Saturday, December 26, 2020

Would You Want a Rolex for $50 a Month?

Apple is crushing the Swiss watch industry and it’s not with a cheap watch. The latest Apple Watch costs $400 and most users typically buy a second strap, a charging station, or another accessory. They likely spend close to $500. This is not the kind of pricing disruption that Swatch created back in the 80s with colorful $50 fashion watches mass-produced in plastic. Apple is selling a premium product that isn’t cheap at all. And while Apple keeps growing and growing, the Swiss watchmakers struggle1. 

The Apple Watch stands out with leading-edge technology, great user experience, but also a disruptive business model. Just like most Apple products, the Apple Watch has a relatively finite expectancy and most customers know that. They got used to that with their Apple iPhone – these devices don’t last very long. Apple releases a new model every year and while most people don’t buy a new watch (or a new iPhone) every year, buying a new one every two years is common. That's what most telco providers do when they sell you their “free upgrade” program. Sure, you can hold out a year longer but the experience starts degrading pretty fast. 

This is partially due to the relentless cycle of innovation, and Apple is a master at that. Every new release introduces something better than the previous release and if you are stuck on the old technology, you are missing out. There is also the ever-so evil planned obsolescence that Apple builds into its products. The old hardware can’t handle the new operating system, battery life degrades, and the phone jack is no longer supported – Apple is a master at that!

Swiss watches come with a history.
 And so, Apple watch users are finding themselves buying a new watch every 2-3 years, which translates into, $250 per year. That’s why it’s not a stretch to call it a subscription - you are effectively paying just over $20 per month to own an Apple Watch.  

Let’s compare that with owning a mechanical Swiss timepiece. You can get some amazing watches for $5,000 – Omega Speedmaster (the Moon watch), Breitling Navitimer, Tudor Blackbay, and many others. These watches do not only tell time, they are also a piece of jewelry, and they serve as a status symbol or a symbol of fine taste. They may not run hundreds of apps like the Apple Watch, but they offer something else – each watch is a hand-crafted mechanical masterpiece. Of course, there are some wonderful watches for under $2,000 and you are also welcome to spend over $20,000 if you like.  

My point is that for $5,000, you can buy a beautiful Swiss watch that will last you a lifetime. These watches are designed to be very robust as they have been built to keep time under challenging conditions - underwater, in the dust, mud, and even in space! Mechanical watches are definitely more durable than the Apple Watch. Patek Philippe – a company that makes some of the most luxurious watches money can buy – advertises with the slogan: “You never actually own a Patek Philippe. You merely look after it for the next generation.” While you won’t find anything for $5,000 in the Patek Philippe catalog, you can find many quality Swiss watches for that amount that will last you a lifetime.  

Comparing $250 per year with $5,000 for a lifetime becomes an interesting consideration. Why not sell the Swiss watch as a subscription? The manufacturer's payback would be 20 years which feels like a long time. But the manufacturers share 40% of that with the dealer and a subscription could (and should) be sold directly online which would reduce the cost of sale significantly. The manufacturer's cost of goods and the advertising expenses for all those ads with sailboats and racecar drivers would presumably remain the same. 

Now, you might object that I can’t compare an Apple Watch and a Swiss luxury timepiece. It’s a different class of wearable, aimed at a different audience. One can’t really compare those two markets. True. As the markets stand today, I completely agree.  

Yet, all those Swiss watchmakers would love to attract new audiences. Their present target market consists mostly of well-off male buyers with a love for mechanical watches or with the need to show off their status. Many of the watchmakers have been trying to attract different audiences by offering cheaper collections with quartz movements and through consolidation by buying up different brands. For example, the Swatch Group owns brands ranging from the high-end Breguet, to mid-stream Omega, to the more affordable brands like Hamilton and Tissot, and of course the cheap fashion watches by Swatch. 

The Apple Watch can do many things but there is a reason Mr. Bond is choosing another brand...

There were 20 million buyers of Swiss mechanical watches last year and the manufacturers would love to sell to another 5-10 million professionals who are perhaps not willing to spend five thousand dollars at once. A subscription-based business model could accomplish that.  

Now, the right price for such a subscription might not be $250 per year; maybe it’s $400. But there is probably a price at which the economies make sense for both the sellers and the buyers. The subscribers could buy into different levels of subscriptions that would give them access to different price levels of watches. If you get tired of the Omega Speedmaster after a couple of years, perhaps you can swap it for an Omega Seamaster. A Rolex, which costs about double that of an Omega, might be more expensive. Maybe $50 per month. The subscriptions could also include servicing once every five years.  

Interestingly, watches are more durable, preserve their value better, and their service costs much less than cars. Yet car subscriptions already exist – just check out Carbar in Australia or Clyde in Switzerland (ha, Switzerland!).   

Swiss watches were not always high luxury items. Before digital technology took over reliable timekeeping, mechanical watches were the only solution. They were designed to keep time especially for people who needed precise timekeeping to do their job: pilots, soldiers, divers, train engineers, etc. They were tool watches. 

Some Swiss watches became cult objects.

All of that changed when cheap digital watches came out in the 70s. All of the sudden, the timekeeping problem was solved cheaply and people didn’t have to buy any Swiss timepieces to tell time. The Swiss industry came under pressure and had to reinvent itself. It turned watches into jewelry and it worked for a long time. But now, maybe it’s time to reinvent itself again. And, maybe a subscription-based business model is the solution. 

Watchmaking is not the only manufacturing sector that needs to re-invent itself. At Zuora, we work with many manufacturers who transformed their business model from selling products to selling services as subscriptions – from medical devices to industrial machinery. One of the ways to build a recurring revenue model is to “repackage” your existing offering “as recurring”. Besides potentially reaching new audiences, the subscription-based model has proven itself as much more resilient than the traditional way of selling products. Especially in times of economic uncertainty like we have right now. 

Monday, December 7, 2020

Salesforce Buys Slack and I’m Disappointed

Last week, Salesforce announced its intent to purchase Slack for $27.7B and the Internet is all excited.  The excitement comes mostly from the high price tag that represents about a 50% premium over what Slack was trading at two weeks ago. But I am disappointed that Slack is getting acquired by Salesforce. 

Sure, the Slack investors are happy. They are making a nice profit on the deal, especially given that Slack has been trading below their IPO level since going public in June 2019. Slack as a company might be happy too. They face heavy competition from Microsoft Teams and Google Apps, and Salesforce might be a good home base to compete from. 

I also understand the Salesforce rationale. Salesforce needs to expand its enterprise footprint beyond the Sales organization. Sure, they have made some inroads into Marketing and Services, but those are still the go-to-market side of the house. Engineering doesn’t use Salesforce. Neither does IT. Nor Finance.  

Slack is a popular solution that is being used by teams across the enterprise. Salesforce needs that really bad. Salesforce tried to enter the collaboration space with Chatter some 10 years ago, but Chatter never managed to break out of the Sales confines. Even though Salesforce offered Chatter for free to any employee, people who are not in Sales just don’t hang out in Salesforce. More recently, Salesforce tried to break out with Quip but that failed as well. Finally, Salesforce realized that it needed something that has already been established across the enterprise and Slack fits that bill. 

Salesforce also needs to keep growing. At their size ($17B in revenue), organic growth becomes increasingly difficult and acquisitions help to “feed the beast”. That’s why we see Salesforce making bigger and bigger acquisitions: $2.8B for Demandware in 2016, $6.5B for MuleSoft in 2018, $15.7B for Tableau in 2019, and now $27.7B for Slack. Bam! That helps to keep the overall growth above 20%! 

Yet, as a Slack user, I am disappointed. Slack is at the heart of a workplace revolution. Their application finally began to improve enterprise collaboration. But it wasn’t alone and companies such as Zoom, and Box are also addressing a [different] part of the collaboration puzzle. These products have been frequently adopted as “rogue software” - software simply loved enough by users that they went around the formal IT and started using it behind their backs.  

My hope always was that one day, Slack, Zoom, and Box would come together and create a complete, well-integrated collaborative solution – one that spans chat/messaging, video conferencing, and content management. Slack alone, without video conferencing and screen sharing from Zoom is incomplete. Both solutions need a persistent repository to manage the content artifacts – something that Box does very well. I need a solution that combines them together. 

Sure, Microsoft and Google already offer such complete solutions. But the market clearly has an appetite for a best-of-breed approach, combining the best messaging, best conferencing, and best content management you can get. This is where the stack vendors tend to come up short, even if they check off all the boxes. The products from Microsoft and Google are good, but not the best. Zoom, Slack, and Box have been defining that “best-of-breed”. 

The magic of the success of Slack, Zoom, and Box has been their ability to take on an old problem with existing solutions that never quite made it. Zoom is the most notorious example right now. Doing what Cisco Webex, Microsoft Skype, LogMeIn GoToMeeting, and many others tried before, Zoom just succeeded with simplicity, dependability, and – we learned this year – amazing scalability. Similarly, Slack excels where Jive, Yammer, Skype for Business, Chatter, and many others came in short. Just like Zoom, Slack isn’t a brilliant new idea. It just works well

Now, Slack will become part of the Salesforce universe. Sure, they will leave them alone for a while, let everyone settle in as part of a giant software company, and drink the Ohana Kool-Aid. Salesforce loves to market grand visions and they might actually make Slack the interface for the Salesforce apps. That could be great for Salesforce customers. But as a user of Slack, Zoom, and Box, I am disappointed because I know that the best-of-breed collaboration tools will never come together the way they could have. 

As a Slack user, I never thought that Slack needed better integration with Salesforce. Never. But I thought many times that it should have been more integrated with Zoom and Box. 





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.