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Going After the Long Tail?

Charles Fitzgerald recently posted an article on the elusive long tail market. The article mentioned some interesting stats on Salesforce's top-heaviness - a small number of enterprise customers account for more than 40% of their user base. Which begs the question, if the long tail is why software vendors are rushing to embrace SaaS, where is the evidence of successful Long Tail ISV stories?

Well, here's my theory:- The majority of SMBs in existence are fighting for survival in the market they are competing in, hence they are not (yet) going to spend their hard earned money on software that they are yet to relate with their profits. Unlike the large enterprises and established companies who may be looking to optimize, streamline or differentiate through IT automation, the number one priority for a large chunk of the long tail is finding customers to pay their bills.

When I was working in China earlier this year, Alibaba was one of the Web companies that caught my attention. For those not familiar with Alibaba, it is China's (if not the world's largest) B2B online marketplace. You can find many small and medium sized companies selling all kinds of merchandise through this online exchange. Essentially, Alibaba is offering (market) channel as a service. It also turns out that Alibaba's CaaS strategy attracted the world's largest gathering of SMBs to its B2B service. Serious viral effect is happening at their marketplace.

What does all these mean to SaaS ISVs and catching the long tail?

Well, to begin, if you are serious about selling to the long tail, you should first seek to become their market channel, or minimally, the short link to their channel. Essentially, this is the value proposition you need to create. The SaaS value propositions that convinced the large enterprises do not always work well for the elusive critter looking for the channel to their cheese.

Compared to the aspirations of B2B exchanges like Commerce One and Ariba in the late 90s, Alibaba does not attempt to provide a marketplace that is overly complicated - there is no automation of RFQ, goods requisition etc, just good old basic "listing" and "search". Although the features are very limited, SMB saw the business value immediately. Alibaba's Web site claimed 21 million and 3.6 million registered users in China and outside of China respectively.

Interestingly, Alibaba launched its software company, Alisoft at the beginning of this year with the mission to sell line-of-business applications to SMBs. This press release wrote that Alisoft already has 500,000 active users and 3 million registered users for its free LOB software.

My takeaway from Alibaba's business direction is that bootstrapping for the long tail needs to focus on solving business priorities for the SMB, which to me, is clearly helping those businesses find their customers. As software companies, selling software is of course the eventual goal, but it needs to be bundled with a customers' business channel story.

The combination of offering CaaS and SaaS makes the ISV business model more interesting but also more complicated, such as offering a few different channel + software services bundles with hybrid monetization schemes. For example, the entry level service offering may need to rely on an ad-funded or transactional model, so that SMB that are new to LOB apps can begin to see the value of the market channel and the software. For the more established SMB, the ISV may consider up-selling them to a full featured application that can take advantage of all aspects of the channel offering, and charge a subscription fee for using the application.

Another industry example of players who are well positioned to sell software to SMB are the telcos. Many of the ones I've spoken to plan to become SaaS aggregators. Telcos are not really SMB's channel, but by offering communication services, they are vital links to the SMB's channels. By tightly integrating line-of-business functions (especially those application features that enable interaction with their customers or leads to sales) with communication services, telcos can entice SMB to upgrade their services to include LOB apps.

These last few years, Internet search, consumer-based ad business models and social networks have drawn a lot of high tech investment energy. I suspect that we will soon see a revived interest in online marketplaces since the last of the B2B exchanges dwindled away in the early 2000s. Perhaps this time around, online marketplaces will focus on being the business channels for the SMBs - and they need to in order to fulfill the SaaSy Long Tail prophecy.

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