Why Most Consumer Marketing Automation Systems Are Not Software-as-a-Service, And When That Will Change

Summary: Consumer-oriented marketing automation systems have been slower to adopt the Software-as-a-Service model than business marketing (demand generation) systems. But this will soon change, bringing lower prices and better systems as a result.

Software-as-a-Service (SaaS) is now the standard model for business-to-business marketing automation (a.k.a. demand generation) systems. Any vendor who didn’t sell that way would be an oddity. But consumer-oriented marketing automation products from vendors like Unica, SAS and Teradata are still commonly sold as traditional on-premise software.

Hosted vs SaaS: What's the Difference?

Many of the consumer-oriented vendors do offer “hosted” versions of their systems. These resemble SaaS in that the software is maintained off-premise by a third party. But clients typically still purchase of a perpetual license rather than paying monthly fees, as in SaaS. More important, the hosted systems are still largely configured and managed by the vendor or a business partner such as a service bureau. To me, the essence of a SaaS system is that users can largely do this for themselves.

I’m making a distinction here between running the software on your computers, which both hosted and SaaS vendors do, and managing each client’s implementation and on-going data maintenance. Hosted vendors do this for their clients but SaaS clients do for themselves. Although this distinction may be fuzzy in some cases, I still think it's important.

There are also technical distinctions that identify SaaS systems, such as whether one system serves multiple customers ("multi-tenancy"). Some people would argue that true SaaS systems are by definition multi-tenant and hosted systems are not. Mostly I’d agree, except that I can think of several conventional systems with versions that a service bureau can install to support multiple clients. Those are multi-tenant by any reasonable definition, but they’re managed by the vendor in the way that SaaS software (as I conceive it) is not. Multi-tenancy itself comes in several versions, depending on whether the hardware, software, and/or the database instance are shared. These have important technical and cost implications, but they aren't relevant to this post..

Why Consumer Marketing Systems Have Lagged in SaaS Adoption

What caused the divergence between consumer and business marketing systems? Much has to do with timing: the major consumer-oriented products were developed when on-premise software was the standard, and the large organizations who are their major customers have been relatively slow to accept SaaS in general. By contrast, the demand generation systems are newer and are sold to smaller companies, which have been early adopters of SaaS.

In addition, consumer marketers tend to manage the entire customer relationship, which requires integration with other corporate systems such as billing and customer service. Until recently, few SaaS vendors could handle such integration effectively. Business marketers generally limit their focus to lead generation and nurturing, which at most requires light synchronization with sales.

Consumer marketing databases also generally have more data feeds and more complex update processes than business marketing systems, again because the consumer systems are managing existing customers as well as leads. This makes them harder for consumer marketers to run without assistance, and thus less suited to the self-service-based SaaS approach. Yet even this is changing, as SaaS tools deliver greater power to non-technical users. For example, SaaS-based business intelligence vendors like Birst and Autometrics offer data integration capabilities that could form the basis for building a marketing system. The increasing openness of SaaS products also makes it easier for them to call on external data integration services.

In short, there’s nothing inherent in consumer marketing that prevents use of the SaaS model. The early obstacles that led to quicker adoption by business marketers are rapidly falling. We can expect the major consumer marketing automation vendors to continue to evolve their hosted offerings towards a true SaaS approach. We can also expect new entrants that are SaaS-based from the start, such as Neolane and Entiera (which I plan to review next week). And we’ll probably see marketing capabilities added by SaaS vendors in related industries such as email services (early example: Silverpop’s acquisition of Vtrenz, now Engage B2B) and Web content management (see my reviews of Marqui and SiteCore).

SaaS Systems Will Bring Lower Costs and Better Products

This can only be good news for consumer marketers. Pricing of conventional consumer marketing automation systems has remained stubbornly high in recent years. This is in part because of limited competition, but also because the bulk of the ownership cost is in the labor to deploy and maintain the systems. High labor costs mean that lower software prices would do little to encourage sales, since the buyer’s total expense would remain nearly the same.

By contrast, business marketers have seen ever-lower prices and rapid innovation as a multitude of SaaS-based vendors enter the field. These systems take very little labor to deploy, since that’s inherent to the SaaS model. In fact, implementation fees have in many cases fallen to zero, making the software fee itself the main expense. (The user’s own labor is another cost, but it’s largely hidden and difficult to estimate in advance; it therefore plays a minor role in the purchase decision.) The result is heavy competitive pressure to cut software prices, as vendors scramble to gain enough customers to cover their (largely) fixed costs.

SaaS-based consumer marketing automation systems have fundamentally similar economics, so we can expect similar results: new entrants able to deploy their systems at lower total cost than conventional software (because users do more of the work) will reduce their prices to achieve an adequately-large customer base.

The process will play out over several years as the SaaS based systems evolve to support more sophisticated marketing and greater end-user self-service. This means the new systems will start in the less-demanding lower and middle segments of the market and eventually work up to the largest marketing automation deployments. Still, the trend is clear and, so far as I can tell, quite inevitable.

It’s a great time to be a marketer.

LucidEra Takes a Shot at On-Demand Analytics

Back in March, I wrote a fairly dismissive post about on-demand business intelligence systems. My basic objection was that the hardest part of building a business intelligence system is integrating the source data, and being on-demand doesn’t make that any easier. I still think that’s the case, but did revisit the topic recently in a conversation with Ken Rudin, CEO of on-demand business analytics vendor Lucid Era.

Rudin, who has plenty of experience with both on-demand and analytics from working at Salesforce.com, Siebel, and Oracle, saw not one but two obstacles to business intelligence: integration and customization. He described LucidEra’s approach as not so much solving those problems as side-stepping them.

The key to this approach is (drum roll…) applications. Although LucidEra has built a platform that supports generic on-demand business intelligence, it doesn’t sell the platform. Rather, it sells preconfigured applications that use the platform for specific purposes including sales pipeline analysis, order analysis, and (just released) sales lead analysis. These are supported by standard connectors to Salesforce.com, NetSuite (where Rudin was an advisory board member) and Oracle Order Management.

Problem(s) solved, eh? Standard applications meet customer needs without custom development (at least initially). Standard connectors integrate source data without any effort at all. Add the quick deployment and scalability inherent in the on-demand approach, and, presto, instant business value.

There’s really nothing to argue with here, except to point out that applications based on ‘integrating’ data from a single source system can easily be replaced by improvements to the source system itself. LucidEra fully recognizes this risk, and has actually built its platform to import and consolidate data from multiple sources. In fact, the preconfigured applications are just a stepping stone. The company’s long-term strategy is to expose its platform so that other people can build their own applications with it. This would certainly give it a more defensible business position. Of course, it also resurrects the customization and integration issues that the application-based strategy was intended to avoid.

LucidEra would probably argue that its technology makes this customization and integration easier than with alternative solutions. My inner database geek was excited to learn that the company uses a version of the columnar database originally developed by Broadbase (later merged with Kana), which is now open source LucidDB. An open source columnar database—how cool is that?

LucidEra also uses the open source Mondrian OLAP server (part of Pentaho) and a powerful matching engine for identity resolution. These all run on a Linux grid. There is also some technology—which Rudin said was patented, although I couldn’t find any details—that allows applications to incorporate new data without customization, through propagation of metadata changes. I don’t have much of an inner metadata geek, but if I did, he would probably find that exciting too.

This all sounds technically most excellent and highly economical. Whether it significantly reduces the cost of customization and integration is another question. If it allows non-IT people to do the work, it just might. Otherwise, it’s the same old development cycle, which is no fun at all.

So, as I said at the start of all this, I’m still skeptical of on-demand business intelligence. But LucidEra itself does seem to offer good value.

My discussion with LucidEra also touched on a couple of other topics that have been on my mind for some time. I might as well put them into writing so I can freely enjoy the weekend.

- Standard vs. custom selection of marketing metrics. The question here is simply whether standard metrics make sense. Maybe it’s not a question at all: every application presents them, and every marketer asks for them, usually in terms of “best practices”. It’s only an issue because when I think about this as a consultant, and when I listen to other consultants, the answer that comes back is that metrics should be tailored to the business situation. Consider, for example, choosing Key Performance Indicators on a Balanced Scorecard. But vox populi, vox dei (irony alert!), so I suppose I’ll have to start defining a standard set of my own.

- Campaign analysis in demand generation systems. This came up in last week’s post and the subsequent comments, which I highly recommend that you read. (There may be a quiz.) The question here is whether most demand generation systems (Eloqua, Vtrenz, Marketo, Market2Lead, Manticore, etc.) import sales results from CRM systems to measure campaign effectiveness. My impression was they did, but Rudin said that LucidEra created its lead analysis system precisely because they did not. I’ve now carefully reviewed my notes on this topic, and can tell you that Marketo and Market2Lead currently have this capability, while the other vendors I’ve listed should have it before the end of the year. So things are not quite as rosy as I thought but will soon be just fine.

The Limits of On-Demand Business Intelligence

I had an email yesterday from Blink Logic , which offers on-demand business intelligence. That could mean quite a few things but the most likely definition is indeed what Blink Logic provides: remote access to business intelligence software loaded with your own data. I looked a bit further and it appears Blink Logic does this with conventional technologies, primarily Microsoft SQL Server Analysis Services and Cognos Series 7.

At that point I pretty much lost interest because (a) there’s no exotic technology, (b) quite a few vendors offer similar services*, and (c) the real issue with business intelligence is the work required to prepare the data for analysis, which doesn’t change just because the system is hosted.

Now, this might be unfair to Blink Logic, which could have some technology of its own for data loading or the user interface. It does claim that at least one collaboration feature, direct annotation of data in reports, is unique. But the major point remains: Blink Logic and other “on-demand business intelligence” vendors are simply offering a hosted version of standard business intelligence systems. Does anyone truly think the location of the data center is the chief reason that business intelligence has so few users?

As I see it, the real obstacle is that most source data must be integrated and restructured before business intelligence systems can use it. It may be literally true that hosted business intelligence systems can be deployed in days and users can build dashboards in minutes, but this only applies given the heroic assumption that the proper data is already available. Under those conditions, on-premise systems can be deployed and used just as quickly. Hosting per se has little benefit when it comes to speed of deployment. (Well, maybe some: it can take days or even a week or two to set up a new server in some corporate data centers. Still, that is a tiny fraction of the typical project schedule.)

If hosting isn't the answer, what can make true “business intelligence on demand” a reality? Since the major obstacle is data preparation, then anything that allows less preparation will help. This brings us back to the analytical databases and appliances I’ve been writing about recently : Alterian, Vertica, ParAccel, QlikView, Netezza and so on. At least some of them do reduce the need for preparation because they let users query raw data without restructuring it or aggregating it. This isn’t because they avoid SQL queries, but because they offer a great enough performance boost over conventional databases that aggregation or denormalization are not necessary to return results quickly.

Of course, performance alone can’t solve all data preparation problems. The really knotty challenges like customer data integration and data quality still remain. Perhaps some of those will be addressed by making data accessible as a service (see last week’s post). But services themselves do not appear automatically, so a business intelligence application that requires a new service will still need advance planning. Where services will help is when business intelligence users can take advantage of services created for operational purposes.

“On demand business intelligence” also requires that end-users be able to do more for themselves. I actually feel this is one area where conventional technology is largely adequate: although systems could always be easier, end-users willing to invest a bit of time can already create useful dashboards, reports and analyses without deep technical skills. There are still substantial limits to what can be done – this is where QlikView’s scripting and macro capabilities really add value by giving still more power to non-technical users (or, more precisely, to power users outside the IT department). Still, I’d say that when the necessary data is available, existing business intelligence tools let users accomplish most of what they want.

If there is an issue in this area, it’s that SQL-based analytical databases don’t usually include an end-user access tool. (Non-SQL systems do provide such tools, since users have no alternatives.) This is a reasonable business decision on their part, both because many firms have already selected a standard access tool and because the vendors don’t want to invest in a peripheral technology. But not having an integrated access tool means clients must take time to connect the database to another product, which does slow things down. Apparently I'm not the only person to notice this: some of the analytical vendors are now developing partnerships with access tool vendors. If they can automate the relationship so that data sources become visible in the access tool as soon as they are added to the analytical system, this will move “on demand business intelligence” one step closer to reality.

* results of a quick Google search: OnDemandIQ, LucidEra, PivotLink (an in-memory columnar database), oco, VisualSmart, GoodData and
Autometrics.

Unica Strategy Stays the Course

I recently caught up with Unica Vice President Andrew Hally as part of my review of developments at the major marketing automation vendors. It’s been a good year for Unica, which will break $100 million in annual revenue for the first time. On the product front, they continue their long-time strategy of offering all the software a marketing department would need. This has mostly meant incremental development of existing components, including continued assimilation of past years’ acquisitions in Web analytics, email, marketing planning, lead management, and event detection. The one major acquisition in 2007 was Marketing Central, which provides hosted marketing resource management. This was well within Unica’s traditional scope, although the “hosted” part is a bit of a change. It will help Unica serve smaller companies in addition to its traditional enterprise clients. But since Unica must penetrate this segment to continue growing, this is less a detour from the company’s primary strategy than a logical extension of it.

Hally did say that Unica still sees substantial growth potential among large enterprises. He said the company still frequently finds itself replacing home-grown systems at big companies, not just earlier generations of purchased campaign management systems. This surprises me a bit, although I suppose many firms never saw the need to replace systems that were already working. I do wonder how many of the holdouts will change their minds each year. If the number is small, then Unica and its competitors will be mostly selling into a replacement market, which can’t be very large. On the other hand, continued demand for new capabilities in Web and mobile marketing should lead companies to replace even relatively new systems. So perhaps the replacement market will be bigger than it seems. Certainly Unica has added features for email and Web analytics. But it still has gaps in ad serving, keyword management, and mobile. Acquisitions in those areas would not be surprising.

Probably the most interesting development Hally reported was a sharp rise in sales for Unica’s Affinium Detect, an event-detection system based on the Elity software acquired with MarketSoft in 2005. Hally said Detect is now Unica’s third-best-selling product, with one to two dozen installations. This compares with the handful that Elity had sold when it was independent. He attributed the growth both to increased demand and to the reduced risk marketers see in buying from Unica. He also reported the product has been sold for telecommunication and credit card applications, in addition to the traditional retail banking.

While at NCDM, I also took a look at Unica’s newest module, an ad hoc reporting package called Affinium Insight. This provides some basic visualization and analysis capabilities for non-technical users. It is designed to free up marketing analysts for more demanding work by giving business users a simple graphical interface linked to data marts assembled with standard Unica technology. The interface resembles the NetTracker Web analytics system Unica acquired with Sane Solutions in 2006.

Hosted Software Enters the Down Side of the Hype Cycle

“SMB SaaS sales robust, but holdouts remain” reads the headline on a piece from SearchSMB.com Website. (For the acronym impaired, SMB is “small and medium sized business” and SaaS is “software as a service”, a.k.a. hosted systems.) The article quotes two recent surveys, one by Saugatuck Technology and the other by Gartner. According to the article, Saugatuck found “SMB adoption rose from 9% in 2006 to 27% in 2007” among businesses under $1 billion in revenue, while Gartner reported “Only 7% of SMBs strongly believed that SaaS was suitable for their organizations, and only 17% said they would consider SaaS when its adoption became more widespread.”

These seem to be conflicting findings, although it’s impossible to know for certain without looking at the actual surveys and their audiences. But the very appearance of the piece suggests some of the bloom is off the SaaS rose. This is a normal stage in the hype cycle and frankly I’ve been anticipating it for some time. The more interesting question is why SMBs would be reluctant to adopt SaaS.

The article quotes Gartner Vice President and Research Director James Browning as blaming the fact that “SMBs are control freaks” and therefore less willing to trust their data to an outsider than larger, presumably more sophisticated entities. Maybe—although I’ve seen plenty of control freaks at big companies too. The article also mentions difficulties with customization and integration. Again, I suspect that’s a contributing factor but probably not the main one.

A more convincing insight came from an actual SMB manager, who pointed to quality of service issues and higher costs than in-house systems. I personally suspect the cost issue is the real one: whether or not they’re control freaks, SMBs are definitely penny-pinchers. That’s what happens when it’s your own money. (I say this as someone who’s run my own Very Small Business for many years.) On a more detailed financial level, SMBs have less formal capital appropriation processes than big companies, so their managers have less incentive to avoid the capital expense by purchasing SaaS products through their operating budgets.

One point the article doesn’t mention is that SaaS prices have gone up considerably, at least among the major vendors. This shifts the economics in favor of in-house systems, particularly since many SMBs can use low cost products that larger companies would not accept. This pricing shift makes sense from the vendors’ standpoint: as SaaS is accepted at larger companies with deeper pockets, it makes sense to raise prices to match. Small businesses may need to look beyond the market leaders to find pricing they can afford.

Everest Software Balances Hosted and On-Demand

The public debate between on-premise and on-demand (hosted) software has largely been won by the on-demand side, particularly where small businesses are concerned. Faster, cheaper and easier deployment seems an overwhelming advantage, even though on-demand long-term costs may be higher, integration more difficult, and functionality not quite as rich as for on-premise systems.

And yet—plenty of on-premise software is still sold. In fact, although I haven’t seen actual figures, I suspect on-premise continues to hold a larger share of the market. Small businesses are reluctant to make a change, so they’re likely to stick with their existing systems and incremental upgrades as long as possible. In addition, many small business owners (and here I speak from personal experience) prefer to have as much control as possible over their business operations, and find the notion of such heavy reliance on a remote system to be distasteful.

Everest Software produced a good white paper summarizing the issues, “On-Demand vs. On-Premise Software Deployment”, available here (registration required). Everest provides enterprise management software (everything from CRM to ecommerce to inventory and accounting) for small businesses. It offers both on-premise and on-demand options, so its paper is free to present a balanced view of the choices.

I have just two factual quibbles with the paper. One is it assumes on-premise systems have richer user interfaces: although this was true in early implementations, today technologies such as AJAX allow even purely browser-based hosted system to provide pretty much the same interface as systems that install local software. The other is the statement, repeated twice, that “after a period of three to five years, many businesses achieve a lower total cost of ownership with On-Premise software deployments (exclusive of personnel costs).” This might be literally correct, but personnel costs can’t really be excluded. Once you count them in, on-demand systems are very likely cheaper in the long run as well as the short run for many small businesses.

In any event, long-run total cost of ownership is unlikely to be a key issue for most small businesses. Capital tends to be scarce at such firms, so the smaller up-front investment of on-demand is a more compelling consideration. Again, I suspect the real obstacles to on-demand are the emotional one of control and the practical one of integration. Of those, integration is really the key. This won’t be solved by publishing APIs, as some hosted vendors seem to hope, because most small businesses lack the technical resources needed to take advantage of APIs. We’ll see whether simpler integration capabilities become available, similar to “mash up” features now available on some consumer Web sites. If I were a hosted software developer, that’s where I’d put my energy.