The Conversation Economy

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 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!

14 thoughts on “The Conversation Economy

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  3. Scott, I enjoyed part one and have some commentary about the post. As someone who’s lived the hosted and SaaS model, I’m glad to see SaaS as an alternative for this economy. As you mentioned, “as long as the product continues to be relevant, and continues to provide the best solutions for your problems, you’ll keep using it.” With that in mind, SaaS vendors have to be engaged for the long haul. I have experience that it take several years to see the revenue upside as compared to the number of customers you may acquire. Due to the pricing model difference between hosted and on-demand solutions, new customer acquisition may positively impact a company before stable recurring revenue shows up.

    The “long-term relationship” as you stated is critical, especially in SaaS. The breakdown often starts when traditional sales models immediately impact new customers by leaving them without a person who “manages the account” or the organization has an ineffective “customer support” team, process or mentality and not a real customer relationship. While SaaS may offload the infrastructure and applications hosting aspects and costs, it doesn’t eliminate the real implementation issues that impact customers. Customization, implementation and methods have to be in place to make it successful. Most SaaS organizations fail to initially use professional services and rely on sales engineers, customer support, product management and even development to “get the customer” enabled.

    This leads to your comment about inactivity and activity with customers. “You either forgot to think about your customers, or you thought about them as active or inactive.” In the SaaS world, they’re either active, engaged and receiving value or their history. The causal effect of replacing any customer always cost “X %” more than keeping one. Organizations contemplating a new SaaS-based offering or migrating to the model have to thoroughly analyze the current business systems and ask themselves if they can really afford to make the transition.

    1. @Jim (@Jim_Holland on Twitter) – thanks very much. I’m looking forward to finishing up the thoughts – already got some great ideas from you and others that will make what I was planning even better! I find it particularly interesting that the SaaS-focused folks have jumped on this article. I think it is critical for SaaS, but just as important for non-recurring, licensed software (which often has maintenance fees and updates, or new versions and upgrades) – which really has the same need for long term engagement. Maybe a year from now, this article will resonate with the license-centric folks too.

      When you mentioned “hosted and on-demand” – did you mean “on-premise?” I hope so, or I have some more jargon-absorption to do. :)

      You make a great point about traditional sales models encouraging your employees to “move on” to the next not-yet-a-customer, leaving the already-a-customer people at risk of neglect. You’ve also opened an interesting thread – it isn’t just about acquisition of customers, there’s a very real barrier to “first use” that gets between “sign up” and the QCP model. Maybe the comments will head in that direction – definitely an interesting topic – where do brand-new users live in the model? I’ll have to think about that some.

      Also – great to capture the notion of “replacing a customer” – good visceral embodiment of the “loss of a customer” which doesn’t seem to affect people (at least me) emotionally, as much. I’m going to steal that – thanks!

  4. Plenty of great points here! In my experience, the “Quiet, Conversing, Promoting” continuum is key for the successful SaaS to grok. In fact, I would perhaps add a little extra emphasis to the point on quiet customers.

    Yes, they are good users of the system and paying the bills on time. But, they are also generally the source of attrition, as they tend to get neglected by virtue of their limited level of engagement. As a result, you may not be engaged with them during critical times in their business cycle (perhaps during budgeting for the next year) or you might not be seen as solving a critical business problem anymore.

    Even for clients with constrained budgets, it’s important to stay on their radar, understand their needs, and position ways you can help them solve their problems within their budgetary constraints. Ensure they see the value of your solution every month.

    I’d argue that every SaaS should do a regular assessment of clients as to where they fall on the QCP scale. If you have a few too many in the “Quiet” column, it’s time to send some emails, make some calls, or do an onsite meeting or two. Not every client will be in the Promoting category, and many might just be scraping in to the Conversing group – but better there than the Quiet masses who suddenly terminate service.

    1. @david (@thedavidbase on Twitter) – thanks, and welcome to Tyner Blain – I appreciate the ‘long form’ comment, great to get larger slices of your contributions than 140 characters at a time.

      On the focus on Quiet customers in the QCP model – you seem to have honed in on the same idea as Jim about attrition. Those folks are definitely the ones at risk. You also raised the specter of past challenges for me with your comment about “not be seen solving a critical problem any more.” I was an employee for an enterprise software (and custom software development services) company for many years. We had clients that after using our products (and paying maintenance fees) for several years, who felt exactly that way. Actually, the “great big problem” we solved for them was solved so well that it lost visibility as a “great big problem” to be replaced by the cost of our solution as the “currently biggest problem.” Ah, memories.

      When you mention clients with constrained budgets – are you saying “QCP customers who might not increase the footprint, but will continue to be customers?” If so – I completely agree.

      Thinking about QCP “ratios” is an interesting one – I should scan in one of the pages from my idea notebook :) with a handy graph. This also ties in to some of the measurement ideas that Dan Olsen (@danolsen) addresses in his Product Management by Numbers: Using Metrics to Optimize Your Product slideshare presentation.

      Also – I think your ideas on actively engaging the Quiet customers is pretty important. On the drive home today, I was trying to visualize the argument for making an investment in “marketing” to your existing customers. Something along the ‘permission marketing’ lines, combined with ‘conversation marketing.’

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