The industrial age is behind us. It was surpassed by the knowledge economy, rapidly evolved into the attention economy. Successful companies realize that attention comes as a result of conversation. We’re now in the conversation economy.
Software as a Service and Conversation
Software as a Service (SaaS) products are products where instead of paying an up-front licensing fee, customers make recurring payments, for as long as they use the software. As soon as the software becomes obsolete, or you no longer need it, you stop using it – and stop paying for it. As long as the product continues to be relevant, and continues to provide the best solutions for your problems, you’ll keep using it.
Peter Cohen at SaaS Market Strategy Advisors, recently did some analysis on the lifetime value of a SaaS customer. What was particularly interesting was that he found that the return on investment (revenue versus cost of acquisition) grows dramatically over a one, three, and five year analysis. His analysis is particularly exciting because he’s quantified the benefits of focusing on your existing customers. Anecdotally, he shows that Salesforce.com needs to keep customers around for a bit under three years to cover their marketing expenses. Given how integral CRM becomes once deployed at a large company, that’s not a bad bet – Salesforce can become an entrenched player, who will only be displaced when their customers focus on the ongoing costs (versus the ongoing benefits).
In my previous article on the economics of SaaS (and the extended remix version published in The Pragmatic Marketer), I provided a qualitative analysis, and the logical conclusion that SaaS providers are incented to focus on their existing customers. Cohen’s analysis supports those conclusions and makes them more concrete.
Long Term Relationships and Conversation
A long term relationship with your customers requires you to have an ongoing conversation with them. To keep that relationship going for years, it also needs to be a fantastic conversation.
A fantastic conversation is one where not only you, but your customers are engaged. Ask yourself – if you’re talking to your customers over coffee, are they leaning back, or leaning forward? Engaged users are leaning forward, and disengaged users are leaning back.
If your users aren’t leaning forward, you need to figure out how to make the conversation more interesting to them and get them engaged.
Activity Versus Engagement and Conversation
In the bad old days, you either forgot to think about your customers, or you thought about them as active or inactive. That was the way we framed analysis. And SaaS models forced us to focus on helping inactive customers re-activate.
A conversational model is different, however. Just because a customer is active does not mean they are engaged. More on this later – just planting a seed for now.
The Freemium Business Model and Conversation
The freemium business model is one where some people get to use your product for free, where other people are paying customers who get to use a different version of the same product. The revenues from your paying customers cover the costs of providing your product to all of your customers. This is a common business model to use with SaaS products, but can also be applied to licensed products. The costs of development, support, and ongoing operations are all covered by the paying customers – even though you incur costs from the free-product users too.
In a recent interview with Damon Darlin on the New York Times site, Evernote’s CEO, Phil Libin talked quite candidly about the conversion of users of the free version of Evernote into paying customers. He noted that the longer a user sticks around, the more likely that user is to become a customer of Evernote’s for-a-fee version.
Mr. Libin studied the behavior of the earliest adopters and found that the longer customers used the service, the more likely they were to start paying for it. About 0.5 percent convert to paying customers in the first month. But after about a year, 4 percent have converted. (He says he thinks the figure will top out at about 22 percent.)
While I’m not convinced that 22% conversion is achievable, the trend is obvious, and 4% is a fantastic number.
You have to have a pretty engaging conversation to keep users around long enough to be profitable.
Combining The Activity Model and the Freemium Model
We can combine the active-inactive perspective with the for-a-fee and for-free approach, and we get the following magic square.
This diagram is interesting, but oh-so-2005. The only moderately interesting insight you get is that the inactive, for-a-fee customers are at risk. They’re just giving you money for no good reason. You should probably figure out how to help them before they go away (and take their money with them).
Introducing a Conversation Model – QCP
As I mentioned earlier, being active does not necessarily mean being engaged and conversational. The following three categories make sense for thinking about “how conversational” a customer is:
- Quiet - An active, satisfied, and possibly loyal, but not outspoken customer (or user).
- Conversing - A customer or user who is engaging with you and with the community about your products.
- Promoting- A customer or user who is actively encouraging other people to become customers or users.
Quiet customers are like the active users in the old model. They use the software and pay the bills on time. Quiet customers are passive. But in a conversational economy, that’s not enough. It may be enough to keep the lights on, but you can’t hope to defend against your competition when all of your customers are quiet.
Conversing customers are engaged in conversation – with you and with the community (yours and theirs). Conversing customers are following you on Twitter, they are fans of your Facebook page, and they retweet, like, and favorite your messages. They interact with you – asking questions, submitting bugs and feature requests. The write blog posts, and are extroverted in sharing their relationship (with you) with their friends. In the standard “engagement model” (satisfied, loyal, and engaged), these customers are engaged. From the conversing customers you improve your understanding of your market, users, and competition. These customers are the foundation of your business.
Promoting customers are your dream team. They aren’t just interacting publicly with you, they are promoting your product. When you begin to focus on word of mouth marketing, or viral product management, you’ll start sending presents to these folks and inviting them to the company kegger.
Your Thoughts and More Thoughts
I’d love for you to share your thoughts here with me and everyone else!
I feel like this is more of a starting point than a comprehensive article. For example, I have some scribbles about how to move customers from the “active free” box to the “active for-a-fee” box (and from inactive to active, etc), and how to move people up the QCP ladder. Will cover that stuff in a future article.
So – chime in, and as my dad would say, please and thank you!