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The power of messaging: Letters from Iwo Jima

In a recent article, I talked about the shifting roles of sales and marketing in Enterprise 2.0: marketing is increasingly taking on tasks historically performed by sales. As a result, I see many marketers focused on tactical marketing and they seem to have forgotten one of the cornerstones of effective marketing: messaging. A typical comment I hear: “we will do it later, we need to deliver leads for the sales team now”.

The trouble is that when messaging is not delivered by marketing, it will still be delivered - by the sales team. To use a military analogy: Messaging is the air cover provided by the air force before the marines’ invasion of a beachhead. If the air cover is not provided to soften the beachhead, the marines will have to do it – using hand grenades. Not a pretty sight….

Speaking of messaging and military strategy, I recently watched the movie “Flags of our fathers” which was shot back to back with Oscar winner “letters from Iwo Jima”. “Flags” depicts the trials of the Iwo Jima flag bearers who came back to the US to help the FDR administration with its 7th war bonds fund raising. Both movies are excellent and I highly recommend them – but I am transgressing…

I was particularly inspired by the war bond campaign. It was (and still is) the largest and most successful borrowing from the American public in history at $26B. To put that amount in perspective the total US budget in 1946 was $56B. Some pundits argue that this is one of most successful campaigns ever.

A key factor in the success of the campaign was the powerful messaging – embodied in the famous photo of the Iwo Jima flag-raising. While messaging may not have been a marketing concept in 1946, its central importance was crucial in the execution of the campaign. As I dissected the ingredients that made the war bond campaign a great success, I put together my “Guy Kawasaki‘sh” top rules for campaign messaging:

Rule #1: Start with what the people want. In Feb 1946, Roosevelt picked up a copy of The New York Times. "There it is again!" he thought as he eyed the photo of the flag raising. He was amazed how many times the newspapers were reprinting the AP newsphoto. Then the idea hit him. He called his secretary of the treasury: "Hank, I've got it. I've got the symbol, the theme for the Seventh Bond Tour. It's the flag raising picture. People love it. FDR understood deeply why the photo was so popular with Americans. It represented victory and the end of war. His genius is that he was able to tap into this powerful yearning and connect it with the war fund raising effort.

A company I recently worked with told me that their campaign message was:” we offer the best open source….”. This may be a good mission statement but it is not an effective campaign message. As a general rule, avoid the word “we” in campaign messaging.

Rule #2: Get the executives involved – Roosevelt had a lot on his mind in 1946 with a war being waged in the pacific and the remnants of a war in Europe. Yet he obviously had been thinking about the message of the campaign when he said: ”I’ve got it, I’ve got the symbol”.

If Roosevelt can spare time to get involved in messaging, surely the company’s executives can. Get them involved in the process. It is that important!

Rule #3: Make it a mantra. During the first two months of the seventh bond tour, everyone in America would see the flag bearer’s picture anywhere they went. You couldn't avoid it. It hung in: 
1,000,000 Retail Store windows
16,000 Movie Theaters
15,000 Banks
200,000 Factories
30,000 Railroad Stations
5,000 Large Billboards

Furthermore, The message was also aired on thousands of radio commercials. While the medium and location may have changed, the message was the same. Consistency is key to successful messaging! 

Too often companies keep changing their messages – often because they believe the messaging is not working, or because the company – not the customers - got tired of it. Messaging needs both volume and time to work.

Rule # 4. KISS or Keep it simple, stupid. (Incidentally, it was another democratic president – Bill Clinton – who used a famously related expression in his successful 1992 campaign: “It’s the economy stupid”). The text used in the war bonds posters was simple: “Now All Together”. No mention of the bonds interest rates. No mention of the amount needed to wage the war. None of that. It was not needed: The photo was the message and it was worth a thousand words!

Here is an example of a simple yet very effective message used by Dell: “Purely you!”. Very short but powerfully conveys what Dell is all about.

Rule #5: Make it emotional. Rosenthal, the photographer who took the picture was asked to explain why his picture touched a national nerve. “What we do in war, the cruelty is almost incomprehensible” he says. “But somehow we need to make sense of it. The right picture can win or lose a war. I took a lot of other pictures that day, but none of them made a difference. Looking at it (the picture), you could believe the sacrifice was not a waste”.

Rule #6. Don’t let details get in the way of a good story. Rosenthal’s photo actually captured the second flag-raising event of the day. A US flag was first raised earlier in the morning. However this flag was too small to be seen easily from the nearby landing beaches. Therefore a larger flag was raised the second time and Rosenthal captured that moment in the photo. Rosenthal was accused of having staged the picture or covering up the first flag raising. Of course, none of those details made a difference in the fund raising effort. The photo captured a great moment in history and the American people did not want to hear any of the controversy.

Translated: don’t let the fine print or the lawyers get in the way of a great marketing message.

Those rules worked back then and resulted in arguably one of the most successful campaigns of all times. They work equally well today. For those readers who are thinking – come on, software marketers have written the book on marketing and have nothing to learn from politicians. I say – hogwash – politicians have written all the books when it comes to marketing. They have been selling the same – repackaged – goods for years. And that, not even the software industry marketers could pull off!

How to make your website "salesperson of the year"

In the first part of this article, I discussed how my son’s 5^th grade class learned the importance of getting into the customer’s head and how this lesson could have saved a tycoon millions of dollars. In this article, I discuss how this task, traditionally performed by sales, is increasingly the responsibility of marketing and what innovative companies are doing about it.

Back in the 90s, it was the salesperson’s job to get into the customers head. Salespeople – at least the better ones – spent the majority of their time asking questions and understanding their customers’ needs. Only after they figured out those, they would talk about products, features and functions. Back then, most salespeople used the old rule of thumb: “You have two ears and one month” – in other words you should be listening twice as often as you speak to be successful in sales (As I learned later, this rule should be applied not just in sales, but in any conversation, particularly at home, but this is the subject of another article!)

But in enterprise 2.0, software is often sold on the web. Even when software is sold person to person, usually by telesales, conversations are brief and tend to happen at the tail end of the customer’s information gathering process – often too late to influence the customer’s decision. It is not uncommon that customers make an emotional decision early on in the process and then spend a lot of time justifying their early decision. The initial encounter of a customer with a company – usually through the website - is therefore critically important.

I was recently talking to a friend of mine – a VP of marketing at an enterprise software company. He was complaining that the company’s website is essentially a billboard. He later went on to state that the marketing department is the caboose – slowing the company down. Of course, in my view, there is a very strong and direct correlation between the two! A website should not be billboard or a marketing brochure. A website should be a salesperson - Not just a salesperson, it should be the “salesperson of the year”. A website should not only meet and greet most of your prospects, but it should engage them in a consultative sales cycle. Here are some techniques and technologies that innovative companies are using to adjust to this new reality:

1- A key piece of information to start a consultative website conversation is: what led the customer to the company’s website? If it was through a search engine, what keywords did the customer use? If it was affiliate marketing, what was the referring website? A customer will spend, on the average, 8 seconds on a website before returning to his previous link. Unless the landing page covers relevant topics that align strongly with the customer’s search for information, the opportunity to sell to this customer is likely to be missed.

2- There has been much talk about the use of personas in website design (personas are representations of typical users of a website). As experienced salespeople know, the best prospects are those who have a clear and well defined problem and the job of the salesperson is to help them buy. Similarly, marketing folks should interview prospects who have a clear and well defined problem to develop a primary persona for the website. Further, the buying process of those personas should be defined and documented. The website’s conversion processes are then designed to match the persona’s buying process. A common mistake I often see is trying to close the sale while the customer is in an information gathering process on the website.

3- A customer will often spend quite a bit of time on a website before he makes the dreaded call to the sales department (dreaded by the customer that is – a salesperson I worked with would often ask his customer: “what is so bad in your business that you are willing to talk to a salesman”). Rather than waste precious time asking customers situational questions, the salesperson should be armed with this information - gathered while the customer was on the website: what keywords did the customer use to find the website?   What pages did he visit?  What papers did he download?  And what emails did he click on? New technologies such as Eloqua and Salesgenius make this possible today.

4- Metrics, Metrics, Metrics. It is the old adage: “You can not manage what you can not measure”. This is perhaps the most important but least understood part. As a website incorporates a set of processes that engage and convert visitors, it is critical to continuously measure and improve those. Too often marketers assume that a new “cool” improvement to a website will result in an improvement in conversions. More often than not, they are surprised with the outcome. A change to a campaign may result in tactical improvements (e.g. more visitors) but a deterioration in medium and long term goals (e.g. trials and sales). It is important to instrument, measure, benchmark all processes of the marketing/sales funnel.

In Enterprise 2.0 the sales team may not have the opportunity to get into the customer’s head the old fashioned way. But through the use of new techniques and technologies, innovative companies are able to engage the customer in a consultative sales process that starts with the website. By doing so they are able to boost their sales and lower their cost of sales. Yet another reason to turn your website into “salesperson of the year”.

Enterprise 2.0 - a perspective from leading CEOs

I was recently the event chair of a panel discussion at the MIT/Stanford Venture Lab (www.vlab.org) entitled "enterprise 2.0: a buzzword or a revolution in software development and delivery?" The event featured a panel of leading Silicon Valley CEOs such as John Roberts (SugarCRM), Ross Mayfield (SocialText), Antony Brydon (VisiblePath) and Ivan Koon (YouSendIt) and was moderated by Mary Coleman a VC with Walden International.

The term Enterprise 2.0 has generated heated discussions recently. The concept was first introduced in an article written by Andrew Mcafee in an MIT Sloan Management Review article. The inclusion of the term and subsequent deletion from Wikipedia has generated a lot of controversy. More recently, some experts have been arguing the case for a broader definition of Enterprise 2.0 - an example can be found in this article (

The panel held different views on what the term Enterprise 2.0 means - no surprise considering that there is still no agreement on that is web 2.0, years after the term was fist coined. However, the panel members strongly agreed that, in order for a company to be successful in today's environment, you have to break away with most established practices in software. In fact, when John Roberts was asked what he would have done differently, he stated, "I should have trusted my instincts rather than listen to so called experts who were telling how to get things done"

Antony Brydon went further to state: "The fact that we are talking about Enterprise 2.0 is an admission that we screwed up in Enterprise 1.0". While the statement contains an element of hyperbole (I doubt that Microsoft, Oracle and SAP would agree that they screwed up in the 90s). The statement is strong indication of the mindset of today's CEOs and the VCs behind them.

Why are those leading companies bent on breaking with traditional approaches to enterprise software? They simply want to avoid some of the problems that are plaguing Enterprise 1.0 software companies: Very long sales cycles, customers' risk aversion, expensive sales and marketing etc... As importantly, the expectations of enterprise workers have fundamentally shifted. Software should work based on consumer experiences rather than enterprise experiences.

SugarCRM is probably the most extreme example of a company trying to break all traditional rules of enterprise software in all areas of the company: Development, Product management, Q&A, Marketing and Sales. John Roberts pointed to numerous benefits that the company is able to achieve as a result of his maverick approach: 1) continuous inflow of ideas from the community 2) Higher quality software 3) Higher ROI for consumers 4) Lower cost of sales etc.... SugarCRM is the first enterprise application software provider which has transformed the dynamics of consumers' interaction with the vendor, replacing sales and marketing with technical staff as the first customer contact point. The result is a substantial reduction in "explicit" sales and marketing costs, while expanding the role of the technical staff as "implicit" sales and marketing.

While Sugar is the most extreme example, all panelists pointed to how their companies, in their own ways, are breaking with traditional software practices: VisiblePath recently introduced a free enterprise edition of its capital relationship management. SocialText is introducing an open source version of its enterprise wiki next year. Ivan Koon described how his company has grown rapidly because of the viral nature of its free email offering.

Through combinations of free downloads, offering software as a service, and viral marketing, these companies have allowed their prospects to take control, reduce risk and adopt the solutions at their own pace. The model works and delivers value at substantially reduced frictional costs to both parties. It reduces the all-or-nothing adoption risk for the customer while reducing direct sales and marketing expenses to the vendor.

What is exactly Enterprise 2.0? Still not sure. Perhaps more importantly, not sure why it is all that relevant. What is clear however is the realities of the enterprise are forcing software vendors to re-examine Enterprise 1.0 assumptions, and based on needs and new capabilities, how software is developed, tested, sold, delivered and marketed. And that should be relevant to most software companies.

Robert Petrossian contributed to this article.

How to get into the customer's head - Part I

How a fifth grader’s business insight could have saved a tycoon 10s of millions of dollars.

I recently volunteered to teach my son’s fifth grade class a class on entrepreneurship entitled – Bizworld. The class is the brainchild of Tim Draper – a partner with DFJ. Tim came up with the idea to teach his daughter’s class about entrepreneurship. Later, he founded Bizworld.org, as he realized that most schools do an OK job teaching kids about math and sciences but fall short on teaching the basics of business and entrepreneurship. I think this a laudable objective – as I believe entrepreneurial skills will become increasingly valuable in the future – particularly as traditional math and science skills become commodities...

In a typical Bizworld class, a class is divided into competing teams – startups - who vie to achieve the highest valuation. Every team has to go through the lifecycle of a startup – including creating a product, raising money, coming up with a marketing campaign and selling the product.

Not only was Bizworld great fun for the fifth graders, they also gained great business insights. This realization hit me as my kids and I were visiting a local family theme park, Bonfante Gardens. The park was created by a local celebrity – Michael Bonfante who sold his supermarket chain and spent 20 years and $100M creating the theme park. My kids and I were strolling down the park on a beautiful Saturday. I was surprised to find the park largely empty. Where were the lines? Where were the crowds?

Looking at my bored kids, I asked my younger son: “Don’t you like Bonfante Gardens?” “It’s OK” I continued: ”what about the rides in this beautiful landscape? You know Mr Bonfante had to transplant 10,000 trees to create this beautiful place.” My son concluded: “I like 10% as much as Great America” . A local cheesy theme park with stomach turning wild rides.

My older son – the fifth grader - chimed in: “Perhaps Mr Bonfante should have attended a BizWorld Class. He would have realized who the customer really is and what they really want. The real customer is us – the kids!” Wow, now that is a statement coming from a fifth grader telling a tycoon how to run a business.

A key lesson my son and his classmates learned powerfully in Bizwold is the importance of understanding who the customer is and focusing on their needs. While many of the bizworld teams focused on creating – what they thought were great products - and sophisticated commercials. The winning team, created simple but colorful products, and their commercial - a raunchy/slapstick commercial - was a great hit with the customers - 2^nd graders. 

In other words, had Mr Bonfante focused on understanding who the customer is and what their needs are, he would have realized that: 1) the real customers are the kids and not the parents 2) kids do not care about 10s of millions of dollars spent on transplanting trees 3) Parents will not take their kids to a park that their kids perceive as boring! Now this is a great lesson for all entrepreneurs young and old.

Most companies introducing a new product – including several I have worked with - have a vague idea as to who the customer really is – particularly in the enterprise. This is often the case in a Sales and Marketing 2.0 environment where most of the sales are likely to happen on the web with little or no human contact. Yet unless the customer is well defined and his/her needs are clearly understood, sales and marketing efforts are unlikely to succeed!

Enterprise Marketing 2.0

By focusing on the end user, innovative companies are turning the traditional enterprise sales and marketing process on its head - and finding great success at it. User driven sales and marketing + Web 2.0 = Enterprise Marketing 2.0?

In my last column, I argued that a few customers - and some software companies - are moving away from a push to a pull - end user driven – sales process. An approach I called Enterprise Sales 2.0. I recently met up with a colleague whose background is in enterprise marketing and the discussion turned quickly to the following topic: what is the role of marketing in the new brave world of Enterprise Sales 2.0? 

Traditionally, enterprise software distribution has largely been led by the sales department – The sales folks played golf with the CXOs of target companies – while marketing focused on ancillary (and often intangible) activities such as branding, trade shows and advertising etc…. Enterprise Sales 2.0 turns this paradigm on its head with marketing taking the lead role in Software Distribution and sales playing an important – but supporting – role.

An extreme example of an Enterprise Sales 2.0 company is SugarCRM. The CEO of the company – John Roberts – often proclaimed that “software is bought not sold” and that his company, in its early days, was a salesperson free environment. This has changed and SugarCRM is now hiring salespeople – but their role is significantly reduced: in enterprise sales 2.0, the sales process starts when the customer initiates an interaction with the corporate website and not the salesperson. 

This is in fact a very positive development – as I discussed in this article – the cost of Sales and Marketing in traditional enterprise software companies is high and can only be supported by high license revenues – One way to reduce this cost is to establish a find/try/buy process where customers largely buy on their own – No expensive golf games required. 

The good news is that marketing in the age of enterprise Sales 2.0 is not the marketing of yesteryear – The old adage that plagued marketing budgets “half of my marketing dollars is wasted, but I can not tell which half” no longer applies.  Marketing should continue to focus on various marketing campaigns to create pull for the product, but a company’s website has become the glue that brings together a company’s various marketing activities and with some instrumentation and web analytics, the marketing department can figure out exactly what is and what is not working.

Increasingly Marketing is no longer an art but also a science.  Metrics like cost per lead, conversion rates, customer life time value, and churn drive the actions and management of these new marketing organizations.  As an example, it is rumored that Amazon has 700 mathematicians analyzing web site data to improve their web site conversion rates – That is a lot of left brains working in what is traditionally a right brain department.  Yes I do realize Amazon is not an enterprise sales company – but as I argued before, the consumer and the enterprise markets are merging….

What is the role of the sales department then in this marketing lead process? Broadly their role addresses three areas:

1) Moving those prospects that are stalled in the find/try/buy process along…. E.g. A customer filled in a form for the trial but did not buy.

2)  Addressing large opportunities and aggregate users into enterprise level deals …with the sales model turned on its head individuals and departments are first time buyers rather than the enterprise

3)  Upgrading existing customers into higher value products and otherwise extending and increasing the vendor/customer partnership. 

Most young software companies concede that they have a hard time competing with big boys in the enterprise. The above approaches enable the new companies – If I can use a baseball analogy - to hit the big guys where they are not: small departments in the enterprise and small and medium size businesses. Best of all, they can do at a significant lower cost than the traditional “proven” sales and marketing!

Enterprise Sales 2.0

As end users start driving software adoption in enterprises, the result is a mashup between Enterprise Sales and web 2.0 - Enterprise Sales 2.0?

First came web 2.0, then bubble 2.0, and now enterprise sales 2.0. The last of these came to me as I was listening to Con Goedman, head of business information for Shell International, give a presentation at Software 2006. As he spoke of overseeing the transformation of IT’s role at Shell, I realized that what he was describing represented a 180-departure from the practices of most enterprises back in the 90s. And boy was it refreshing!

Whereas in the past, IT decided what software end users would use, Mr. Goedman’s IT group is now letting its users take the lead in selecting their tools. Contrast this with the past decade when buyers—typically CIOs—made software purchase decisions with little input from end users. The result? Millions of dollars worth of software sitting on shelves, because users saw no value in it—and nobody had bothered to consult them.

That’s because back in the 90s, the mantra for most sales and marketing folks was, “Sell to buyers; ignore end users!” I remember a presentation at an Oracle sales kickoff in which the speaker stated that the only way to succeed in selling to the enterprise was to approach the task from “top down”—that is, by calling on the top of the organization (ideally the COO or the CIO). “Don’t bother with the users,” the speaker said. “They have no budgets and no decision power.” Even then, I wondered how many calls a CIO would actually entertain. Apparently many. Those were the days when IT mattered.

But times have changed. These days the above approach rarely works: IT budgets are earmarked for existing suppliers, and CIOs are unwilling to take risks on new technologies. After all, these days, IT doesn’t matter anymore.

If it is end-users who are leading the new adoption cycles in enterprises, it should come as no surprise that the software companies that are making headway selling to the enterprise are open-source and on-demand companies. By their very nature, companies in these categories focus on the end user and enabling the end user to try and use the software with no input from IT. Thus, most companies in these categories target end users in their marketing and sales efforts.

Consider JBoss: This open-source company has become a poster child for enterprise sales 2.0 by generating $50 million in revenue for what is, in essence, support and training. This surpasses Oracle’s J2EE revenues. And when you consider that Oracle’s revenues include license fees, JBoss’s numbers look even more impressive. Some technology pundits estimate that JBoss has been able to displace $300 million worth of license revenues from Oracle, IBM and BEA. So much for Oracle’s famed marketing and sales prowess!

Another company using the enterprise sales 2.0 approach to its advantage is Zimbra. In my last column, I wrote of the numerous innovations this company has adopted to take on entrenched competitors like Microsoft and IBM in the messaging arena. But perhaps the innovation that matters most at Zimbra is its extreme focus on end-user adoption: It has created an addictive interface that turns users into evangelists; end users are able to take immediate advantage of the software (they don’t have to convince entire departments to use it); and they don’t need IT’s support or blessing to use it! This is what I call selling to the user—the enterprise sales 2.0 model in action—and it works: Within four months of its product launch, the company had already announced several customers, including a 100,000-seat deployment at H&R Block.

Will Zimbra displace Microsoft and IBM? Probably not. But it can make a nice business selling to niche markets that Microsoft and IBM haven’t reached. Similarly, will Microsoft, Oracle, and SAP lose their app dominance in the next three years, as Ann Winblad posited at the Churchill Club? Not likely. But by bypassing the old IT guard, new players are carving market niches the big boys haven’t touched.

Microsoft, Oracle and SAP to lose their dominance.... Part I

Or so says venture capitalist Ann Winblad, who believes the big boys have just three years left on top before proprietary software becomes a thing of the past.

As you might imagine, when the Hummer Winblad founding partner made this bold prediction at the Churchill Club's annual top tech trends debate in January, her words were met with more than a bit of skepticism. Even though Ms. Winblad cited the advent of Internet-based software, web services, new pricing and business models, open source, and open standards to support her claim, I must admit that I, too, was skeptical.

But then I thought about it. And as I did, I was reminded that VCs are often wrong—particularly when it comes to timeframes. Could it be that Miss Winblad's prediction is correct but just ahead of its time?

In a recent sandhill article, Geoffrey Moore, of crossing the chasm fame, states that not all innovation is inherently disruptive, as author Clayton Christensen (The Innovator's Dilemma) and others have posited. Indeed, Moore writes, there are all kinds of nondisruptive innovations: application innovation, process innovations, integration innovation—the list goes on and on. Frequent AlwaysOn blogger Tom Forenski, however, disagrees, article that “if an innovation is not sufficiently disruptive it will not overcome the inertia of the status quo—and will therefore not be classed as innovative.”

I happen to be on Moore’s side in this debate. Not all innovation is inherently disruptive, and much of it is incremental. But rather than quibble over semantics (and since I'm an engineer by training), I prefer to use numbers: Googling “incremental innovations” resulted in about 5.5 million hits, while Googling for “disruptive innovations” yielded a measly 2.6 million hits. If all innovation is disruptive, why are more people talking about incremental innovation?

Regardless of whether you consider innovation to be inherently disruptive, there’s a lot of it going on right now—particularly in the software world: It's been a long time since we’ve witnessed the convergence of so many areas of potential innovation. Consider the following:

Marketing innovation: New business models such as open source and software as a service (SaaS) are turning enterprise marketing and sales upside-down—models that JotSpot cofounder and CEO Joe Kraus describes as “addicting the end user and selling to the enterprise.”

Application innovation: Until recently, web applications were slow and cumbersome compared to their native Windows cousins. Not so today, however, as new technologies such as AJAX are providing a look and feel superior to many native Windows applications.

Product and integration innovation: Hybrid web apps – mashups - which seamlessly combine content from a variety of sources, represent a promising area, with many interesting applications already emerging.

Platform innovation: By taking advantage of open-source and low-cost application infrastructures, companies can significantly reduce the cost of software.

Established companies—which often stumble dealing with just one innovation—will find it difficult to deal with (and get right) simultaneous innovations. They simply have too many stakeholders who want to maintain the status quo. For startups, however, it's a different story: With innovation occurring in so many areas, opportunities abound for newcomers that are able to take advantage of the challenges presented by evolving markets and platforms.

Zimbra is one such startup: An an-open source company that uses a SaaS delivery model and AJAX technology to deliver rich Internet applications, Zimbra is taking on Microsoft and IBM in the messaging area—something that would have been unthinkable (and unfundable) a few years back. Fast-forward to today, however, and Zimbra has attracted a strong following and raised $16 million to date. Further, its applications can be integrated with other apps to create mashups. In other words, Zimbra—by embracing innovation—is now getting it right!

An upcoming event put on by the MIT/Stanford Venture Lab focuses on  just what I’ve been talking about here—innovation within the software industry (specifically around AJAX technology) and at Zimbra. Microsoft will be represented as well, and to stir things up, Om Malick will be the moderator. I’ll provide a summary and analysis of the event in my next column.

New Rules for Sales and Marketing: Lessons from Open Source

Let’s face it: The traditional software business model is broken - A recent study by Goldman Sachs shows that in 2005 software companies will spend 82% (up from 66% in 2000) of their new license revenues on sales and marketing. In other words, software firms are charging customers for their sales efforts under the guise of license fees! Since most customers dislike the dreaded sales cycle, I suspect many of them will take their money and put it elsewhere – most likely into software companies who charge less for their sales efforts.

How can software companies afford to plough most of their license revenues into sales and marketing? The answer is maintenance fees. For most software makers, maintenance fees are highly lucrative, often producing profit margins of between 80 percent and 90 percent. And the more customers a company has, the larger the maintenance revenue it generates and the more profitable it is.

It is no surprise that a new generation of companies is adopting a different business model altogether: Drop the license fees and help “customers sell themselves”. At the forefront of this business model are open source software (OSS) companies such as MySQL and SugarCRM. But the trend is crossing over to traditional software companies such as Oracle and even hardware companies such as Sun – Sun has recently announced that it dropping license fees for its software and will only charge maintenance fees.

Many open source companies have adopted innovative techniques to help lower their sales and marketing (S&M) expenses. Larry Augustin, Chairman of VA software, asserts that open source companies’ S&M expenses are 75% lower than traditional companies. Let’s take a closer look at some of those techniques:

1-      Give the base product away. Many open source companies report 1000s of daily downloads with no sales interaction. About 1 to 2% of those trial customers come back to purchase maintenance and services – since few enterprises are willing to use an unsupported product. Whether this nirvana of “build it and they will come” is sustainable remains to be seen, particularly as competition heats up between various open source offerings. Still, there is power in free software: Jonathan Schwartz, President of Sun Microsystems says: “Volume wins in the marketplace for technology and the price that drives the most volume is free”. 

2-      Focus on the end user experience. As mentioned earlier, most open source sales cycles start with the end user downloading the software and trialing it. If the end user likes the product, he is likely to champion it internally and ask for funding for support and services. This is different from the traditional enterprise sales process where purchase decisions were made largely by senior level executives based on strategic/political considerations with limited - or no input - from end users.

3-      Ride the culture of personalization. Most open source products are built by a community of developers, testers, end users, bloggers etc… Community participants take pride in their contributions and are therefore likely to become evangelists for the product. Word of mouth marketing in the form of blogs, wikis etc… is a much more effective and inexpensive form of marketing than traditional advertising campaigns. In addition, direct communications between technical developers and (technical) customers in open forums is likely to carry more weight than the old tired marketing messages.

4-      Create an ecosystem. Successful open source products are part of a standard stack - e.g. LAMP (Linux, Apache, MySQL, PHP/Python/Perl). Since those products are integrated, customers, looking to adopt one product, are likely to adopt the entire stack. In addition, channels are more likely to ship/resell the stack. For instance, Dell has recently started shipping the LAMP stack with some of its servers.

5-      The halo effect. Until recently, many IT departments have been unwilling to buy products from new suppliers. However, as enterprises are successfully running open source products such as Linux, there is a “halo effect” around open source products that carries over from existing implementation to new ones.

Can all software companies adopt the above techniques and therefore achieve a 75% reduction in sales and marketing costs? Not likely!

Companies that offer open-source software in large, mature markets are likely to achieve the most significant reductions in their S&M costs. Customers in those markets are looking for lower cost alternatives – and increasingly do not see significant differences between proprietary and mature OSS.

On the other of the spectrum, companies offering highly differentiated solutions in niche markets are unlikely to significantly lower their S&M costs. Customers still need to be made aware of the existence of the solution, and understand the significant differences between offerings. In addition, many niche products need to be integrated with previously installed software. All of this makes for a long and expensive S&M cycle.

What is clear however, is that the status quo is unlikely to go on and most companies should be taking a fresh look at their sales and marketing. The Gartner group predicts that “Open source software is the catalyst that restructures the software industry”.  Those companies who embrace some of the above techniques are likely to win in the upcoming seismic shift.

<a href="http://technorati.com/tag/Antony+Awaida" rel="tag">Antony Awaida</a>

Technical innovation is no longer enough!

Innovation in other areas of the business such as sales and marketing, combined with technical innovation, is what is driving today’s successful businesses. Examples are SalesForce.com, MySQL, Skype and others….

Oracle’s CEO Larry Ellison made several predictions in an 2003 interview with BusinessWeek – amongst those: 1) The IT industry is mature 2) There are far too many companies in the software space that need to be consolidated and 3) Silicon Valley is dead - innovation will be the realm of large companies

Few would argue that the IT industry is maturing: IT budgets are growing at single digits, Precious few IT startups have made it to the public markets and Ellison is making his consolidation prediction a reality having acquired 10 companies in the last year.

Yet in an interesting twist of fate, innovation is back – not the technical innovation that was the mainstay of the 80s and 90s but a new kind of innovation that has the potential to significantly disrupt established firms businesses’- including Oracle’s.

By and large, most successful businesses in the 80s and 90s used their technical prowess to offer a new technology to an emerging need or to offer a solution that is superior to the incumbents’. For instance, Oracle became the database king by offering a more powerful “relational” database system than the incumbents’ “network” database system.

In contrast, today’s successful businesses are successfully grabbing market share by embracing business model innovation. Those companies are bringing innovative approaches to sales, marketing, product development etc… while introducing innovative technologies to market.

An example is SalesForce.com. The company did not use its technical savvy to create a more powerful product than the market leader Siebel, something that would have been hard to achieve considering Siebel’s significant resources. Rather it delivered a benefit that the CRM market was screaming for: lower adoption costs and lower risk. This was a significant breakthrough in an industry notorious for expensive failures – Customers having spent millions of dollars on CRM software with little adoption by end users.

In contrast to Siebel, customers could spend a few thousand dollars adopting SalesForce.com’s software. If the software did not deliver on its promises or if the end users did not adopt it, the loss would be small. SalesForce was able to offer this critical benefit by using an innovative business model: delivering flexible software exclusively on the internet – bypassing the need for expensive consultants - and selling mostly on the phone.

Ironically, another business model innovation is being played out by a database startup – MySQL - that threatens to disrupt Oracle’s business.  MySQL can hardly match Oracle’s data management capabilities. However, the startup has two phenomenal advantages that will only grow over time: an army of free developers – most of its development and testing is done by the open source community - and an army of free salespeople – Open source software tends to spread by word of mouth. In other words, MySQL can continue to grow its technology and revenues by hiring few engineers and salespeople!  Oracle will have to go through a lot of pain to adjust to this new reality.

Another example of an innovative business model is Skype (recently purchased by Ebay). The underlying technology - offering free phone calls over the internet – has been around since the late 90s. Arguably, Skype offers an easy to use interface that could compete in its simplicity with the telecoms. But the true innovation is Skype’s business model: offer free phone calls to attract customers to the Skype network and charge a flat fee for those people who call outside the Skype network.

Unfortunately, innovative business models are much harder to create than innovative technology. Innovative business models require that new approaches to sales, marketing etc… are created in concert with the new product. This is significantly harder than the traditional approach of building a product first and then figuring out the go-to-market strategy.

The areas of sales and marketing are particularly ripe for innovative thinking in new and established businesses. Traditionally, many companies relied heavily on direct sales (outside sales or telesales) to sell to new customers. This “hard sell” approach to customer acquisition is no longer effective, particularly when introducing new products. Marketing needs to assume a prominent role in reaching out to prospects, converting them, and helping them “spread the word”. In turn, sales can take a softer approach to selling and focus on “helping customers buy”.

Powerful new trends make innovative marketing and sales approaches possible. There is much talk about the “culture of personalization” and such megatrends as Blogs, Wiki, RSS feeds, viral marketing etc…. While some of the talk sounds eerily similar to the hype surrounding the internet in the 90s, it is undeniable that the internet did change the way most companies do business. Similarly, some of those trends will change the way most companies market their products. Those organizations who embrace those trends are likely to gain a lasting competitive advantage. As more and more companies adopt business model innovation, the march of new businesses will resume.

The startup's true secret sauce?

Startups have been known for their ability to create innovative products. Yet in today s environment it is their ability to come up with optimal go-to-market strategies that will carry the day!

Much has been written about startups' unique advantages when it comes to creating innovative products for emerging markets. In fact, many established companies, eager to capture some of the advantages of their smaller brethrens, have created internal startups - sometimes called "Intrapreneuring" or "Spin-ins" - to send a few people "back to the garage" with the task of coming up with innovative products. But new businesses who focus on product innovation alone often miss out on what may be the most important aspect of successful startups: their ability to quickly understand their markets and deploy successful go-to-market strategies. Most startups spend vast amounts of time and money creating the best possible products. Yet, little analysis is performed to come up with the optimal "go-to-market" strategies – partly because the startup has very limited data on the emerging market. It is not unusual that the task of figuring out how to sell the new product is left to the sales team - "we will hire great salespeople who will figure it out". Yet this strategy is likely to be as successful as the proverbial "build it and they will come". Lessons from successful Startups There are a number of strategies that successful startups have used - or have been forced to use - that may seem anathema to some entrepreneurs. Yet the results from those strategies are undeniably rewarding. Here are six go-to-market strategies most new businesses can benefit from: 1. Sell the product while it is being built. Most companies use a structured, sequential approach to product introductions - typically starting with Product Definition, Engineering, Marketing and then Sales. On the other hand, some startups, typically starved for money, will try to sell their products while those are being developed. Those "premature" sales efforts - whether successful or not - enable the startup to obtain feedback from a critical constituency - real buyers (and not focus groups!) This can bring very beneficial results. Since the product is under development, the product definitions can be modified to ensure that the first release of the product can be successfully sold. Also, if the early sales are successful, the new business ends up with references that can significantly accelerate the adoption rate. 2. The entrepreneurial team - and not sales professionals - should lead the initial sales efforts. Many startups cannot afford to hire professional sales people and that works out just fine anyway. Entrepreneurs tend to be more successful selling to early adopters - Vision makes up for what a startup sorely lacks: references. Once the first few sales have been made, sales professionals can be hired to scale the business. 3. Everyone is in Sales - especially Marketing employees. In a new business, the Marketing department has the unique challenge of coming up with a marketing strategy before any sales have been made. Yet, the Marketing department is often unable to answer key questions that are critical for an effective marketing campaign. For example: What is the customer's buying process? On the other hand, in some startups, the Marketing team is often an integral part of the sales effort and therefore can gain, early on, a deep understanding of the customers buying process and the decision unit. 4. Align marketing and sales efforts to reach key decision makers. Most startups have scarce marketing budgets. Those are best spent helping the sales team getting in front of decision makers. Too often, marketing campaigns target audiences that are poor entry points for the sales team. This is a waste of precious resources since the sales team ends up engaging the customer at the wrong level. 5. Create a simple, yet compelling "elevator speech." Most startups need an elevator speech to introduce their business to investors, to early customers and to the founders' moms. Since this target audience is from outside the industry, the elevator speech has to be simple yet compelling. As the startup interacts with various prospects and partners, the elevator speech will be honed and toned. This elevator speech serves two purposes. It becomes the rallying flag behind which the entire company aligns as the company evolves and it becomes the cornerstone of the company's messaging that can be used to develop effective marketing and sales tools. 6. Follow the money. Most new businesses start with a loosely defined target market and product offering. As the business interacts with real prospects, it will typically change its focus and product direction. A startup will give particular attention to those customers who "vote with their purchase orders." Microsoft's original plan was to sell computer-programming languages. Their plan changed when they landed an IBM contract to develop an Operating System. It is not unusual for a business to go through several iterations before it narrows down to a sweet spot. The Best of Both Worlds Most entrepreneurs tend to be technical people and will bring a strong analytical discipline to their product development efforts. If those entrepreneurs can bring the same discipline to their go-to-market strategies, they are much more likely to deliver on the always optimistic forecasts for the new business.