Sunday, October 25, 2020

Four Types of SaaS Companies

The traditional way of segmenting cloud companies is IaaS, PaaS, and SaaS where the main distinction is how much of the stack is provided by the vendor. But I want to examine a different way of segmenting cloud companies based on their target market. The four types of SaaS companies are:

    • Consumer SaaS
    • SMB SaaS
    • Enterprise SaaS
    • B2All SaaS

Depending on whom they sell to, cloud companies have very different characteristics and I examine them in this article. These characteristics have a profound impact on the companies’ strategy and their go-to-market approach. So, let's take a closer look:

Consumer SaaS

Consumer SaaS software (often called B2C) is the software all of us use every day on our smartphones and home computers. From Twitter to Spotify, Quicken to Über, and the Nest thermostat app to The Economist app, we are accustomed to using consumer SaaS applications so much that we usually don’t think about it as software. Often, we don’t actually buy the software - we either pay for it with advertising (Twitter or Facebook), we pay for the content (Spotify or The Economist) or we pay for the service or hardware that the software controls (Über or Nest). Still, there’s also consumer software we do pay for - increasingly as a subscription - such as Quicken or Adobe Lightroom.

What these applications have in common is a high scale. We often like to say “consumer scale” and that’s exactly what we mean - a scale that consumer SaaS applications work with can be quite impressive. We are talking millions of users and [really] big data. The applications usually run partly on your device/desktop and partly in the cloud that handles backend functionality at a high scale for things like data synchronization, subscriber services, provisioning, metering, billing, etc. 

This high scale represents a high barrier for entry, which is why some companies can dominate their market for a long time - just think of Quicken. Yet such examples are rare, usually reserved for software that established itself as a necessity with a high degree of “stickiness” and that manages to remain top of mind for the customers. That’s often the challenge for consumer security, anti-virus, or backup software. Because it runs in the background with little stickiness if any, consumers don’t develop any loyalty to it and are more than happy to switch to another vendor at a moment’s notice. 

Due to the massive scale, it is impossible to customize the software for every user. In fact, this is one of the key tenants of consumer software: every user gets the same experience. Sure, the UI might allow for some degree of personalization, i.e. setting default location, font size, or background color. But the functionality is always the same. My Twitter app is the same as your Twitter app even though we all follow different people.

The go-to-market effort of consumer SaaS companies is focused on two primary objectives: awareness as a way to attract customers and monetization, which varies from an advertising model to converting freemium users into subscribers. Consumers tend to be very fickle customers, difficult to please, usually highly price-sensitive, moving in packs when picking their software (just like fashion trends), often ignoring rational arguments over hype, and more than willing to churn when they don’t see the value or when there is simply something new that looks like a cool novelty. Consumer SaaS can be extremely lucrative but only for those few companies that keep winning over the long term.   


SaaS software for SMB targets small and medium businesses (SMB, eh?). In this market, you can find applications for every small business such as QuickBooks or but also a myriad of specialty applications targeting various verticals. For example, MindBody has software for fitness studios, ServiceTitan targets service companies, and InnoVint provides software for wineries.

The barrier to entry for SMB SaaS companies is usually lower than for consumer software or for enterprise software. The deployments are relatively simple, the customization needs are still only minimal, and the scalability requirements are modest. That’s why so many software companies fall into this category. The online software catalog Capterra lists over 35,000 software packages across over 700 categories - that’s 50 applications for each category! There is a lot of software companies out there that you have never heard of!

While many of the SMB SaaS vendors proudly sport a few logos of big companies in their marketing, don’t get fooled. These are not enterprise deployments. Usually, it’s a group deployment inside of a large company; often flying under the radar of corporate IT. But that’s not to say that all SMB SaaS software is built poorly. In fact, many enterprise SaaS companies start by selling to SMBs, because it’s really hard for an unproven startup to sell to an enterprise. But the shift from SMB to enterprise ultimately exposes whether or not the software has been built as enterprise-grade. After all, the software architecture cannot be an afterthought.  

The go-to-market at SMB companies is primarily focused on finding target prospects and convincing them to give the software a try. The buyer is often the company CEO or owner and the software is rarely free. While every business needs some bookkeeping software, convincing them that` they need reputation management requires a very convincing pitch. That has to be done at scale because SMBs, by definition, don’t have many users and so you need a lot of them to reach scale. On top of that, SMBs are notorious for churning. They will give it a try and cancel if they don’t see quick results. Since SMB software doesn’t require much deployment effort, churn rates up to 40% are not unheard of in this market. At that churn rate, you need to keep feeding the beast constantly with new prospects and customers to keep growing. 

Enterprise SaaS

Enterprise SaaS companies target enterprises. While every vendor has its own definition of where SMB ends and enterprise starts, this software is meant to address the requirements of even the largest companies. That involves scalability in terms of the number of users, transactions, processes, or the amount of data under management. True enterprise software can cater to customers that truly stretch the limits of its architecture.

While the enterprise software scalability doesn’t often reach the scale of consumer software (after all, no enterprise has 100 million users), enterprise software also needs other requirements: security, high availability, compliance, and - most importantly - extensibility. Extensibility is the key characteristics of enterprise SaaS; something that really differentiates it from SMB and consumer software. Because in the enterprise, every deployment is different. Even when deployed at two companies for the same use case in the same industry, the two deployments won’t be the same. And that is hard to do.

Enterprise software pretty much always requires professional services to deploy. Yes, it’s still running in the cloud and the customers don’t have to worry about the hardware, the infrastructure, disaster recovery, provisioning for peak demands, upgrades, and patches. But enterprise software needs to be integrated with other enterprise software, it needs to be customized for the “last mile” of specific requirements, and it needs to be agile enough to quickly respond to any market changes. 

That’s why software from Oracle, ServiceNow, ServiceMax, and Zuora is built on an extensible platform and comes with developer tools for no-code, low-code, or high-code developers. That’s why all these companies provide their own professional services and also partner with global and local system integrators to deploy, integrate, and customize the software.  

On the go-to-market side, enterprise software requires less branding and awareness and much more high-touch marketing (i.e. ABM or, account-based marketing) and sales effort with long sales cycles and complex sales processes involving RFPs, customized demos, proofs of concept, and multi-stage deployments. Because of the high effort to deploy, customize, and integrate, enterprise software tends to be very sticky. Churn, if any, usually comes from a mismatched fit - for example when an SMB company purchases enterprise SaaS only to realize that they don’t use most of the capabilities.

B2All SaaS

There are SaaS companies that managed to build software for everyone - from consumers and small businesses to enterprises. This was what made Microsoft Office the king of software for decades. We used Office at home and at work, no matter how small or big the company was. We were vested in it because we learned to use it well which made it very sticky. Our colleagues and friends used it too and sharing documents in the Office format forced us even more to use Microsoft. For years, there was just no alternative.

Today, the companies that sell to everyone are companies like Box, Dropbox, Slack, Zoom, Docusign, Evernote, Google Suite, and Microsoft Office 365. Since they address the requirements of a really broad market, the B2All software has to be easy to deploy and use. Every user still gets the same experience with no customization of functionality, no matter whether they use the software at home or at work. But this software also has to satisfy the requirements of an enterprise such as integrations to other applications and systems, compliance for regulated companies, or enterprise security features such as SSO. 

Obviously, all of this is not easy to do. The B2All software has the satisfy the scale, ease of use, and seamless experience for the B2C audience as well as the complexity and extensibility expected from a B2B software. It also needs to manage the situations when B2C users use their private software accounts in the enterprise and share information with their co-workers. This is the so-called “roque software”, the nightmare of all IT departments!

To do all that, B2All software has to be well designed with a solid architecture to satisfy all markets. It needs to scale like enterprise software and provide at least some of the extensibility of enterprise software. That makes for a very high barrier to entry, which is why not many companies make it. But those that do, are often rewarded with great brand awareness and high trading multiples.  

On the go-to-market side, B2All is all about leveraging the network effect to convert individual, private users to an enterprise license. Sign up as many users as possible using the B2C marketing tactics, make them use the product at work, share with each other, and then convert companies with enough users to an enterprise license. The B2All SaaS companies have to master marketing and sales strategy for consumers and for enterprises.

Well, those are the four types of software companies, based on their target markets.

Thursday, May 28, 2020

VR and Sports in a Global Pandemic

The last 10 weeks of lockdown have been hard on everyone. If you are lucky to still have a job, you have been working from home. All students have been studying from home. The essential services workers have been keeping the world running and the healthcare workers have been fighting for us on the front lines of the COVID-19 pandemic. 

One of the areas hit really hard are sports. It hit the professional leagues such as soccer,  basketball, hockey, and baseball. But it also hit the semi-pro and amateur sports. The Olympics have been postponed. The Boston Marathon has been postponed. Wimbledon has been canceled. The Tour de France has been canceled. Even your local gym has closed. And we don’t know if any of the sports are coming back this year and if they do, how that will look.

Enter virtual reality. An amazing technology looking for problems to solve. For years, VR was used just for games and entertainment. There is a niche market using it for training simulators (i.e. for pilots) and a few other business applications but let’s face it, VR has been mostly used by gamers so far.

But now, in a global pandemic, all professional leagues are shut down and the only sports available are e-sports. Overnight, what have been just video games became virtual reality stages of sporting battles. Virtual reality might be finding another application besides gaming. And as it turns out, there are different degrees of virtual reality blending with the physical one.

One of the early and most aggressive moves has been made by Formula 1. With all the 10 races so far canceled this year, F1 switched to virtual racing leveraging the official Formula 1 game by Codemasters. The kicker is that the F1 managed to recruit many of the actual professional drivers to race virtually. Since some of them are less experienced gamers than others, the F1 used the in-game handicapping to even out the field: “This includes running equal car performance with fixed setups, reduced vehicle damage, and optional anti-lock brakes and traction control for those less familiar with the game”, according to the F1 press release. 

The online fans experience in virtual races rivals what they could ever see on tv during the actual races. This is Virtual Reality!

Fast forward a few weeks and F1 is broadcasting its races online with visual quality and level of excitement comparable to the real thing. There are fewer crashes and none of them are game-stoppers for any of the drivers which is somewhat refreshing compared to frequent DNFs in the real races. And as it turns out, the Ferrari star Charles Leclerc of Monaco is a champion in the physical and virtual world. Perhaps you have not heard of Charles Leclerc but he is one of the two Ferrari drivers which makes him an official divinity in much of the world. Just check out this scene from the movie Rush. My point is, though, that this is not gaming. The fans watch the races for the excitement of sports.

This gaming teenager is actually George Russell (22), a professional driver for the Williams F1 team who won the last couple of the virtual F1 Grand Prix. 

Other leagues have been having a little more difficulty transitioning to virtual reality. The NHL staged virtual games, such as the matchup between the Washington Capitals and St. Louis Blues. In the NBA, the Phoenix Suns took on the Minnesota Timberwolves in a virtual arena. Even the Indy 500 staged a star-studded virtual race, featuring multiple former champions. While different leagues have seen varied traction with their VR events, it can be said that VR found its next application in virtual sporting events. But let’s face it, they are still using a VR game.

Mario Andretti, the Godfather of American motor racing, is practicing for the virtual 2020 Indy 500. He’s 80 now and he’s one of the most accomplished race car drivers of all times.

Yet, there are also VR platforms originating from the fitness world that blend virtual and physical reality. For example, professional cycling took things to the next level, using the virtual racing capabilities of the Zwift and Rouvy platforms that make it possible for riders to compete on a virtual course while riding their bicycles on trainers in their homes. The UCI (Union Cycliste Internationale) organized a virtual Tour of Flanders and other races followed. 

The Virtual Tour of Flanders had the pro cyclists compete on the actual course…from their homes.

Here, the pros are competing not with their reflexes and gaming prowess but with what they actually do - their cycling legs. While the F1 drivers race virtually in rigs that resemble their car cockpits and while they probably benefit from their real-life racing expertise, an amateur non-racer might beat them. When biking on a trainer, the professional athletes will blow away any amateur. Always. This is a different type of virtual reality that blends with the physical one.

Rowing, running, and even triathlon have been staging similar blended events that combine the virtual and physical realities leveraging a training platform. Using VR to measure actual physical strengths or endurance to stage a race that challenges the competitors and excites the fans is a very different application than gaming. While the term augmented reality (AR) comes to mind, the way we have been using it so far doesn’t really fit. This is not a virtual data overlay on the physicals reality view. Instead, this is about combining very different virtual and physical environments to create something quite compelling for participants and spectators alike.

Competitors from more than 115 nations register for IRONMAN VR1 virtual event

No, I don’t believe that virtual sports will replace the excitement of going to see a game or a race. But, they are a form of entertainment that is giving VR technology another application. Watching a virtual cycling race attracts a different audience than watching a League of Legends tournament. And while a virtual Indy 500 might never replace the excitement of the real thing, there is definitely excitement involved.

That’s a good thing for sports, the athletes, the fans, the sponsors, and the virtual reality technology.

Thursday, March 19, 2020

The Silver Lining

The Good Things That Might Come Out of the Corona Virus Epidemic

The Corona virus pandemic is one of the most worrisome things any of us have experienced in our lifetime. Not just the virus itself, but the changes it inflicts on our society, such as the lock-down on entire cities are unprecedented events in peacetime. But I don’t want to write another scary article. I want to write about the good things that can come out of this:

Working from Home becomes the new normal
By now, most of us are forced to work from home and we had to figure out how to remain productive…even you Marisa Mayer! Sure, some of you have been working from home for years but for many employees, this is a new experience, even if they had occasionally ‘worked from home’. But then, they still had to ask the boss, and they’d feel a little bit guilty and looked down upon as someone who might just be taking it easy for a day. 

Well, guess what, that’s changed now. We are experiencing that we actually can effectively work from home. The tools such as Zoom, Slack and Box are widely adopted now and, in most roles, you can be as productive working from home as while working in the office. Working from home should become the new default after this crisis is over. There are tremendous benefits that will result from this shift: 
  • Cutting down on my commute saves me 2.5 hours every day, and my commute is the average in the Bay Area. Now, getting just 25% of the people off the roads during rush hour every day would significantly reduce our traffic and make the commute a breeze for those poor souls who still have to commute.
  • I save serious money on fuel and my car’s operating costs. The official IRS mileage rate is $0.575 per mile and, trust me, the IRS is not being generous with that rate. That means that if you drove to work 25 miles each way, you are now saving $575 every month (!) on the cost of your vehicle, service, fuel, etc. You might even not need a car at all. That’s a pretty good raise, folks!
  • The reduced traffic also means much less pollution. Even in the Bay Area, where it feels like half of the cars are Teslas that don’t have any exhaust pipes, the pollution is down just like the traffic. The cities around Europe are already noticing much cleaner air as a result of the lockdown. In the end, if we can get 25% of the cars off the roads because people work from home, it’s 25% less pollution. Wow, here is a way to address Global Climate Change!
  • Work-life balance. Yeah, you know what, working from home means that we get to be more home. It’s something that some of us managed better than others in the past. Being at home gives you all kinds of flexibility, from being home for dinner every night to being able to sign for that pesky package delivery.

Distant learning becomes the new normal
Being stuck at home doesn’t need to mean that learning stops. Distant learning in the modern era means live video streaming and interactive conversations between the teacher and students. At least that’s the theory – after all, the technology is available and just about every kid is online today.

That said, my kids go to different schools that have shown a different level of preparedness for a crisis that forces everyone to learn from home. One school was ready to go with a distance learning protocol whereas the other school asked for a full week to figure it out. And we are in Silicon Valley where just about everyone has access to a computer and a decent Internet connection at home. I can only imagine that other places might not be as fortunate.

But the schools are figuring it out and getting better at it. Sure, not everyone might end up with real-time lessons, but they are doing at least something. This is a great step towards breaking down another boundary which is making the world a little more flat and which makes education accessible to more people, no matter where they are.

Tough times bring people together
I am fortunate to have lived in multiple countries and, in times like these, I like to see what’s happening where I lived before. The entire world is going through this crisis. Everyone struggles and everyone is impacted. But what I love is reading the stories about how this pandemic brings people closer together.

I read stories about the Italians singing like a choir from their balconies and about the kids in Prague volunteering to walk the pets for the elderly who are under a mandatory lockdown. I read about young people in Munich, Toronto, and San Jose helping others get their groceries or medications. There is even a new word they invented for this in Canada: caremongering! To stand up against fearmongering that the media loves to indulge in, people in Toronto are caring for each other. How cool is that?! Tough times can bring people together, and this time is tough for everyone. No matter where you live, where you come from, who you vote for, or which god you worship, together we are stronger!

We all learn a lot about hygiene
I probably don’t have to explain this one much but just think about how well we have learned to wash our hands in the last few days. What’s your favorite hand-washing song? I like the Bohemian Rhapsody but that’s a bit too long…I figured I’m done by “Galileo!”.

We have learned about social distancing, that we should rather call physical distancing, because we should remain social, even if we are physically isolated. We are learning about which material makes a more effective face mask and about the virus surviving on packaging surfaces for 24-72 hours. Learning more will make us smarter and we need to get smarter to prevent the next epidemic from ever happening again.

Casual is the new normal
Working from home, hardly anyone puts on "office clothes". And that’s just fine…and, I hope we can keep it that way even after the pandemic. Why do we live in a world that requires us to have two complete wardrobes? Why do I need to buy clothes to only wear in the office? It’s expensive, not that comfortable, and it’s environmentally irresponsible. The clothes and their cleaning require resources that are only used because we need to wear office attire.

Now, don‘t take me wrong. I am a father of teenagers and I am well aware that there need to be some boundaries in what people can wear. Different jobs, climates, cultures, safety requirements, and other factors may require such boundaries. I also understand that some people like to stand out by the way they dress. It’s a free country and we should be able to wear what we like. For example, every male in Italy will always look way, way, way sharper than anyone of us in Silicon Valley. But I do hope that we can drop the term "smart business casual" once for all…because I still don’t know what it really means.

We all become a little more human
One of the things I enjoy the most during this Giant Working From Home Experiment is that we are all impacted the same way. Even the company’s executive officers have their children screaming, dogs barking, and doorbells ringing at the most inconvenient times while on video calls. And you know what, that’s great! We are all human. We all have to deal with the daily hassle of family life, we need to have our oil changed, our refrigerators fixed, our hair cut, and our teeth cleaned. This crisis makes it a little more visible for all - and to all - of us. Because we are all impacted the same way. We are all human and it’s good to see that firsthand.

Social media might become social again
Let’s face it, social media no longer has the appeal of what it had ten years ago. Remember when we used it to just connect and share pictures of our pets and favorite dishes? Social media once allowed us to stay closer with our remote family members, communicate better with our friends and reconnect with our old classmates. Since then, unwanted advertising, online trolls, and political manipulations have become an integral, annoying, and unfortunate part of our social media experience. We don’t like when we see it but the most troubling part is that very often we don’t realize that we are being manipulated. Social media has become much less “social” and much more “media”.

Well, this crisis could be social media’s second chance. If we manage to start connecting with each other again, if we use it to share about ourselves and to help each other, we might find the social part of social media again. I still see a lot of fearmongering but I’m beginning to see some caremongering too. I still see a lot of fake news and advice but I’m also starting to see useful tips and sharing about how to deal with kids in the house while working from home. There is a lot of good that social media can do for us when we are all socially distant at home.

The Internet can be a powerful lifeline to our families and friends during this crisis. It’s up to the leaders of Facebook and Twitter to weed out all the evil - the trolls, the manipulators, and the fake news. This is their second chance. They have blown it the first time but if they figure it out this time, their platforms might have a real future. Otherwise, we will sign off for good.

The Corona virus pandemic is the greatest challenge that mankind has faced since World War II. It’s testing our resilience and our ability to adapt. But I do not doubt that we will come out of this crisis stronger than ever before. I also hope that this crisis will result in some permanent changes to our way of life – good changes, that make us and our lives better.

Monday, March 2, 2020

Four Types of Software Platforms

Many software companies claim to be a platform. That word alone invokes the impression of significance, scalability, good architecture, and a multiplier effect. Being a platform means that something or someone can stand on it. Companies that have a platform are surely more strategic and their software is ‘stickier’. Platform companies enjoy higher valuation multiples, just like SaaS companies get higher multiples than on-premises software. Being a platform is cool.

But what does it mean to be a platform? The term platform implies that it can be used to power several applications that solve different business problems. The opposite of a platform is an application that is always targeting the same business problem or set of business problems for the same buying center. There have to be multiple applications to make a platform, and sometimes there might even be thousands and thousands of applications powered by a platform (think iOS or Android) but those are extreme and wildly successful examples. A platform does not have to enjoy such broad appeal to be successful.

To become a platform, your company needs to decide what it is trying to accomplish. A platform can attract highly skilled talent, it can help to enter new markets, it can provide ways to solve new business problems, and it can help saving software development time and cost. But not all platforms are  equal and here are four different business strategies that a software platform might want to pursue: 

1.     Developer Platform
This is a platform strategy with the goal to attract developers who write code using the platform facilities - APIs, libraries, services, widgets, etc. The result of this strategy, when successful, if a large pool of broadly available talent trained to deploy and customize the platform. Microsoft is a good example of a company for which the availability of skilled and inexpensive talent has always been one of its primary strengths, especially for products targeting the SMB market. Another example of a hugely successful developer platform is Linux. Today, some of the hot developer platforms are Twilio and Google with their plethora of platforms from Android to YourTube.

The developers look for platforms as a way to accelerate the development of applications. Nobody would even think to build their own database for their application today, no matter how sophisticated a data model the application needs. The platform - in this case a database - provides that functionality ready to use. In addition, the developers seek platforms as a way to differentiate their skills and increase their market value, hoping to find the one with the right balance of strong demand and scarcity of talent.

When pursuing the developer platform strategy, you will want to have a well defined and documented API and developer tools. You will want to be very visible on developer communities such as GitHub, SlashDot, and StackOverflow. On the marketing front, you will be running developer conferences and hackathons, and you will want authors to write books about how to code on your platform. You will create developer certifications and badges that skilled developers put on their resumes and LinkedIn profiles. This strategy focuses on developers as individuals and your goals are meeting their needs and help their career success.  

2.     Application Platform
The application platform strategy has the goal of fostering an ecosystem of commercially available software solutions built on your platform. The focus is not the individual developers but rather the companies that augment your platform with applications, tools, utilities, or widgets. Rule No 1 of an application platform is that your success depends on the success of your ISVs. What you want is a thriving ecosystem. If your ISVs struggle, you will struggle.

The best recent examples of successful application platforms are Salesforce and ServiceNow. Salesforce, for instance, built an impressive ecosystem of applications that run on the Salesforce Platform. That said, Salesforce is also an example of a vendor that keeps repeatedly violating Rule No 1 as they struggle with the dilemma between making ISVs successful vs taking over that space themselves. There is a growing list of Salesforce ISVs that have found themselves competing with Salesforce: Veeva, Apttus, and ServiceMax to name a few of such examples.

When pursuing the application platform strategy, you will want to do a lot of co-marketing and co-selling with your ISVs. Your Strategic Alliances and Partner Marketing organizations will be continuously looking for ways on how to promote your ISV partners and how to optimize your co-selling tactics. Lead-sharing, sales incentives, and joint marketing campaigns need to become a priority.

The primary benefit of the ISV ecosystem is its ability to take your platform into new markets. That’s why it is important that the ISVs make a big bet, taking on a lot of risk when they build their solution on your platform. Applications that merely integrate with your platform don’t count because they are not taking you into new markets, they expect that you bring them into yours. By placing a big bet, though, your ISVs depend on you for their addressable market and they trust that you won’t violate Rule No 1. If you do, they have no choice but to hedge their bets and eventually abandon your platform.

3.     Customization Platform
A customization platform is a platform that enables customers to tailor their software deployment to fit their specific requirements. This is particularly important in the enterprise market where every company needs a different flavor of your solution, even if the solution has been built to address a specific business problem in their industry. If nothing else, they need to customize the data models, business rules, and business processes. This requirement is what separates the enterprise market from SMB.

In the enterprise, every deployment requires some degree of customization. That’s why so many enterprise software companies call themselves a platform even if they don’t publish any APIs nor do they have any ISVs. And they are right - those are platforms that can be customized to solve any business problem. The best examples of such platforms are the Business Process Automation vendors such as Pegasystems or Appian or the new breed of Robotic Process Automation vendors such as Automation Anywhere or UiPath.

The customization platforms are used by customers themselves and by companies that provide deployment services; the system integrators. The customization can be done on any level, from high code development to some of the new, modern approaches that don’t require a single line of code. These modern approaches called low-code and no-code enable quick and easy customizations of commercial applications or even the creation of simple new bespoke applications.

4.     Shared Services Platform
Smart software companies build a platform even when they don’t pursue any of the external-facing strategies described above. Or maybe they don’t pursue them yet. One of the benefits of a platform strategy is a scalable architecture with shared services that can be reused from one product to another. The shared services usually include a data model, data store, user management, security, event management, process orchestration, notifications, administration, monitoring, audit trail, reporting, etc.

By leveraging shared services across multiple products, software companies can greatly reduce the cost of development, speed up the time-to-market, and improve the interoperability between the applications. This strategy also fosters the land-and-expand strategy where a single application might be the initial entry point into an account and, as the customer identifies further needs, the additional applications can be added easily when based on a common platform. 

These benefits are usually compelling enough to make the shared services strategy worth pursuing, even if the company has no interest in attracting developers or ISVs and even when its solutions are deployed in a one-size-fits-all manner without any customization.

It is tempting to say that you want to pursue all four strategies for your platform. Large vendors with a lot of resources might actually have the money to drive all those programs. Microsoft certainly does. But most software companies can usually only do one of those things well and so they have to decide which strategy do they pursue for their platform.

Because, yes, a platform can mean many things.

Tuesday, February 18, 2020

Sick of SIC Codes?

Classifying your customers or prospects based on industry segments should be much easier than it actually is. It’s actually surprisingly hard. So hard, that Gartner stopped any market sizing and forecasting efforts based on verticals back in 2017. Chances are that if you measure your company performance based on verticals, there are only very few people in your company who can provide such data. And chances are that data is highly inaccurate.

Charles Darwin would struggle too...
There have been two main efforts to standardize the taxonomy of industry verticals. The SIC is the older, international standard albeit originally developed by the US government. NAICS is much a more recent taxonomy from the US Census Bureau. SIC, which was last updated in 1987 is so old and outdated that it should no longer be used but it lives on as many of the companies with headquarters outside the US don’t have an NAICS code and only are classified with a SIC. Also, SIC is in particular used in the UK and so if your EMEA headquarters are in Britain, chances are they will be using SIC codes just to keep their US marketing colleagues out of their turf.

The NAICS has been most recently updated in 2017 and is much more up-to-date than SIC but don’t hold your breath, it’s not that much better. In fact, while I called out SIC in my [hopefully] catchy title of this blog post, the challenges are the same with NAICS codes.

Both are using multi-digit code to specify the industry. For example, NAICS is typically used with 2 to 6 digits. The more digits you use, the more precisely you are diving into the taxonomy. You can select to filter companies based on their, say, 3-digit NAICS and you will get a list of companies with a specific level of granularity. If you want to be more or less granular, you add or remove a digit. That is immensely useful.

The problem with the standardized industry code is not so much the quality of the standardized taxonomy, although, try to classify technology companies using SIC - most common technology categories hadn’t been invented yet in 1987! The problem is the classification ambiguity.

At first, it sounds simple. After all, Boeing builds planes, Bayer makes drugs, and the Department of Energy is part of the government. But when you start looking closer, you realize that sometimes, Boeing is classified as a manufacturing company, Bayer as a laboratory equipment manufacturer, and the DoE under power & utilities. And those classifications are correct. In fact, Boeing might be also classified as a transportation company or aerospace & defense company and none of those classifications are wrong.

Part of the challenge comes from the source of the SIC and NAICS codes. There is no central register of SIC and NAICS codes. That means that every organization or agency that uses them is in charge of their own assignment. Companies might also self-select their NAICS code when filing various government reports (i.e. census, taxes, etc) but that often leads to different NAICS code selection for different purposes.

Another source of NAICS codes are the data companies such as Dun & Bradstreet that assign NAICS codes on their own. That is another source of ambiguity, especially when you start combining lists from different providers. 

On top of that, companies evolve. As they add new product lines or services to complement their products, the original NAICS code might no longer fit. Sometimes, they keep the old code but often, they end up with a highly ambiguous code such as “Business Services” which might be technically accurate but doesn’t really tell anyone what they do.

So, how do you solve the NAICS and SIC code puzzle? How can we get accurate and useful classification for your particular organization? The short answer is that there is no magical shortcut. If the NAICS codes that come with your data list don’t work, you’ll have to assign them yourself. Yes, this is a manual process and it’s impossible to do for your database of 100,000 suspects. But it might be possible for your database of 500 or even 5,000 customers and that’s where you should start.

To do that, you want to first build your own taxonomy. Because you’ll have to manually classify your customers, you can’t have a taxonomy with hundreds or even dozens of possible entries. There are over 1,000 6-digit NAICS codes, 709 5-digit NAICS codes, and 311 4-digit NAICS codes, Even if you limit yourself to just 3 digits, there are still 99 NAICS codes to assign. That’s too many! There are only 20 sectors using just 2 digits which is a good, humanly consumable number but you’ll find out that that won’t give you nearly enough granularity.

What you need is your own taxonomy - a taxonomy that is based on NAICS but stays very high level in some of the branches and perhaps ignores some completely. Maybe you don’t do any business in the agricultural sector at all? Or perhaps the public administration sector is not relevant? Leave them out.

At the same time, you need to go deeper than 3 digits in some of the more relevant areas. Manufacturing is a good example. If Medical Equipment Manufacturing is a relevant sector for you, you have to go to 4-digit NAICS code (3391). Obviously, you can’t add every 4-digit code, but you can pick the ones relevant to your business.

That means that you end up with a taxonomy that uses the correct NAICS codes but goes deeper in some areas while it remains shallow in others. It all depends on what’s relevant to your business. Now, that taxonomy should have no more than 20-25 entries. Anything more becomes humanly impossible to keep track of unless you have dedicated people who do nothing but this. If you are tracking more than 25 verticals, you need to rethink your vertical strategy - so why work with a taxonomy that contains hundreds of them?

Next, you need to establish some rules on how you will classify some of the ambiguous cases like the ones I mentioned above (Boeing, Bayer, etc). You have to decide how you will classify those companies based on what serves your business. Here are a few more examples:
  • LSG Sky Chefs is a company that provides food catering services to airlines. You decide whether they are a Food Services (722) company or an Air Transportation company (481). Think about the impact on your business. Would you find them at a gastronomical conference or at an aviation expo? Would they be handled better by the sales rep who’s focused on aviation or by a rep specialized on the food industry?
  • Kiwa is a company providing inspection services across verticals and you need to decide whether you classify them as Pharmaceutical and Medicine Manufacturing (3254), Oil and Gas Extraction (2111), or perhaps you create a category called Testing and Inspection Services that doesn’t have a NAICS code. What you probably don’t want is to assign them the code for All Other Professional, Scientific, and Technical Services (541990) which is where they usually are classified by default. 

 As you can see, the ambiguity can be pretty high and overwhelming, but the good news is that you can get started and create (and document) your rules as you come across the ambiguous cases.

Now, it’s time to think about the business process. Obviously, it is unreasonable to go through thousands of accounts and classify them all at once. That’s a lot of work. Instead, you should think long term. What’s the process that touches all customers in the course of a year? Perhaps it’s the contract renewal process. If that’s your best bet, then the team handling the renewals will be the team that assigns them their vertical the next time their contract is up.  

Another possibility might be to let customers select their vertical from your custom taxonomy - perhaps as part of a customer survey or when they register for a webinar on your website. Or, you can make the field mandatory for inside sales to fill out when they accept the opportunity. You will find ways to systemically apply your classification to make it feasible and consistent.

A vertical strategy is extremely important for most software companies. As you mature from selling features to selling solutions, you will want to start infusing more and more vertical language into your messaging. But none of that is very useful if you can’t target your prospects and customers based on their vertical. And that’s where the NAICS and SIC codes are very useful, but only if you make them work for you.

Happy marketing!