Thursday, October 22, 2009

The Death of Sales and Marketing?

I recently heard the CEO of a fast rising, cloud computing “PaaS” (platform as a service) company declare that in his business today “cheap means no need for sales and marketing.” The gist of his argument was that the cloud + SaaS means that the price waterfall now starts at $0 which effectively eliminates the #1 obstacle to web services:  the pain of adoption.

Now this is not the first time I’ve heard the death of marketing proclaimed.  And normally, I would just ignore it.  But in this case,  the speaker happens to be a highly successful serial entrepreneur (certainly more succesful than me!) and pioneer in the SaaS space whose statement I can't just casually dismiss.

So to what degree is this true?

Now the answer partially depends on what you consider marketing.  To aid my thinking, I turned to what is incontrovertibly marketing and arguably the most basic of marketing frameworks:  the “4Ps” and its companion the “3Cs.”  For those unfamiliar with Marketing 101, the classic “4Ps” of the marketing mix are product, price, promotion, and place (or channel).  The “3Cs” are customer, competition, and company (although now I understand we are up to 7Cs).  Within each each element are sub-elements which when combined constitutes the firm’s marketing strategy.

For example, in the statement under consideration, “cheap” clearly refers to the price element of the marketing mix.  But does the fact that the price of trial is $0 trigger a paradigm shift?  Or does it just mean a substitution in the mix?

In this context, when I say “paradigm shift”, I mean a change to the basic assumptions that underly the rules of marketing, in the same ways that the physical laws that describe the behavior of water are different depending on whether one is describing water as a liquid or as a gas.

For example, prior to the web, because of the cost of deployment, economies of scale favored  centralized media channels (i.e. trade magazines, newspapers, TV and radio stations) where target customers knew where to go for “validated” information. When Mosaic was released in 1993 and the commercial World Wide Web was effectively born, companies were quick to recognize that websites were an alternative to print advertising where the cost of promotion effectively dropped to $0.  But this did nothing to shift the paradigm behind promotion.  The web was just a more cost effective substitute.

However, Web 1.0 reached a point where the exponential growth of information changed the key problem of promotion from one of messaging (push) to one of search (pull).  In this case, the magnitude increase in information changed the paradigm behind promotion in the same way heating water above its boiling point changes the rules describing its physical behavior.  Thus was born the industry epitomized by Google, search engine optimization (SEO), meta-tags, and all the other techniques now considered fundamental aspects of marketing.  Advertising, as a promotional vehicle, was officially declared dead(1).

(Incidentally, it’s worth noting that today in the Web 2.0 world, the fundamental marketing discipline of positioning has not gone away.  If anything, its importance has increased as the need to rise above the noise has increased, driven by the same exponential growth in information.  Branding, advertising, and PR firms are still around, and I don’t know about you, but for a dead media, advertising seems to pop-up with annoying regularity.)

But returning to the question about whether the price of trial being $0 eliminates the need for sales and marketing, back in the days of hardware, we called this the free sample.  One company I worked with regularly give away product with a retail price of $750 (but actual cost of $375) to customers.  The economics were compelling.  For the $40,000 cost of running a typical one year trade ad campaign, they could give away 105 base stations.  Each base station typically used $130/yr in consumables which the customer purchased.  This covered 1/3 of the free sample cost.  The follow on customer conversion rate was 60% and each converted customer typically purchased 5 additional stations plus consumables.  So over a 1 year period, for every $1 in trial cost, the company made $2  in revenue!  Obviously, they gave away free samples to anyone who wanted to try their product, right?

Absolutely not.

The program worked because it was only offered to a carefully targeted set of customers for whom trial was a prelude to a production facility conversion.  To get to the trial point, the company had developed a product that met the customer’s needs. They had to know where (place) to reach the customer, and they had to promote an awareness that they had what the customer wanted, not a competitor.  At this point, the free trial was highly effective at overcoming the pain of adoption.  (And the company also ran the trade ad campaign.)

So for the PaaS company, I have no doubt that giving away their service is highly effective, especially with a cost of delivery that probably is close to zero.  But I also notice that the company promotes two distinct product/price offerings via a website, PR releases, a blog, and sponsored links on Google keyed to search terms which may or may not have been optimized by an SEO vendor.  Oh, they also have a VP of Marketing and a VP of Sales.

Sounds like marketing to me.


(1)  Oliver, Richard W., “The Death of Advertising,” Journal of Advertising (1994).