Multichannel Marketing

On-Demand Technology: The Gain Without the Pain Knowing what to look for in on-demand software March 2008

Driven by the desire to reduce infrastructure costs and reallocate those funds into marketing, merchandising, and customer acquisition, retailers are moving away from licensing or building their own software platforms in favor of on-demand software, also known as software as a service. While the primary attractions of the on-demand model are standardized features and functionality, and speedier development and implementation cycles for upgraded versions, retailers still need to perform due diligence when selecting the appropriate vendor.

Among the issues retailers need to weigh before entering into any contract are the vendor’s definition of on-demand software, how the on-demand model will benefit their business, what level of support and service they will receive from the vendor, and what it is they are paying for.

Clarification of the vendor’s definition of on-demand software is essential because the definition itself is blurring, according to Scott Olrich, chief marketing officer for Responsys Inc., a San Bruno, Calif.-based, global provider of on-demand marketing automation solutions.

By definition, on-demand software is software that resides at a single location and that multiple customers access and use as needed. It is a low-cost way for retailers to obtain the same benefits of commercially licensed or home grown software without high implementation and maintenance costs or the complexity of customizing the platform to their needs.

Universal upgrades

True on-demand platforms are multi-tenant, thereby allowing all users to run the same version as opposed to customized applications. The payoff from this approach is that upgrades are universal to the user base so that when one user discovers the need for a new feature, the vendor rolls it out across the platform. Vendors will upgrade their platform as often as once a month, compared to every 12 months or longer for licensed applications. Changes to home grown platforms are slower, too, as IT personnel must be shifted away from their core duties.

“Multi-tenant platforms allow end users to better leverage the power of the software because the cost of upgrades are spread out across the user base, which means they happen faster,” Olrich says.

The confusion over the definition of on-demand software comes from vendors. “Some providers of single tenant, on-demand platforms are blurring the difference between their offering and the on-demand, multi-tenant model for marketing purposes,” says Olrich.

Distinct differences

The loose definition of on-demand software often includes the managed service provider model, also known as MSP. While a managed service provider arrangement is similar to on-demand platforms in that both provide such fundamentals as rack space, power, connectivity, security, storage, backups, monitoring, and basic maintenance, there are distinct differences between the two.

“With an MSP, the software is deployed on servers dedicated to the client,” explains Jeff Max, CEO of Venda Inc., a New York-based e-commerce platform provider. “Provisioning clients on the MSP model is as involved as licensed software. Upgrades are infrequent due to the resources required to modify each client’s custom deployment one at a time and performance depends largely on the customer’s dedicated server capacity.”

True on-demand platforms are deployed on a single instance, multi-tenant architecture. “Because of the homogeneity of the code base, better self-service tools are provided that give clients improved ability to customize and administer their own virtual environment,” Max says. “Provisioning takes half the time, upgrades are routine and the shared resources give the system more resiliency and performance.”

The primary question to be asked of a vendor is whether every user on the platform runs the same version of the software. If the answer is no, retailers are apt to pay more money over the long-term for the platform and wait longer for upgraded versions as new features are added on a client-by-client basis. “Single tenant solutions are more costly and the end user bears more of the cost for upgrades than they would for the multi-tenant model,” adds Olrich.

Once retailers are clear on whether the vendor provides a true on-demand platform, they need to consider how it will benefit their business. The most obvious and immediate benefit is that the vendor’s support team has a greater breadth of expertise than that of the in-house IT staff.

“The time spent solving an IT problem in-house takes the retailer away from their core business,” says Shawn Schwegman, chief marketing officer for Vcommerce Corp., a Scottsdale Ariz.-based provider of e-commerce platforms. “Plus, in-house IT staff has to solve problems as they arise. With the multi-tenant on-demand model, problems are addressed for all users at once, which in most cases is before many of the users identify the problem exists.”

This capability allows the client to leverage the skill set of the vendor without having to reinvent the wheel each time. One way Vcommerce leverages this expertise for clients is through A/B testing. As tests are run for individual clients, trends are identified and the knowledge from those tests is applied simultaneously across the user base. “This means clients learn faster about what works and what doesn’t,” says Schwegman.

Having an experienced third-party support staff to operate and maintain the platform is critical, as retailers’ operating platforms become more complex as they grow in proportion to their revenues. Subsequently, retailers struggle to effectively train their IT staff on how to get the most out of the software.

Complexities that arise as a retailer’s business grows include making sure the software platform meets compliance requirements for security across all phases of their business such as PCI, a data security standard created to ensure the safe handling of credit card account information, and compliance when printing shipping labels for package carriers.

The turnover problem

“The average IT staffer stays in their current position about 2.5 years, which means a retailer’s IT staff can turn over within three years and that is a huge loss of resources and experience with the platform,” says John Marrah, president and CEO of ProfitCenter Software Inc., a Uniondale N.Y.-based e-commerce platform provider. “In an SaaS model providing and training support staff are the responsibility of the software provider, not the retailer. It is almost impossible for a multi-channel retailer to afford the depth of personnel to make sure they always have trained and experienced staff. For an SaaS provider, it is a cost of doing business.”

With so many systems feeding into the multi-channel platform, such as CRM, point-of-sale, order management, and customer service applications, it is tougher for retailers not only to manage those systems, but also to stay abreast of the latest advancements for each application. “It is rare that retailers can manage their platform in a manner that is seamless and know the actions that took place at each customer touch point,” continues Marrah. “We implement and roll out new versions of our platform monthly.”

To ensure the highest level of technical support ProfitCenter Software provides constant training for its own staff as well as that of the retailer’s internal IT staff. “Most of our staffers start their training with how to service client needs by learning the client’s business and their objectives,” Marrah says. “In-house users struggle to effectively train their employees on how to get the most out of the software.”

Marrah joined PCS in 2007 after serving as president of Escalate Inc., a software provider to direct and multi-channel retailers. During his eight years at Escalate, Marrah grew the company through a strategy of acquisition and organic growth around Escalate’s Ecometry and Blue Martini products.

Support for in-house staff

Ongoing training and support also need to be provided to the retailer’s in-house IT staff. With each new release of its platform ProfitCenter Software gives clients release notes and a tutorial video that explains the new features and functionality, how to deploy them and how to best leverage them to benefit their business. “A lot of training gets delivered to the client through video and online,” Marrah says. “This approach lets them come back to refresh their understanding of the application and they don’t have to pay to attend another training session. This makes training sessions reusable and more cost effective.”

Further training and support come from an executive advisory board made up of users and by having support personnel spend about 30% of their time visiting clients, Marrah adds.

Providing ongoing training to clients gives retailers a greater feeling of control over the platform. In doing so, PCS is knocking down one of the barriers retailers have to acceptance of on-demand platforms. “Retailers like control over their software platform, but that is waning as they gain a better understanding of the SaaS on-demand model,” says Marrah. “They see the resources that drive the product from a functionality standpoint.”

PCS’s ProfitCenter Software is a web-based multi-channel application that automates and manages the entire customer lifecycle across all sales channels and provides retailers with unified customer and inventory views that reduce the costs and complexities of traditional software.

Staying ahead of the client

Among the resources PCS can deliver to retailers through its platform are speedy development and implementation of new features on a monthly basis. “If we see our platform lacks a capability we try to be proactive and add new functionality ahead of customer needs,” says Marrah. “We try to use technology as an enabling force to allow clients to run their business and optimize their financial performance while minimizing costs. This allows them to focus on their core strengths of marketing, merchandising, promotion, and supply chain management, which is why retaining control over the platform is not as big a barrier to acceptance with retailers as it was three years ago.”

Nevertheless, retailers are best advised to take a proactive role in the management of their web sites to determine whether a vendor is living up to expectations. Issues they need to stay abreast of include whether the vendor promptly takes product pages down when an item is out of stock or states on the product page when less than 10 units remain or that an item is on back order. Other issues to track include whether bounce rates are rising, return rates are increasing, and whether shoppers on the web site are placing more phone orders for specific items.

All of these metrics help retailers quantify the performance of the vendor. “On-demand users really need to have the online business skills to control their own destiny,” says Venda’s Max. “If they have the right business skills, they will be able to distinguish business problems from technology problems and determine when the vendor could be doing more.”

Ideally, retailers want a partnership between themselves and their platform provider in which they collaborate with the vendor to leverage the full capabilities of the platform. To achieve this goal, Responsys offers webinars and user groups where customers can exchange ideas on ways to optimize the capabilities of the Responsys platform and improve it.

“We offer client workshops on how to use our application to execute the programs customers want to put in place at the lowest cost in order to drive the highest value,” says Olrich. “We will help them build campaigns and create templates. Retailers want technology partners that help them build core competencies in their organization.”

In doing so, retailers can get the most from their internal resources and those of the vendor, which is the best of both worlds. If retailers are too self-sufficient, they are not leveraging the skill set of the vendor. If they are too reliant on the vendor, they are not necessarily building core competencies. In either case, retailers are forgoing a collaborative environment that enables them to optimize the full functionality of the platform. “A collaborative environment gives retailers more options when it comes to leveraging their platform to meet their business needs,” says Olrich.

A key component of creating a collaborative environment is helping retailers differentiate the customer experience. Olrich cites the example of a flower retailer that offers shoppers the option of receiving a notification of delivery via e-mail or wireless mobile device.

As part of the notification process, the retailer enhances the customer experience by including a single question pertaining to their level of satisfaction with the purchase. The question is phrased simply, i.e. did they find the entire shopping experience to be positive or negative.

If the response is positive, a thank you is sent along with an incentive to encourage a future purchase or for referring a friend to the site. If the response is negative another message asks what they found to be dissatisfactory. “In a collaborative environment, the vendor supports the retailer’s marketing and operating goals,” Olrich adds.

The cost of ownership

A very important aspect when evaluating a vendor is the actual cost of ownership. This goes beyond the fees charged for usage to include security, maintenance, support, development and implementation costs for new features and functionality. “Most retailers underestimate these costs when weighing the cost of the on-demand model vs. licensing a platform,” says Vcommerce’s Schwegman

Some large retailers can spend as much a 3% to 6% of revenues on IT support costs for licensed software, he adds. Vcommerce bases its pricing on a revenue sharing model in which retailers pay a percentage of the revenue from the total dollar value of the transactions running over the platform. Pricing tiers based on volume enable retailers to decrease their costs as volumes increases.

Figuring the cost of ownership requires retailers to perform a technical deep dive and map out the workflow of the steps involved to process each transaction. “At each step of the process retailers need to ask how a feature or functionality affects the customer experience and how problems are dealt with to ensure a satisfactory customer experience,” says Schwegman. “Drop shipping, for instance, is becoming a popular option with retailers because it enables them to increase their virtual inventory, but it is a complex piece of the order management process that needs to be fully understood before committing to a platform.”

Part of the technical deep dive is to ask vendors to list all the features included in the platform and if the retailer or vendor will need to add technology partners, such as credit card processors. “Determining upfront where a platform begins and ends is the challenge that comes with determining whether they are buying a true end-to-end solution,” Schwegman says.

In many cases, short-term contracts do not work because there are multiple integration points across all sales channels before those objectives are achieved. “Non-IT personnel tend to simplify the complexity of using on-demand platforms to achieve their business objectives,” says Schwegman, who adds retailers can outsource some or all of their platform functionality to Vcommerce. “Our approach is to install in phases, reevaluate, and redeploy as necessary. The worst mistake a retailer can make is to try to do everything all at once. Adding capabilities over time is a more effective approach, especially in a multi-channel environment.”

In 2007, Vcommerce added a full service online marketing services group to support its platform.

The flat-rate alternative

While there is no question the lower cost of ownership of an on-demand platform can help retailers justify such arrangements, some vendors are moving away from revenue sharing models and offering flat rates to create straightforward pricing.

“The goal is to bring transparency to on-demand software because many vendors offer pretty similar services and functionality,” says Venda’s Max. “Flat rate pricing normalizes the cost and delivery of the platform and allows retailers to plan for the actual cost of the platform.”

Under a revenue sharing model retailers can pay from 2% of sales volume to as much as 40%, according to Max. Such fluctuations can be difficult for retailers to digest, because it means their costs are unpredictable.

“Retailers may persuade the provider to bill against more predictable business metrics, such as number of orders or new account registrations or they may insist on a cap in overall fees per billing period,” says Max. “But all of these approaches require non-standard concessions for most providers.”

Venda charges $12,000 per month for its service, plus a fee for its credit card gateway. Contracts typically run three years with options to renew for subsequent one-year periods thereafter. “Signing a contract for a minimum of five years can give vendors too much room to rest on their laurels,” says Max.

Many also recommend that retailers build into their contracts specific requirements for up-time, response time to service requests, and guarantees that give an out if expectations aren’t met. “With these types of contracts, retailers know exactly what they are getting,” Max says.

A last resort

While including an out clause in a contract provides retailers a measure of protection in the event vendors fail to meet expectations, exercising it ought to be an act of last resort. “Exiting a contract before it is fulfilled and switching platforms will disrupt the retailer’s business,” Max says. “It is better to try to work through the problems with the vendor than cut and run. But if it is clear the vendor is not paying attention to the retailer’s needs, then that’s a tough problem to solve.”

As retailers look to shift their focus away from licensed and home grown e-commerce platforms to on-demand platforms that offer standardize features and functionality, knowing the right questions to ask of a prospective vendor is more important than ever.

Read complete article at Internet Retailer