Marketing Memos

Sometimes the only way to win a market is to break it.

Markets tend to stagnate. Solutions become entrenched due to offerings being well understood and being good enough. To enter such markets with the same class of product is an elegant and expensive form of corporate suicide. When faced with such situations you need to invent products and services that not only add value but shatter the current market precepts.

Think of Genghis Khan as a new and different product and the Xia Dynasty as the established market.

Call it creative destruction or disruptive technology. The marketing principle at play is that offering the same product as everyone else means you offer nothing at all and that you will eventually compete on price. That is the definition of a commodity and that is a lousy way to make a living.

A case in point of shattering a stagnant market is the start-up Security Mentor. Long ago (when I was young and Taft was in the White House) I was a designated security officer for a classified computing facility. Part of my job entailed educating a small squad of computer users on secure use of systems and data. Quarterly I would conduct all-hands briefings which mainly consisted of reminding them not to do stupid things with classified data and alerting them on new dangers (for example, 3.5″ floppy discs became available during my tenure, and the ability to smuggle data out of a building in one’s shirt pocket became a real issue).

Today enterprises are doing much the same thing. They hire security consulting companies that make periodic visits to conduct mandatory seminars. Employees typically learn dozens of security tips, remember one or two, then proceed to forget the rest and in the process expose their companies to financial ruin.

Clearly there is room for improvement, but the current vendors — the security training firms — do not want to break the mold. Face-to-face training is what they know, where their experience lies, and frankly it is the only way they know how to make a buck.

Enter Security Mentor, a company prepared to disrupt the status quo. In examining the security training market, they saw some fundamental weaknesses:

• Recurring expense (repeat training sessions)
• Lack of sustainable value (employees forget what they are taught)
• Lack of consistency (instructors change)
• Lack of validation (did the employee learn or did they sleep through the class)
• Lack of reinforcement (no repetitive exposure to education)
• Disruption of employee work routine to attend classes

The market status quo is crummy.

Security Mentor did what I call a Circuit City Shuffle. Long ago (when I was young and you could buy a new Hudson automobile for $500) Circuit City discovered and may have perfected the market disruption process. Then known as the Wards Company, they surveyed to discover what consumers hated about buying televisions and radios. They got an earful — limited selection, lousy repair services, mom-and-pop retailers with high prices and on, and on, and …

The situation was so bad I’m surprised Milton Berle didn’t starve to death from lack of viewers. So Circuit City engineered each of the negative aspects out of their operations, added a few new values, enchanted consumers, built a strong brand and became the darling of the New York Stock Exchange for a long time. They then repeated that processes with the used car market and invented CarMax.

Security Mentor has done something similar. Their product delivers automated security training in small chunks suited to the time-crunched work lives of the typical employee. These security snippets are delivered with a frequency that keeps security at the forefront of each employee’s alleged mind, unlike quarterly trainings that allow the urgency of security awareness to dissipate between torture training sessions. Recurring topics and tactics in security also reinforce and make permanent the security lessons, much the same way as repetitive advertising on television keeps inane product jingles in your brain 20 years later (Hold the pickle, hold the lettuce, special orders don’t upset us). And being web/Flash based, there is the ability to capture records on which employees have failed to view their requisite security training content and tack corrective action.

Like Circuit City and CarMax before them, Security Mentor has analyzed a market, itemized the weaknesses therein, built a product that eliminates all those weaknesses and adds some new value as well. This is a structured approach to breaking into a market and one that greatly enhances their probability for success. From a marketing strategy standpoint, their product design process is superb.

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Who would have thought Oracle would lead the SaaS market.

Not that I hold perfect confidence in the source of these numbers, but a report at venture capital focused SandHill.com shows Oracle at the #1 slot for companies using and considering vendors for SaaS deployments.

In fact, top-shelf companies fill the top shelves of the SaaS vendor list. Oracle, SAP, Microsoft are all players. The early-advantage entry — SalesForce.com — scores a trailing 11% compared to Oracle’s 16% and Microsoft’s 14%.

Sarah Friar — the Goldman Sachs analyst who wrote this report — tells me that the focus of the survey was at the application level. I would have automatically believed her numbers had  databases and infrastructure management tools been included. But focused on applications, Oracle’s dominance caught me by surprise.

This spells bad news for SaaSy start-ups. Mature markets are dominated by an average of three vendors. This is based on some groundbreaking research by General Electric in the 1960’s and my personal market observations. When three vendors together consume 2/3rds or more of a market, that market is definitively saturated.

Though Sarah’s report did not break-down the sources of these market share numbers, we see four competitors taking 53% of the current SaaS market (which may grow as time continues). This is far from saturation point, but the market space is dwindling and the gorillas are starting to beat their chests. This means in certain segments of SaaS, opportunities will begin to shrink — at least in the B2B SaaS space. The consumer space will remain a Wild West frontier for quite a while.

Does this mean you should abandon your SaaS start-up and stash your stock option warrants in the toilet paper dispenser? Not at all. Oracle has to buy somebody. Like Microsoft before them, Oracle is slowly slipping from the innovator caste to that of aggregator, conglomerate and Borg. This is a natural effect of the changes in the B2B technology markets and still remains your best exit strategy.

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I want to brag about a client of our for something they did on their own (kinda).

We have had a relationship with Open-Xchange since our days advising SuSE Linux on their North American marketing strategy. Open-Xchange is groupware with highly usable features uncommon in other groupware offerings and with all components well integrated to make collaboration dirt easy. I routinely recommend the product to everyone I meet.

Like many companies they started by selling on-site server software and had a tough time of it. Going toe-toe-toe with the likes of Microsoft Exchange, Novell Groupwise and Lotus Notes is no easy feat. Despite a better over-all design and vastly better usability, Open-Xchange did not find the huge adoption it deserved.

This was in part because the high end of the market was saturated. Online collaboration was recognized by top enterprises as a necessary tool. Thus the installed base was dominated by the market’s gorillas by the time Open-Xchange was whelped, much less by when it was refined and differentiated. While SuSE as a reseller, we devised what wedges we could into the established enterprise markets, but recognized and advised Open-Xchange that the down market was their mid-term objective.

The problem is that the SMB market is running away from self-managed IT faster than Rodney King from an LA Police officer. Whenever possible SMB customers are opting for managed services. I can’t blame them — here at Silicon Strategies Marketing we outsource everything IT. In fact we regretted not being able to use Open-Xchange ourselves due to the inability of our hosting service to provide a Java servers.

So Open-Xchange made the decision a while back to make a SaaS version of the product, offering it to Internet service providers (ISPs) and hosting companies as a value-add to their customers. In other words, they found a relatively unexploited niche for addressing the needs of SMBs through partnership.

Their strategy is working.

This month you can acquire Open-Xchange via the largest of hosting services fronting in North America, that being 1and1. Unfortunately it has been re-branded as MailExchange, though Open-Xchange did receive some on-page branding rights. frankly, “MailExchange” short-sells the capabilities of the product.

Many things make Open-Xchange’s revised strategy work:

• It provides outsourced services to SMBs, the sector of the market where current strong demand and lack of an installed base exists.
• It provides the solution in the form that target buyers (SMBs) want to acquire – as an outsourced service.
• It gets 1and1 and other hosting companies to do the heavy sales work.
• It gets the product and brand to the public in the most direct way possible.

The marketing lesson herein is that knowing and serving the available/addressable market — the market not saturated by gorillas — is critical to making traction. Open-Xchange identified and created products for that market, and deserves kudos and success for doing so.

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I’m rarely impressed by other people’s promotions, but this one I have to share.

When introducing your company, products or services you must rapidly communicate what it is, what makes it different, and why the prospect should be interested. The more abstract the product or service, the more difficult this becomes.

When I came upon an online intro by NearSoft, I found a case study in how to do web promotions right.

NearSoft is a near-by outsourcing software development house … in Mexico (not a country one normally has on a short list of offshore opportunities). Their value propositions are that (a) they are closer than India – same time zone as Phoenix – and (b) they eliminate many of the common offshore headaches (such as the cost of flying to India to manage project details).

The folks at NearSoft knew they had to communicate their unique value propositions in a short amount of time and make the message stick. They also knew that buzz marketing was the most effective means of spreading the word that outsourcing to Mexico was possible and sane.

So they made a video.

My initial reaction was “Well who in the Sam Hell hasn’t made a video?” Getting your video noticed in the flood of online content has been classified by the American Psychiatric Association as a form of auto-masochism. Yet another self-serving promo video, from a Mexican software house none-the-less, sounded like a model for failure.

Here is what NearSoft did right. Use it as a “how to” model for promotions in general and web intros in particular.

Guarantee of brevity: They flatly state the intro lasts a mere 53 seconds. Anyone will invest under a minute is they know the time limit is real (which it wasn’t, but that doesn’t matter).

Selling the benefits: The speaker reads the benefits and the video animations drive home the points. This technique takes advantage of a subtle quirk of the human brain whereby it can absorb more information per unit of time if the information comes from multiple sensory input and it tightly related (this is the way we learn languages, by matching visual input with spoken words). I cannot tell you exactly what the speaker said, but after one viewing I got the idea that NearSoft was a $500 plane trip within one time zone, and that this saves me time, money and headaches.

Humor: Being funny makes even a software outsourcing company, in a relatively unknown town in Mexico, seem approachable. Humor can be tricky, so NearSoft uses visuals that are universally understood (or understandable) and tight synchronization with the spoken word (in fact, an early slide admits that the video is actually 85 seconds long while making the promise that it is 53 seconds). They juxtapose the announcer listing serious off-shoring issues (such as the “excessive rework”) with unrelated images (Michael Jackson’s nose).

The net effect (pun intended) is that the video successfully gets you to visit, listen, communicate why NearSoft is important, and give you a reason to spread the word (like I am doing now) even if you do not need their services. And they did it for very little money. All in all, great promotional effort.

Silicon Valley could learn a lesson or two from Hermosillo.

http://www.nearsoft.com/nearsoft-quick-intro.php

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The technology business has more than its fair share of lose nuts.  Some are wealthy as well as insane, while the dot-communist are poor and insane. 

Perhaps the key to success in this business is being bonkers.

Sadly, some of the insanity is settling in Microsoft, as witnessed in a blog written by Sergey Solyanik.  Sergey recently escaped from Google and landed back at Microsoft.  Perhaps he had been on a spying mission all along.  Regardless, he seems to have mentally drifted in the direction of a room designed with very soft walls.

“I can’t write code for the sake of the technology alone — I need to know that the code is useful for others, and the only way to measure the usefulness is by the amount of money that the people are willing to part with to have access to my work.”

(emphasis mine) 

“Only” is a rather exclusive word.  It means alone; solely; exclusively;  It means no exceptions.  It means Sergey left a marble or two in his cubicle at Google.

The true measure of usefulness is how many people actively use something.  Google uses a lot of Linux, and basically pays nothing for it.  Has this company with $166B market capitalization not found use in Linux?  Have users who perform 62% of their web search using Google not found it useful despite not giving Google a dime of their own money?  Certainly advertisers — who don’t buy Google technology directly and yet they toss about $5B into Google coffers every quarter — find Google technology useful.

Sergey confuses revenues with value.  The two are not unrelated, but one can create technology that is fantastically useful and not make a dime on it.  Or they can create technology that is useful and widely used, and for which revenue is generated indirectly.  His defense of the traditional marketing model for software make sense if you are at Microsoft — that is the game they play best … having failed at most of the newer technology business models.

He goes on (and on) with more off target insights:

I was using Google software … and slick as it is, there’s just too much of it that is regularly broken. It seems like every week 10% of all the features are broken in one or the other browser. And it’s a different 10% every week – the old bugs are getting fixed, the new ones introduced. This across Blogger, Gmail, Google Docs, Maps, and more.

Aside from sounding like a normal software development side effect, Sergey ignores the history of how Open Source and Freeware evolves.  Linux was buggier than a night in a swamp when it was first launched, and for a few years thereafter.  Like a small child it was learning to walk and falling down a lot in the process.  But walk it did.  Then it ran.  Then it ran away with the market.

Google has the brain- and horsepower to do unguided R&D, putting tools onto the net in their formative years to field test what is and is not useful.  Companies like Microsoft that thoroughly study concepts before writing code are slow.  Companies that try, fail, try again are nimble and visionary.  Google will make mistakes but in the process will create technologies that never existed before, are insanely useful, and will indirectly earn them even more money.

Sergey missed this lesson.

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