Marketing Memos

It is no secret that Open Source has gone mainstream.  You’d have to be Steve Ballmer to not agree.

The question is “why?”  Knowing buyer motivation is key to knowing how to market any product.  iPods didn’t sell because they were new or great technology.  They sold because Apple marketers tapped into the emotional motivations of music junkies.  So too must software vendors, and the Open Source movement supplies interesting insights into IT buyer motivations.

In a study conducted by Forrester, companies in the North America and Europe were polled about their adoption of, and views about Open Source.  There were a set of completely unsurprising motivations for evaluating and adopting Open Source solutions.  These attributes are not completely peculiar to Open Source, so every software vendor should take note.

Among the top attributes of Open Source that buyers found important were support for open standards (78%), low use restrictions (76%), and lack of vendor lock-in (79%).  Two of this top-three list (standards and flexible use) are traits that even proprietary offering can (and should) adopt.  Not surprisingly, the community aspects of Open Source (access to source code, participating in development, etc.) were the least important to buyers.

On the flip side, the concerns expressed by these same IT buyers were compelling.  The total cost of ownership (TCO) was the least of their worries, which dispels one of the mythical selling points of Open Source in general and IT in particular.  Service, support and security were the top concerns.  But these are the same concerns IT buyers have with proprietary vendors, which makes gives Open Source a comparative advantage.  And despite SCO an Microsoft’s best efforts, only 43% of the respondents were bothered by legal and intellectual property issues.

The telling detail was that more than half of the respondents were using Open Source for mission critical applications. This wasn’t limited to infrastructure either.  Though Open Source is still climbing the hill to run the top-most critical applications, there is little … and less … reluctance to use Open Source for heart-of-the-business needs.

The last non-surprise was that 75% of the respondents are using Open Source to consolidate IT skill sets.  This isn’t surprising because in our work with SuSE Linux years ago we discovered this was a primary CIO/CTO motivation (see our white paper titled “What CxOs think about Linux“).

Today’s marketing strategy lesson is this:  the market finds a way.  Like life, the market adapts to provide what is really needed.  Open Source is meeting key and long standing needs of IT buyers, and software vendors will need to ante-up and meet the top buyer motivators to survive.

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For those in the Silicon Valley area, or visiting in early October, I will be speaking at the Software Business 2007 conference.

My topic will be “Changing Marketing Strategy Issues - How the Software Business is Getting Crazier.” Since I know a lot about software marketing strategies and craziness, this should be a good talk.

The central theme will be how too many new options are available in go-to-market planning, and how software companies need to rein-in their expectations and plot matrixed market segmentation strategies, lest they over-extend themselves.

I’ll hit the stage on October 2nd at 1:40PM.  Be there or be under-informed.

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I was a judge for a recent
VC/startup pitch session with Startup Epicenter.  I may be in a bit of
a rut given that I was also a CODiE judge earlier this year.  All told I’ve been listening to start-up money begging
pitches for over six years now.

They haven’t gotten any better.

The fact that most start-ups still have weak pitches is strange.  We are a decade into the tech industry rise, complete with the
burst bubble and dot-bomb fallout.  Throughout, much has been written on
kick starting a business and seeking cash from strangers.  Guy Kawasaki ( oddly another "Guy" in the business who somehow I have not yet met ) even provides a checklist
of all the items that should appear in every pitch presentation.  There is
ample information for any green CEO to use and become more successful
at entrepreneurial panhandling.

Yet they continue to fail.  At last week’s event, all the companies
has pleasant enough pitchmen, and most had interesting product/service concepts. 
But only one had a complete proposal, a keen idea of where they were in the
market, and how they were moving forward.  They also had $900,000 annual
traction … they had been through the wringer before and knew what the audience
needed to hear.

It occurred to me that angel investors likely have it worse than venture
capitalists.  Angels typically come into the investment cycle earlier in a
start-up’s evolution and thus deal with newbie CEOs greener than Kermit the Frog
with a hangover.  I chatted with a long time acquaintance and angel investor,
David Greer.  He confirmed my fears that angels should either be
ripping their hair out by the follicle roots, or be institutionalized in the Home
for the Terminally Bewildered, for actually wanting to deal with callow
tech execs.  It is painful to see the average start-up
fumble through a pitch, but angels get to shave off the really rough edges
first.

My personal nit picks — coming from the marketing strategy perspective — are the failures to understand and communicate:

1. The segment or segments in which marketing and sales will be focused
2. The genotypes ( buyers and influencers ) and their motivations

These two factors retard more start-ups than under funding, stiff
competition, or coke snorting CEOs.  It is the identification of a segment
that matches product features and demand, and then understanding how to
communicate the solution value that decides how rapidly people will buy, and if
they can/will communicate that value to their peers.  So when you pitch
your company, if you fail to identify one or two specific segments, and fail to
describe how you will sell to the decision makers and influencers within these
segments, then I mark your sheet as "no deal."

The aforementioned Mr. Greer enlightened me with a link to the Angel Journal,
which had a list "10
Mistakes in Approaching Angel Investors."  Though going beyond funding
pitches, it is worth reading to know what your angels and VCs are often
concerned about, and how you can effectively end your chances of receiving (
more ) money.

#1 on their list:  Not Knowing Your Market and Buyer.  Enough said.

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I normally would not use this space to hype yet another YouTube video ( unless it was mine ). But this parody of Microsoft branding is instructive for marketing folks.

The video basically relates how Microsoft might brand and package an iPod, if it were there invention. Throughout you see text which are typically questions marketing mavens and brand managers ask during development of packaging. And it shows how to drain the emotive element of a brand.

The lesson herein ( and it is a big one ), is that the expected outcome of a purchase is the first and primary motivation of the buyer, and that which the marketing person must tap. iPod’s are all about music and fun, not technical specs ( which can go on a web site ), legal disclaimers ( which can go on the box bottom ) and third party endorsements.

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I hate it when a market matures.  Sure, the profits are more
predictable, but the excitement evaporates.  Kinda like getting married.

As a marketable technology concept, SaaS has matured.  This is evidenced
by several factors, from adoption rates by enterprises, and by seeing companies
with the most to loose from SaaS competition joining the fray.  The giddy
days of SaaS are soon behind us, but reduced profits ahead.

The good news is that enterprise customers have shaken their SaaS jitters and
are adopting services at a fair clip.  A recent survey of CIOs showed some
interesting numbers:

• 10-15% of IT budgets are spent on SaaS
• 86% are using SaaS non-experimentally either for department point
  solutions or corporate wide
• An average of six SaaS solutions are in use in an enterprise
• 73% of the CIOs plan on expanding use of SaaS

This bodes well for software companies who bet the farm on SaaS. 
Adoption and satisfaction rates are high and growing, which drops the barrier to
adoption.  SaaS will soon be given equal consideration in all project
planning within IT.

And all a pure play SaaS software company has to do is make less money.

The McKinsey Quarterly reported that SaaS software vendors do not make as
much as traditional software firms.  This may be a side effect of being a
relatively new offering, and that SaaS start-ups face significant SG&A costs
( 49% of revenues compare to 35% for a traditional and established software
concern ).  But the net effect is that today a SaaS software company
keeps about 13% of their revenues as profits ( EBITDA ), and folks that sell bits
on CD keep 31%, almost three times as much.

So why would Microsoft be at all interested in SaaS?  Microsoft rakes in
a lot of money from software, upgrades and technical support services. 
Given that the average cost of goods sold and SG&A expenses are so much higher
for SaaS than Microsoft’s existing business model, it would seem suicidal to
adopt SaaS. 

"The industry will change," is what Allison Watson, the corporate vice
president of Microsoft’s worldwide partner group, said in a recent interview. 
Microsoft is old and cagey enough to spot trends, and know when to not fight
them.  SaaS will dominate in some markets, and CRM is the top achiever ( 36%
enterprises that have deployed SaaS deployed SaaS-based CRM applications ). 
SalesForce.com added 253,000 new seats in 2006, and Microsoft had far fewer with
their Dynamic CRM product ( some estimates claim that Microsoft owns a mere 1.4%
of the total CRM license sales ).  Thus, Microsoft is entering the SaaS
market and targeting the low end, with a long-term plan of up-selling SaaS
accounts to software licenses.

Microsoft’s changing strategies avoid treating software as a zero-sum game. 
They see when they are being cut out of a market, and drive to adapt — to claim
or recapture market share.  Knowing the lifetime value of a customer, they
are willing to suffer lower margins in a highly competitive market to gain
customers, and begin the insidious processes of creating interdependencies
between Microsoft products, and raising customer switching costs.

SaaS is now officially here to stay, so you had best think through
SaaS as an offering.  It may be on your customer’s requirements list.

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