fact, the farther away we are from the beginning of this transition, the clearer the bifurcation between the way things were done BC (before cloud) and AC (after cloud). The change has altered almost every aspect of the way a software company works but is best understood through the lens of the customer. In particular, B2B software customers AC differ from BC customers in two very important ways:
1. How they purchase software
2. How their lifetime value (LTV) is realized
These two themes are closely related. In fact, number 1 is the reason for number 2. To be truly precise, the major difference in the purchasing process is not really how customers purchase a software product but that they purchase a software product. In the days BC, unlike today, the purchase transaction actually did result in a change of ownership. This model, commonly referred to as a perpetual license, passed ownership rights to use the software from the vendor to the customer at the time of the transaction. Because of the singular nature of this transaction, the vendor needed to maximize the monetary value of it in order for its business model to work. The result was that the cost of the initial software purchase was relatively very high, not to mention the associated hardware costs. For a software company, especially enterprise B2B, this was the only path to profitability (yes, there was a time when that mattered).
A consumer scenario, which might bring back memories for some of you, helps to illustrate how dramatic this change has been. When I was 16 years old, I fell in love with a song I heard on the radio, “Bohemian Rhapsody” by Queen. It was amazing and complex and needed to be listened to over and over (although my mother might disagree with that last point). The only way to accomplish that goal in those days was to purchase the album (“A Night at the Opera,” for those who care). So that's what I did. I went to my nearest music store and plunked down $16.99 for the 8-track (if you don't know, look it up), a lot of money for a 16-year-old kid at that time. Basically, I paid $17 for one song. To play and listen to that song, I also had to have a pretty expensive stereo system. You know, the ones with the three-foot-tall speakers that doubled as bar stools. And that's the way it was – $1,000 stereo system and $17 for the album to listen to one song. This was basically the consumer music ownership experience for the better part of 50 years. The first major change, other than format and not counting Napster, in how we consumed music came thanks to Apple – the ability to purchase just one song for 99 cents on iTunes. This was revolutionary (it literally started a revolution) for the music industry. In fact, it fundamentally changed it forever, but the analogy to the software world was only completed when streaming music services, such as Pandora and Spotify, came along. No longer are songs even purchased. They are leased, and, depending on how much music you listen to, the cost per song may be down to pennies or even less. I could have listened to “Bohemian Rhapsody” thousands of times through my computer (purchased primarily for other reasons) for only a few bucks. Thankfully, for all us parents, this change was accompanied by the invention of earbuds and small and inexpensive personal music players (PMP). What drove this change in how we purchase (or lease) music? Technology and the Internet. The very same drivers that changed the way companies purchase their CRM system. (See Table 1.1.)
Table 1.1 Consuming Music Before and After the Cloud
Music
Software – Siebel versus Salesforce
In those days BC, it was common for a software deal, such as the Siebel one approximated in Table 1.2, to be a multimillion-dollar transaction. It was also common for that initial deal to constitute more than 50 percent of all the money the vendor would collect from that customer over its lifetime. In the earliest days, before software maintenance fees, that percentage might even exceed 80 or 90 percent. Contrast that with the Salesforce example (AC), and you'll begin to understand point 2 – the realization of LTV from each customer over a much longer period.
Table 1.2 Consuming Software Before and After the Cloud
It's not hard to grasp what happened and why. Let's say I'm the CEO of a software company, and I sell you my solution for $3 million. I'm well aware at that point that all of the additional money I will collect from you over your lifetime as my customer is maybe another $500,000. Given that reality, your value to me diminishes dramatically the moment your $3 million is in my bank account. That's not to say that I, or any past or current CEOs, don't care about customers. Of course we do. As we all know, customers have value beyond what they pay us – references, case studies, word-of-mouth, and so on. But that additional value, even if you include the future monetary value that comes from the purchase of more products, licenses, and maintenance fees, does not change the fundamental viability of my business. I can still survive, even thrive, based exclusively on my ability to continue to sell new customers for that same price. I may care passionately about my customer's success, but if it doesn't matter to the bottom line whether they get value or even use my solution, then I'm highly unlikely to invest significantly in ensuring their success. It was this reality that led to the birth of the term shelfware. That was just a cheeky way to describe software that wasn't being used by the customer. That still happens today by the way. SaaS did not solve the adoption problem by any means. It just matters a lot more now than it did back then.
Although lots of B2B software is still purchased the old way, the tide has forever shifted. Today, the vast majority of software companies are using this new model in which the software is never actually purchased but leased. With this new model, SaaS, customers do not own your software; they pay for the use of it on a subscription basis with a time-limited commitment. Many software companies lease their software on a month-to-month basis while others require an annual contract or longer. But, in all cases, there's an end date to the subscription, which requires a renewal. This, then, is the subscription economy. No more paying a large, onetime fee up-front; instead, software is leased on a short-term commitment. Another related wave takes the subscription concept one step further into a pay-as-you-go model. Google AdWords and Amazon Web Services are examples of pay-as-you-go. In both models, customers have become significantly more important because their LTV really matters, not only what they pay in the initial transaction. Therein lies the need for a philosophy and an organization–customer success.
Simply put, customer success is the organization or philosophy designed to drive success for the customer. That sounds amazingly obvious, but, as we mentioned earlier, there was a time when the success of our customers was not really a business imperative. That's no longer true. You see, successful recurring revenue customers today do two very important things:
1. They remain your customers.
2. They buy more stuff from you.
It's a fundamental reality for CEOs today that, if their customers aren't taking both of those actions, their business has no chance of success. The economics just don't work. And that is why customer success has become an imperative. We'll circle back here after we take a brief look at the origins of the subscription economy, which really started with the development of SaaS. Understanding the history is important because all recurring revenue businesses are following in the footsteps of the earliest SaaS companies.
The Birth of Software as a Service
In the fall of 1995, John McCaskey walked into the Stanford Bookstore in Palo Alto, California, and bought several books, Foundations of World Wide Web Programming with HTML & CGI, HTML & CGI Unleashed, and O'Reilly's Programming Perl among them. At the time, McCaskey was a marketing director working for a company named Silicon Graphics (SGI). Despite his marketing title, McCaskey was an engineer at heart, and his new book collection had a purpose greater than simply a hobby. His intent was to reprogram an internal application, lightly used by the SGI marketing community, called MYOB (mine your own business). MYOB was a business intelligence (BI) tool, built on top of Business Objects. Its intent was to provide insights to the marketers regarding the sales of their products. As McCaskey's version started to take shape, it became known as MYOB Lite.
That very same year,