are hauled into the CEO/COO’s office for a grilling to explore why this happened.  Inevitably, Marketing is thrown under the bus for not producing enough leads.  But there’s a disconnect that is frequently overlooked or disregarded – what marketing are working on today is not what sales are working on today.

Although the above statement may be intuitively obvious to anyone who stops to think about it, this time difference isn’t sufficiently considered for marketing and sales performance measurement.

Consider a manufacturing supply chain as an analogy.  There are planning, scheduling, procurement and delivery activities that happen in the inbound supply chain long before manufacturing can produce a product, and then there’s the outbound supply chain to ship and distribute the product for purchase by the eventual customer.  This total lead time from end-to-end is typically 3 to 12 months depending on the industry.  Manufacturers use Demand Planning to deal with synchronizing the supply chain lead time with anticipated future demand relative to when the finished goods will be purchased.

Marketing has a life-cycle of processes over an extended time period like a supply chain.  Consider this hypothetical example of a typical B2B marketing campaign process over a quarterly time increments:

• Q1 – marketing does research, analysis and testing to formulate the campaign value proposition, target market(s), offer, etc.
• Q2 – marketing develops the campaign content, materials, enablement resources, etc.
• Q3 – marketing begins executing the campaign.  First leads start coming in.
• Q4 – campaign in full swing – leads are coming in.  Sales get qualified leads for action.

Now add the typical B2B sales and/or buying cycle of 3 to 9 months or longer on top of that and we’re in Q6 or Q7 or later when deals are planned to close for leads generated by this campaign.  So if Q7 sales didn’t make quota, marketing wasn’t working on the same leads or deals for Q7 as sales was.  That doesn’t exonerate marketing from some responsibility for the problem.  However, what these quarterly sales review meetings seem to miss, is not to look at what marketing did in the quarter in question (Q7 in this example), but what marketing did in Q1 through Q4 that led to the Q7 outcome.

Some questions executives could ask considering the time differences for a more relevant discussion and productive outcome from the review process:

• What was the original analysis for the campaign(s) that produced leads that should have generated sales in the quarter under review?
• What was the anticipated customer demand in the plan and how was it determined?
• What changed in the meantime?  Economic factors, buying cycles, customer budgets, competition, market shifts, etc.
• Did the campaign execute as planned and produce the expected results?
• Were adjustments made to the campaign as unanticipated external or internal changes occurred?
• Are sales selling according the campaign value proposition and reasons customers expressed interest?

That meeting is also a good opportunity to look forward for the next couple of quarters with the same questions to anticipate potential problems and proactively make adjustments. Also review what plans marketing have in the early phases of the campaign process that will drive sales activity 3 to 5 quarters from now.

Is this lead time difference an issue for you?  If so, how do you handle it?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Should You Provide Pricing Information on a B2B Website?

Providing specific pricing details is de rigueur for B2C eCommerce websites. Most B2B websites don’t provide details because pricing is usually complex based on many variables, combinations, configurations, and other factors specific to each buyer’s circumstances. Competitive exposure is another claimed reason for not publishing prices, but B2B companies already know competitors’ prices from other sources. Pricing is something that prospective buyers always want to know.

The problem is that website visitors and prospective buyers want to know whether a product/service/solution is within their budget range before they consider further exploration. Many B2B companies provide some guidance by indicating applicability by type of business, industry or company size – e.g. solutions for small business, mid-size companies or large enterprises. That’s a good approach, but website visitors still have no real understanding of the price range. There is anecdotal evidence that website visitors will leave to explore alternatives if they can’t get at least some basic understanding of prices.

The question of whether to provide pricing on B2B websites depends on the specific circumstances of a company/product/service/solution and common practices in the market(s) served. It’s also not a binary question. The question is really whether there are ways that B2B websites could provide some pricing information to satisfy the immediate needs for website visitors so that they continue to consider that company/product/service/solution and possibly initiate some follow-up response.

Many B2B websites want their website visitors to initiate contact to get additional information such as pricing, but the majority of website visitors are reticent to do that because they’re not ready to deal with a salesperson yet, nor do they want their contact information in another marketing database. In most cases, B2B website visitors are not looking for precise prices, just a general indication of price ranges relative to their needs.

What should you do?

• Although providing pricing information on a B2B website may not be an absolute necessity, there are good reasons to investigate whether you should do it and in what manner.
  
• If you can provide pricing in a relatively straightforward manner, consider doing it. This is obviously a decision that goes beyond marketing into the entire organization.
• Don’t publish a complex pricing formula, matrix or calculator. Providing a complicated pricing algorithm might be worse than not providing any pricing.
• If appropriate, provide a simple calculator for estimating general price ranges.
• Providing sample prices for typical situations or configurations may be adequate. The key is to provide sufficient samples for website visitors to find one that resembles their requirements and business.
• Provide an easy mechanism for users to submit basic parameters to request a price estimate which you can turn-around in 24 hours. But don’t ask for a long list of intrusive contact information details to discourage use of the request service.
• Have a sales support hotline link on the website for providing real-time information based on getting the necessary qualification data.

If you do make any changes for providing pricing information on your B2B website, track response rates before and after to determine the impact of pricing availability.

How to do you handle providing pricing on your B2B website? Have you made any changes and seen any beneficial results? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Should you disregard or include ex-customers in your marketing plans?

The previous post ‘How many customers do you have? Really.’ identified 8 distinct groups of customers based their current status. Two of these groups that rarely receive as much attention as they should are:

• Customers don’t exist – the customer company doesn’t exist for various reasons.
• Customers not using – customers that don’t use your product/service/solution.

Why should you pay attention to, and spend marketing resources on ex-customers? Because, firstly you can learn valuable insights and secondly there is potential revenue from your ex-customers. Most companies tend to disregard ex-customers because they view them as a lost cause and it’s too unpleasant or difficult to communicate or deal with ex-customers. But they’re missing out on a significant opportunity to improve their business by learning from ex-customers. And there is still potential revenue to harvest.

Customers that no longer exist – nothing you can do about customer companies that shut down, go out of business, merge, get acquired or cease to exist for whatever reason. However, there were people inside those companies that used your product, maybe even liked your product. These people have moved on to other companies, they know about your product/service/solution, you probably have their names in your database. Find out where they are now and reconnect. Someone with a positive previous experience with your product/service/solution can be a valuable contact to market and sell into the company where they currently work.

Customers that have stopped using your product/service/solution – this can happen for a variety of reasons including dissatisfaction, new management preferences, a competitive product/service/solution that better meets their needs or many other reasons. Losing customers is painful and costly and has a direct impact on Lifetime Customer Value (LCV). The customers you have lost can provide valuable insights to prevent losing more customers by applying those lessons for improving or correcting whatever caused them to defect. Proactively taking action based on empirical research and analysis from these ex-customers can greatly improve retention and loyalty for current customers.

“The Customers you lose hold the information you need to succeed.” – Frederick F. Reichheld

Just as most companies do a win/loss analysis on current sales deals, you need a continuing Customer Defection Analysis program to gather information from ex-customers for business and marketing plans:

• The first step is to categorize the reason for defection – let the information from ex-customers guide you to the right categories rather than preconceived internal opinions.
• Identify the underlying causes in the ex-customers’ context, that led to the defection. Look for commonalities and trends to determine appropriate corrective action to avoid or minimize future defections.
• Get information about when they stopped using your product, what they’re using now, whether they’ll make the same decision again, etc.
• Determine what other useful and relevant information to gather for the Customer Defection Analysis based on your specific business/ product/service/solution circumstances.
• Identify possible revenue opportunities with these ex-customers:
• Can you provide paid services to help them migrate from your system to their replacement system? I know this sticks in one’s craw, but getting someone from your company into the ex-customer environment to provide services can yield significant insights in addition to the services revenues.
• Can you sell them something that is either complementary to their new system or addresses a completely different functional area of the business?
• Put them on the contact list for appropriate marketing programs to stay in touch and consider your business/product/service/solution for future needs.
• Although gathering information from ex-customers may seem difficult, most people are usually willing to share the reasons for the decisions. Don’t be defensive, argumentative, judgmental or try to rectify the past – just listen and learn.
• Being understanding, supportive and helpful during this information gathering process can put your business in a more favorable position for possible business opportunities with ex-customers.

Are you currently disregarding or including ex-customers in your marketing plans? Has this article given you food for thought to reconsider your practices in this area? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Is the RFM customer analysis model relevant for B2B marketing?

Continuing the discussion about customer metrics and analysis from previous posts; this post explores the relevance of the RFM (Recency, Frequency, Monetary) customer analysis model for B2B marketers and businesses.

The RFM customer analysis model has been around for over 40 years and is commonly used by Retail, Database Marketing, Direct Marketing, Non-profits and other primarily B2C businesses and marketing organizations. I have personally only encountered minimal use of RFM in B2B marketing but believe there is value in using this model in some aspects of B2B marketing depending on the specific circumstances of a business.

The premise of the RFM model is straightforward:

• Recency – when did a customer last buy? Research shows that Customers who purchased recently are more likely to respond to an offer than those who purchased some time ago.
• Frequency – how many times has a customer bought? More frequent buyers are more likely to buy again.
• Monetary value – what is the value of their lifetime actual spend? Big buyers are more likely to spend more than small buyers.

The RFM analysis ranks each customer for each RFM factor on a 1 to 5 scale (5 is highest). The 3 scores together are the RFM ‘cell’ for each customer ranking their historical propensity to buy with a 555 customer ranking being the best.

The RFM model has limitations and risks such as:

• Historical behavior does provide indicators for future behavior, but it’s not truly predictive.
• Continually targeting high-scoring customers could annoy or alienate them.
• Neglecting lower-scoring customers that should be nurtured.
• Just analyzing the numbers without relating the RFM score to specific business, product and marketing events and circumstances.
• The 125 cell (5x5x5) RFM model is too granular – rather group scores into clusters or bands to get a better picture of what the data are communicating.

The RFM model could be a valuable marketing analysis and segmentation tool to complement and qualify other analysis and segmentation tools used by B2B marketers:

• Relating customer RFM scores to lifetime customer value (LCV) can provide insights for developing and improving revenues from existing customers.
• In addition to the RFM score, the trend or migration between cells over time can provide further actionable information for marketing.
• The RFM score trend over time for major customers or segments of similar customers can provide insights into changing buying behavior and revenue performance.
• Relating RFM scores to results for various campaigns can provide insights into the effectiveness and appeal of particular campaigns for different RFM segments of customers.
• Relating RFM scores to products or product categories. For example, if a customer buys something in a product category do they usually buy more in that category or does it lead to cross-sell opportunities in other categories. Or if they buy something of low monetary value does that lead to buying something of higher monetary value or vice versa.

Do you use a RFM analysis in B2B marketing and if so, how has it worked for you? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com