The metrics-driven SaaS business

I founded Bluenose in part because there are major changes happening across technology-based industries. In this post, I’ll review those changes and what it means for technology vendors. In particular, I’ll discuss the importance of adopting new ways to manage businesses, even as the old ways still hold true.

There’s a business model revolution going on.

Our friends at Zuora coined it the “Subscription Economy®”. It’s fundamentally changing the patterns of consumption:

  • in music content, we’ve gone from buying a CD for $18 to buying a song or subscribing to a monthly streaming service
  • in movie content, we’ve gone from owning the DVD for $49 (ouch!) to on-demand viewing or a monthly streaming service
  • in desktop software, we’ve gone from buying a boxed CD at the computer store to a monthly subscription. And lots of freemium mixed in.
  • in business software, we’ve gone from perpetual licenses with up-front payment to monthly or annual SaaS subscriptions
  • in mobile phones, we’ve gone from long-term contracts to shorter ones, and in many cases pay-as-you-go
  • my favorite example: GE Aircraft Engines used to sell you an engine for a few million dollars. Now, you purchase “flight hours” and your billing is metered accordingly

It seems like everywhere the internet touches our lives, the business model has been transformed in turn.

A new dynamic between customer and supplier

When suppliers got up-front payments for their products, their attitudes toward customers often sucked. You have a software problem? Call tech support, where you’ll be rushed off the phone as soon as they can. After you were on hold for too long.

After all, at that point you as a customer are a cost. Repeat after me: a cost, as in to be minimized.

In recurring revenue models where you consume and pay over time, it’s a new game. The supplier must keep loving you, or you and your revenue stream go away. Study the organizational design of a SaaS businesses, and you will encounter new departments called “customer success”, “customer advocacy”, “customer experience management” or “customer retention”.

What’s going on?

Follow the money. The new shape of revenue is causing a new way of thinking about the customer.

By the way, we as customers are liking this quite a lot. We’re holding the leverage now, and are enjoying the newfound attention as a result. For that reason, I think this model is here to stay. Marc Andreessen said “software is eating the world”. Maybe it’s more like SaaS is eating the world.

Time for new metrics

As suppliers, lots of the old ways to measure success are still there. We still care about revenue, profits, cash flow, access to cheap capital, competition, etc.

But this new business model forces us to master some new metrics in turn, like Lifetime Value (LTV). Or Customer Acquisition Cost (CAC) to LTV ratio. Or Churn Rate. Or Renewal Rate.

The new metrics that I find most interesting are ones rooted in the measure of a customer relationship over time. And, the linkage between relationship health and the associated financial outcomes: renewals, churn, up-sells, cross-sells, etc.

“Subscription Economy”® is the registered trademark of Zuora, Inc.

Customer analytics | 8 data sources you can use now

Customer analytics for SaaS companies is about reducing churn and increasing lifetime value of your existing customers.  While every company looks at acquisition metrics, SaaS vendors must do more because the customer lifecycle begins at the point of web conversion.

A customer that enrolls in a trial or subscription is beginning their relationship with your company. However, your SaaS offering will need to be constantly delivering the value your customer is seeking or you will fail at customer retention.

How do you know if you’re meeting customer expectations?

There is a recent body of research called behavioral economics.  In a nutshell, it states that what a customer does, versus what they say, is a truer measure of their satisfaction and intent. This means that a customer who says they are happy in a survey might not actually be happy.  Even worse is the customer who never tells you they’re unhappy, and they simply churn.

Customer analytics unlocks the power of this research by enabling SaaS vendors to understand their customers’ actions, focusing on product usage combined with everything else you can know.

How to get started?  Make an inventory of all of the data you have about your customers, and ways it can be used.

  • Traffic and volume metrics: Attributing customers to the channel that they came through will enable you to find patterns of valuable or less valuable customers.
  • Product usage: Logins, modules used, processes run, usage frequency.  This tells if your customers are using your product and what parts of it they are engaging with.
  • Sales CRM: (when you have a sales-assisted acquisition model)
  • Support CRM: Issues your customers needed help with. Use it to spot your customer’s frustration with your business.
  • Purchase & product plans: What your customer purchased and how much they paid.  Identifies customer tiers, potential up sells, upcoming renewals and payment status.
  • NPS ® (Net Promoter Score ℠): Surveys taken on a subset of your customers to gauge satisfaction.  Allows your customers to tell you qualitatively vs. quantitatively if they are happy with your service.
  • User comments: In emails, on support forums, or even Tweets. A second data source of customer sentiment that can be tied with NPS and Support CRM.
  • Customer intelligence: Key changes within your customer’s organization that could signal potential changes in the stability of your relationship.

Most SaaS companies review metrics from each of these sources independently.  Customer Analytics happens when we analyze our customers’ data across multiple touch points.   This reveals valuable insights you would have no way identifying if the data remained apart.

Look across all of your customer data, and consider what it means across the lifecycle.  The result? Better products and increased revenue.