Previously, we ended the first half of Bessemer’s top 10 Laws of Cloud Computing and SaaS with corporate employees’, “violent revolt against the years of oppression,” by legacy software providers.
Bessemer Laws 6-10 add detail to this revolt; pointing out that the employee uprising is powerful enough to change the way software companies market their products, and also force software providers to shift their focus to keeping their customers happy.
6. Sales Prospects are Online, Savvy Online Marketing is a Core Competence of Every Successful Cloud Business
Your product requires web access. So it goes without saying that target customer groups for all cloud companies are all online. Business and consumer buyers alike don’t make large investments anymore without doing their due diligence via online research.
B2B marketers need to rip a page out of the handbook of B2C marketers and aggressively market online. Lead gen, SEO, SEM, email marketing, and yes, even social media, are now just as important for software companies selling a product to an international enterprise as they are for clothing brands selling to tweens. As Bessemer puts it:
“Forums, Twitter, Facebook, LinkedIn, and dozens of other social media tools constantly facilitate discussions about your market, your competitors, and likely your company and product. You need to get into position to monitor and help define these discussions, and the most savvy marketing teams will use this to their considerable advantage.”
7. The Most Important Part of Software-as-a-Service Isn’t “Software”, it’s “Service”!
Here’s my favorite Bessemer quote of all:
“The only acceptable reason to lose a customer is death (bankruptcy) or marriage (acquisition). Every cloud company is in the service business, and therefore your customer service can be the difference between failure (churn) and huge success via high retention and up-sells.”
C’mon now. You sell a cloud product. Use the visual analytics and dashboarding capabilities and real-time results that cloud platforms offer to track key usage metrics and measures within the data that you already compile, including:
- Who logs into your product
- How often they log in
- What they do within the product
- What results they achieve within the product
8. Leverage and Monetize the Data Asset
According the Bessemer, “Data can be a difference maker.”
A convenient residual effect of running a cloud company and hosting customer data is that you can monetize that data. For example, you can leverage this data across your customer base as benchmarks. The data you capture could be very interesting to customer’s exec teams. Sell them the premium service of packaging their data into management dashboards.
9. Mind the GAAP
Cloud Computing revenue is composed of two elements: subscription services and professional services. In older days, subscription service license revenue could be tracked when a CD was shipped, for example, because software was comparable to a product. Professional services followed this same logic, i.e. if a customer paid $100k for two months of professional services, the company would recognize $100k in revenue over two months, ratably. As Bessemer explains, today’s world is more complex.
“Even if the cash is collected upfront, the revenue needs to be recognized ratably over the lifetime of the contract. In addition, the revenue recognition cannot start before the service goes live, to ensure that revenue will match consumption. So if you sell a product today and bill the customer upfront for one year with net 45 days, but you need 60 days to implement the service and go live, you will have collected one year of cash but won’t be able to recognize any of it before the 61st day. This explains why the GAAP revenue lags the CMRR as we have discussed earlier in law #2.”
And when it comes to Professional Services…
“According to GAAP, professional services for recurring revenue businesses are tied to the subscription service, and therefore cannot be accounted for separately. In this respect, even if the professional services are delivered only over the first few months of the contract, the revenue recognition needs to match at least the length of the contract.”
10. Cloudonomics Requires that you Plan your Fuel Stops Very Carefully
Cash flow forecasts for cloud companies can be great in the long-term, but often tight in the short-term. Cloud companies need R&D, sales, and marketing funding to last roughly four years before achieving positive cash flow. Too many cloud companies show promising beginnings but fail because they run through investments much too quickly.
So if you’re in the cloud start-up phase, plan your equity and debt financing events well in advance to maximize value, minimize dilution, and give your company the best chance for success in the billion dollar cloud industry.
Missed part 1 of our series on Bessemer’s Cloud and SaaS laws? No worries. Click here to read about laws 1-5!