The future of business software

Tom Tunguz wrote an insightful blog recently comparing legacy software applications with the new, disruptive ones.

He writes:

“A senior SaaS executive once told me, “Reports sell software.” In a top down sale, that’s absolutely true. The CEO wants better predictability of bookings so she’ll buy a CRM tool to gather the data. Classically, software has been built for that mantra.

In bottoms up sales, workflow sells software. And new SaaS companies who aim to displace incumbent systems of record will architect their products in a radically different way. They will be event-driven SaaS companies (emphasis is mine).”

I couldn’t agree more.  

My start-up’s product is (was) event-driven

In the case of Bluenose, we were trying to help you unlock the value of user feedback (in the form of NPS surveys) and user behavior (in the form of product usage data).  

This data should flow into your company continuously, and produces many valuable signals:

  • As a signal about the health of your relationships with your users at a macro level
  • As a signal about the health of your relationship with each user
  • As a signal about where each user stands in their adoption journey

How can you use these signals?

The first signal unlocks the drivers of NPS, retention and churn in your business.

The second signal mobilizes your Customer Success team or guides your contact center agents.

The third signal enables you to target each user with relevant messaging on how to take their next adoption steps.

How does Tom’s thinking apply to your business?

If your job is to improve customer retention, “event-driven” is a provocative way to think about your customers and the events that should drive your engagement with them. The design of your customer-facing processes should be event-driven for sure.

If you’re in the role of designing products, it’s a clue about how to disrupt incumbent competitors (or fight off the upstarts if you’re being disrupted), by thinking about the events that should drive your app’s features.

If you’re in sales, it’s a way to frame your product as being different – and more valuable – than an incumbent product that doesn’t utilize events to drive a business process.

A final thought

One of the ways I like to think about customer events is how they drive scores.

You’re forecasting a customer renewal.  Should the forecast probability (a score) be based on customer events?

  • Sustained use of your app
  • Survey responses

You’re scoring each customer’s health as part of a weekly Customer Success team meeting.  Should the customer’s health score be based on events?

  • Recent use of your app
  • Recent responses to a survey
  • Recent support tickets
  • Changes in the customer’s team

Not only do events make for more accurate scores. They also pinpoint what’s changed in a score and make the next customer touch much more obvious.

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.