The SaaS Industry Needs a Customer Relationship Revolution!

November 11, 2013 Paul Philp

 

Customer Relationship

You will not have to worry about a dove in your bedroom, a tiger in your tank, or the giant in your toilet bowl.
The revolution will put you in the driver’s seat.

– Gil Scott-Heron, The Revolution Will Not Be Televised

In the late 1950s, as the construction of his first theme park neared completion, Walt Disney was asked what excited him most about Disneyland. His answer is profound and even more relevant for today.

 

The park is alive. It’s a living, breathing thing. It’s never finished. When you turn a picture over to Technicolor, you’re through.

– Be Our Guest, Disney Institute.

Disneyland is not a product to be first produced and then consumed. The relationship between Disneyland and customers is continuous, dynamic, and always growing. Customers engage with Disneyland because Disneyland engages, surprises, and delights them. Disneyland is not a product at all; it is a service.

What’s the difference? Products built for consumption are Hard Offerings and services built for engagement are Soft Offerings. Hard Offerings and Soft Offerings demand very different customer relationships. In the SaaS industry we transformed the delivery of technology from Hard Offerings to Soft Offerings over a decade ago. However, our customer relationships remain largely unchanged. It is time to finish the job.

Now is the time for the customer relationship revolution.

Hard Offerings vs. Soft Offerings

It is conventional wisdom to think of a business like Disneyland as delivering an experience. This isn’t quite accurate and slightly misleading. The value a Disneyland customer receives is entertainment, and entertainment is clearly experiential. However, what Disneyland sells is a service and they manage the delivery of that service extremely well. In a very real way, all of Disneyland is a service. Disneyland is the prototypical Soft Offering.

The switch from on-premise products to cloud-based services is transforming the technology industry from a Hard Offering model into the Soft Offering model. The customer relationship is very different between these two types of offerings. Hard Offerings have very transactional relationships and the business model is focused on monetizing products. Soft Offerings have long-term relationships and the business model is focused on monetizing those relationships.

Customer Relationship

Hard Offering

Soft Offering

Value

Established at Purchase

Established in Use

Offering

Goods and Services

Service

Customer Relationship

Liability

Asset

Intelligence

Demographic, General

Individual, Specific

Customer Management

Reactive

Proactive

Data

Internal Business, Customer Opinions

Customer Interactions and Outcomes

Touch Points

Static, Dumb

Dynamic, Smart

Revenue Model

One-time Transactions

Recurring

Alignment

Low

High

Service Level

Cookie Cutter

Personal

Sales Process

Funnel, Internal Goals

Journey, Customer Goals

Business Model

Monetize Products

Monetize Relationships

Managing Customer Relationships in the Soft Offering model

In the Hard Offering model, the management goal for the customer relationship is straightforward: produce the highest level of customer satisfaction at the lowest possible cost. You want them just happy enough to buy another product in the future. This goal drives the customer management strategy.

It is not as clear in the Soft Offering model. New customers will cost you money at first. The cost of acquiring a new customer is spent up front, but payments are received over time. The first management goal is to maximize the return on the customer acquisition cost, and this means managing customers as an asset. As with any asset, the goal is minimize upfront cost and maximize the long-term cash flow.

However, the value of a customer is not fixed: it can go up and it can go down, depending on their overall satisfaction level. Customer and vendor are aligned, and the second management goal is to proactively manage customer satisfaction in order to maximize the value of each customer. Finally, customers are dynamic and social. They change jobs, complain to friends and make recommendations to peers. This leads to additional cash flows and these add up. The final management goal is to leverage customer relationships to generate secondary revenue streams.

When it’s all put together, the Soft Offering customer relationship strategy has four aims:

  1. Get: Acquire customers at the lowest costs.
  2. Keep: Protect the investment in customer acquisition.
  3. Grow: Maximize the value of each customer.
  4. Spread: Generate secondary revenue streams.

The overall goal of the Soft Offering model is to Get, Keep, Grow and Spread customer relationships by ensuring that the customer is receiving the value they expect. This is very different from managing a customer through a funnel.

The Customer Cultivation Revolution

In the Soft Offering model, the winning approach is to cultivate customer relationships, not to manage them. It’s instructive to contrast the relevant dictionary definitions:

Cultivate: To foster growth.

Manage: To have control of.

Managing customers makes sense for Hard Offerings because:

  • Relationships are transactional;
  • Processes are vendor-defined and linear;
  • Value is established at the time of purchase;
  • Products are assets; and,
  • Customers are liabilities.

Optimizing the value of the product portfolio is the strategy in the Hard Offering model: sell a large number of a standardized widgets while spending as little as possible to ensure that the widget functions properly for the customer. This lends itself naturally to a cookie-cutter relationship where the customer can be attracted, qualified, closed and supported. If a customer isn’t ready to buy now it doesn’t make sense to spend too much time on the relationship. Managing customer relationships means quickly moving the right customers to the right stage using a repeatable process.

Managing customers through a funnel is a limited approach in Soft Offerings because:

  • Relationships are dynamic;
  • Processes are customer-defined and organic;
  • Value is established through use;
  • Products are liabilities; and,
  • Customers are assets.

Optimizing the value of the customer portfolio is the correct (or most effective) strategy in the Soft Offering model: acquiring the customer at the lowest possible cost and expanding their value over time. This requires dynamic processes tuned to meet the needs, desires, goals and challenges of the individual customer. Forcing these customers through a linear funnel management process creates friction and increases the risk of churn. Engaging, coaching and leading customers are the ways to keep and expand the relationship over time.

SaaS is a Soft Offering

Since the start, most technology firms followed the Hard Offering model. Suddenly, with the swift growth of the cloud, the technology industry is rapidly transitioning to a Soft Offering model. This is a large-scale, disruptive transformation that continues to accelerate. It is challenging for many established firms and experienced executives. As a result, many of today’s SaaS companies are following a hybrid approach, grafting elements of the Soft Offering model onto a fundamentally Hard Offering model.

The delivery model is pure SaaS. The marketing messages are pure SaaS. However, customer relationships and product strategies frequently still follow the Hard Offering model. This results in higher churn rates and minimal customer growth over time while the cost of customer acquisition remains high. The SaaS industry is a long way from optimizing the value of its hard won customer relationships.

In order to foster high growth rates and sustainable profitability, the SaaS industry needs to revolutionize the customer relationship. It’s time for customer and funnel management to give way to customer cultivation and outcome management. Today’s innovative SaaS startup companies have customer cultivation in their founding DNA. Some of the most exciting innovations today involve new ways to cultivate, engage and expand the customer base. A startup that can demonstrate this type of innovation will receive multiple term sheets from the venture capital industry.

Just as Walt Disney recognized the power of seeing Disneyland as a living, breathing service providing customers with a valuable experience, the technology industry is just beginning to understand that the same power is available to them. It’s an exciting – and revolutionary time – for the industry. We founded Amity with the vision of building a revolutionary CRM platform to enable the customer cultivation revolution. We’re living it everyday and this blog will be our ‘Notes from the Front’.

You are in the driver seat and this revolution will definitely not be televised. I can’t wait to see what happens next.

 

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