Startleap weblog

Revisited - The art of pricing software

Recently, my family and I spent a couple of days at the Mandalay Bay Hotel in Las Vegas. On Saturday morning, as we walked to the wave pool there was a prominent sign advertising “private cabanas starting at $400”. A steep price, I thought, for what is essentially a tent. But in Vegas, city of glam and sin, some bathers will find a little extra privacy- as the commercial goes - priceless.

On Sunday morning, the sign was there again but the price had gone up to $600…. It figures: The pool was overflowing with people and privacy was very hard to come by.  Later that afternoon, the price had dropped to $350.  Someone was obviously trying to keep those cabanas full at all times and doing a good job at it: All of the cabanas I could see seemed occupied!

So I decided to inquire about it and asked to speak to the manager in charge. The manager volunteered: “Well, you know, yield optimization is standard practice in the hotel industry. We change our room rates constantly – based on occupancy rates, day of the week etc…. sometimes even based on the weather forecast! We use the same ideas to optimize the price of our cabanas but we keep it simple – unlike hotel rooms where we may have 100s of room rates on any single day”

Not bad for a guy peddling cabanas in a Vegas wave pool. Perhaps he should take a job as a software pricing guy. After all, there are a lot of similarities between pricing software and hotel rooms. Both have high fixed costs and small marginal costs – in the case of hotel rooms that would be soap, shampoo and other sundries. In the case of software, support calls and the like. Perhaps more importantly, both are perishable goods: A hotel room has zero residual value when left unoccupied. Similarly, a piece of software has zero residual value after a customer decides to purchase an alternative solution.

At Ephox, we recently faced a pricing challenge. The company – a developer of the leading proprietary editing software EditLive! – has entered into a distribution agreement with MoxieCode – the developer of the leading open source editor – TinyMCE.

Distributing open source software sounds like an oxymoron: Open source software is usually free. However, Ephox is selling premium support and consulting services to the TinyMCE community. Further, the company is selling commercial licenses to those customers who cannot agree to the sometimes onerous requirements of open source licenses.

One decision that generated debate in the company was to spend time offering support via the TinyMCE forum for free. Ephox has historically offered premium support services at a premium price. The pricing for the support service was such that it covered its cost and contributed to the company’s bottom line.

The controversy around free support subsided when we agreed that it would be considered a marketing expense. The argument went like this: Ephox can generate leads and make itself known in the TinyMCE community by paying for Adwords, banners and other marketing activities with dubious returns. Or, it could use the same marketing dollars to fund engineers who will contribute to the TinyMCE forum. Not only is the latter approach more in alignment with the ideals of open source, it is likely to be a more effective branding and lead generation exercise overall.  

To this point, Ephox spends 100s of thousands of dollars a year on lead generation and brand building programs. The open source alternatives spend zero on those activities…. However, a Google search of TinyMCE yields 2.6M hits vs. 105K hits for EditLive!  On the web, you either pay to establish your brand or you offer a valuable free service!

This pricing exercise reminded me of a 2004 article written by one of my favorite bloggers Joel Spolsky:

Pricing is a deep, dark mystery, they tell you. 

 The reason I bring this up is because software is priced three ways: free, cheap, and dear.

1.        Free. Open source, etc. Not relevant to the current discussion. Nothing to see here. Move along.

2.       Cheap. $10 - $1000, sold to a very large number of people at a low price without a salesforce. Most shrinkwrapped consumer and small business software falls into this category.

3. Dear. $75,000 - $1,000,000, sold to a handful of rich big companies using a team of slick salespeople that do six months of intense PowerPoint just to get one goddamn sale. The Oracle model.

Notice the gap? There's no software priced between $1000 and $75,000.

Software pricing has been turned on its head since Joel wrote this article. Most new software companies (including Saas) price their offerings in the $1000 to $75,000 range – what Joel calls “the gap”. In fact, Joel’s company now sells its software in the $1000 to $10,000 range. What has changed? Most software can now be sold on the phone using screensharing – no expensive four-legged sales calls required.

So let’s take a stab at updating Joel’s software pricing matrix. It is still priced three ways: Free, value priced and dear.

1-      Free. Whether open source, proprietary, or hosted, every new software company should have a free offering. Why? It is “the power of free” that has brought us the likes of Google, Facebook and….. TinyMCE. Would Facebook have 500M users if it charged for its service? I seriously doubt it… Keep in mind that “free” does not mean “free forever”: SalesForce.com used to offer a low end service free but now that its brand is well established, it charges $5/month.

2-       Value Priced: $1000 to $75000. This is the sweet spot for most new software companies. Software in this price range can be sold on the phone – No expensive trips to the customer sites, no hotel stays and no golf memberships required.   

3-      Dear: More than $75000. Most new software companies will struggle getting traction in this price range.  Software that costs upwards of $75000 will typically require several face to face meetings with customers. Some industry observers estimate that it costs upward of $20M to establish an effective channel in this price range.

Note that I called the second category “value priced”. In the olden days, salespeople tried to figure out the value a customer perceived in the proposed solution and discounted it accordingly “to value”. This is now done on the website, where customers are offered an “a la carte” menu of packages and options: Customers will pick and choose based on their budgets and their perception of the value of the software.

Still unsure about how to price your software and feel that you are no better off now then you were 2 pages earlier? Send me an email and I will give you the phone number of a cabana pricing guy in Las Vegas – He may be the man for the job!

How Ephox moved from online sales to enterprise sales and grew profits tenfold along the way.

This article was originally featured in SoftwareCEO.

Just like many software companies, Ephox got its start by selling its web authoring software online. Founded in 1999 in Australia, the company mastered the art of search engine marketing, and during the first few years most sales were on the web.

While the company was doing well, growing at an average of 25-30 percent a year, it wanted to move beyond its online roots. This situation is quite common in the software industry, with thousands of small companies that have created a niche for themselves by selling online.

In particular, SaaS and open source companies –-- typically with a low entry point --- find it natural to get their start by selling online. However, only the companies that can break away from online sales and master enterprise sales are likely to tap the true potential of the market and become leaders in their space.

"Buying software online is like building a house by going to The Home Depot," says Andrew Roberts, CEO of Ephox. "Some may do it, but for many it is far too daunting a task. Most businesses prefer to deal with experts --- builders, architects, etc. --- who will guide them through the complexity and mitigate the risk of failure.”

"We now have a significant share of the web authoring market. Moving to an enterprise sales model has helped us get there."

Enterprises are looking for solutions and not software. This was the starting point for Ephox’s move from online to enterprise sales. Ephox was able to triple its revenues and grow its profits tenfold in just two years, even while facing severe economic headwinds. Here are the actions the company took to achieve its transformation:

1: Touch customers multiple times during their decision process
To make the transition to enterprise sales, one has to touch customers more often and in more ways. While web downloads of evaluation software continue to play a role in marketing at Ephox, these are only one touch point –-- a minor one –-- in a marketing process that aims to touch the customer multiple times.

While the web used to be the key conversion tool to transform prospects to customers, in enterprise sales the key conversion tools are phone calls, webinars, and sometimes face-to-face meetings.

2: Reach beyond the people who download the software
At Ephox, people who visited the website and left their contact information were most often technical people, with little understanding of the problems their end users faced. Further, since they were in IT and not on the business side, they had little decision-making power on the purchase.

The Ephox sales team now starts by contacting those IT folks, but focuses its selling efforts on the business manager or project director who holds the key to the purse strings. Those decision-makers are more likely to understand the ROI.

3: Upgrade sales skills
Selling to the enterprise can be financially very rewarding but it takes a very different skill set to execute well.

An enterprise's buying process is usually complex –-- involving multiple stakeholders with different agendas –-- and the sales cycle can be lengthy. It takes a skilled salesperson to navigate through this maze and bring the stakeholders to a decision point

4: Increase the value of the software to customers
Enterprise buyers appreciate a complete solution, one that includes handholding during the sales cycle, 24x7 telephone support, custom legal agreements and professional services.

When you move beyond the technical downloader to the business decision-maker, price is less of a driver and other considerations become critical. These include integration with existing systems, quality of support, reputation in the marketplace, trust established during the sales process, and so on

An online sales process will often come down to a price comparison. Enterprise sales, on the other hand, bring out other, more important decision criteria: references, ability to understand the requirements, post-sales support, services, and so on.

As an example, Ephox has established support centers on three continents to ensure that customers can talk live to a local expert.

For Ephox, the proof is in the pudding. The company's average deal size has increased from $15K two years ago to about $35K now.

5: Leverage partners
Ephox had established relationships with key software vendors such as EMC, Oracle, and others. Initially Ephox targeted these vendors to OEM its products and pay a royalty.

But this is not as effective as going straight to their customers, which are typically F2000 companies with big budgets for content management. Ephox is increasingly focusing on developing joint-marketing programs with its partners to reach out to the customer base and sell add-on modules.

6: Make sure multi-channel marketing has a compounding effect
Enterprise customers prefer to buy from other large enterprises.

While Ephox is a relatively small company, it invests heavily in online and offline marketing activities: Google adwords, trade shows, regional events.

This marketing outreach seems to be working. While visiting the company's offices, an IBM manager stated recently, "To the outside world, Ephox seems so much larger than it really is."

7: To get the attention of OEM partners, get the attention of their customers
To get noticed by an OEM partner, One needs to sell to their customers. Yet, to sell to customers, you have to be anointed by the OEM partner:  a typical chicken and egg problem.

Ephox plays in the web content management market alongside the industry heavyweights. Establishing meaningful partnerships with those companies is a challenge, since they are being pursued by hundreds of other small companies at the same time.

Ephox took the approach of initially "forcing" its way into the customer base by building integration code – with or without public APIs.

After the first few customers started raving about the Ephox product, the OEM product teams took notice and opened the doors to a tight partnership.

8: Establish a sales process
A key step to successfully moving a sales team to enterprise sales is to establish a sales process. The sales process is simply a tool for the sales team.

It includes these pieces:

1) A checklist to ensure that salespeople cover all the bases during the sales cycle

2) A summary of best practices that is continuously evolving to reflect new realities

3) A baseline to measure how new approaches fare, compared to existing ones.

9:Land and expand, with referrals
A referral from an existing customer is one of the shortest paths to closing new business.

But in most online sales environment, sales transactions are largely reactive. When a sale is made, little happens until the customer re-initiates contact with the vendor.

In enterprise sales, it is critical to have the sales team proactively call the customer to check on the status of the project and then ask, "Who else in your organization –-- or outside --- should I talk to?"

Ephox is now getting 25 percent of its new licenses as a result of referrals from existing customers, up from single digits.

By following these tactics, Ephox has successfully transformed its business from web downloads to enterprise sales. In fact, the company even hit the Inc. 5,000 list this year. And I believe any software firm, who successfully makes the transition from online to enterprise, can vault itself to the upper tier of vendors in its market. 

Social Netwoks and B2B Marketing - Lessons from the Obama Campaign

Political analysts have showered praise on the Obama campaign for its effective use of the internet to win the race to the white house. In particular, the Obama campaign did an exceptional job in leveraging social networks – and B2B marketers would do well borrowing a page from the Obama campaign’s playbook.

Let’s start with the Obama website: it is a true community powered website – a social network in its own standing. It allows voters and volunteers not only to learn about the candidate but also to contribute and share content.

Allowing people to create content and share it with their peers is a central premise of social media.

Take the Obama blog, not only does it contain articles by Obama, but as importantly, it contains articles by 100s of members and 1000s of commenters. One article is by Jenny Richmond a 54 year old first time voter telling why she has decided to finally vote. Another is by Bradley – a campaign volunteer – describing the most exciting campaign he has ever worked on. Another section of the website where the social media thinking is at play is in the people section: Latinos, Unions, Environmentalists etc… These coalitions show their grass root support by posting their articles and videos.

By contrast, the McCain website looks like an official production by the campaign with limited grass root contributions. The blog section largely consists of press releases by campaign officials (no articles by Joe the plumber!). The People section looks particularly poor – essentially the same content was used for various coalitions with minor modifications interspersed here and there.

Lesson #1 to B2B marketers – In a web 2.0 world, community created content is much more effective than campaign created content to engage the community and therefore result in online or offline action. A company’s website is a place where customers and prospects come to gather and, increasingly, exchange information. Forums have been extensively used to enable technical people to exchange technical information. Similarly, business people are looking for this unfettered information from their peers – rather than the usual marketing innuendo.

I do realize that getting business people to share information on a B2B website is much harder than getting campaign volunteers to share information, but – with some out of the box thinking, it can be done!

One innovative approach is being espoused by one company I am currently working with – www.realization.com. Over the years, the company has recorded 10s of videos of its customer presentations at its annual user conference. In the videos, customers from industries as varied as Aerospace to Software present the challenges they were facing and how, using Realization’s solution, they were able to overcome those challenges - . The company is now using those recordings as the centerpiece of its website http://videos.realization.com/realweb/ For prospects considering the company’s products, watching a case study – ideally one from the same industry with a similar problem – is a very effective conversion tool - much more so than sifting through pages of marketing literature. The page further enables customers or employees to create customized playlists and email those to prospects.

Another company I am working with has come up with an innovative scheme to create customer content: it has offered existing customers a one time discount on technical support fees in exchange for a case study. Further, new customers are offered discounts on their license fees in exchange for a case study within six months – discounts which would have been offered anyway in today’s challenging sales environment. The campaign has been quite successful: It is amazing what customers will do to lower their costs in today’s environment.

Those two cases are examples of what innovative companies are doing to transform their websites into community powered websites. Those are initial steps in what is likely to be a long journey. Marketers may worry that they are relinquishing control of their website’s messaging. They need to understand that their level of control in a web 2.0 world is increasingly limited and that the power lies with the customer. If B2B marketers do not provide the infrastructure that enables customers and prospects to create and exchange the information they are looking for, they will do it somewhere else – often on a competitor’s website.

Part 2 of the article discusses how the Obama campaign masterfully leveraged social networks such as Facebook and Linkedin and how B2B marketers can use those lessons to leverage business social networks.

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.