The Three Phases of the SaaS Revenue Model (and How to Win at Each)

Ah, the digital age — computers, chrome and software all over the place. Indeed, software revolutionized the way we do business, but the SaaS revenue model revolutionized the software business. For customers, the benefits of the SaaS model were clear. It brought lower costs, lower commitment risk, and a try-before-you-buy model, which gave customers a remarkable opportunity to assess a product before making a purchase. Indeed, the benefit is so clear that a 2017 study conducted by BetterCloud found that 86% of organizations estimate that 80% of their business apps will be delivered through the SaaS model by 2022.

companies will be running on saas and the saas revenue model

For software businesses, on the other hand, the SaaS model presented an entirely new way to build, distribute, market, sell, and support a software product. It literally affected every single part of a software operation. But the most significant change that the SaaS model brought — the one at the root of all the other changes — was the SaaS revenue model.

The Three Phases of the SaaS Revenue Model

Before SaaS (let’s call that time the Age of Sales), the software revenue model was transactional and all that mattered was the initial sale of the software product. Big, fancy salesmen sold long-term deals for one, two, even five million dollars a pop. Done. Hands dusted, gong rung, contract signed — all the revenue that was going to come from that deal had been generated.

Enter the SaaS revenue model. It swapped the single point of revenue with three essential phases (and it couldn’t have come at a better time):

Initial sale → Retention → Expansion

SaaS Revenue Model Phase 1: The Initial Sale

It still exists! And it’s still an essential part of the SaaS revenue model. “Closing” an initial sales includes everything from a simple self-serve upgrade to an annual contract shepherded by an inside salesperson.

If you play this phase well and show strong initial sales growth, you’ll get somewhere with your SaaS business. You’ll probably be able to raise some money, maybe even have a mini-brand — excellent! But wait — don’t ring the gong just yet. These days, an initial sale brings in far less revenue than in the traditional SaaS revenue model.

It’s still extremely important — you need a flow of new customers — but you also need to move on to…

SaaS Revenue Model Phase 2: Retention Revenue

“You mean we have to keep them happy?!? ! Forever??”

– Early SaaS pioneer

Quite so, Mr. Early SaaS Pioneer. There’s a new (SaaS) revenue model in town.

Most early players, however, maintain the sales-first mentality even though they’re selling much smaller, month-to-month deals. They’re celebrating the initial sale disproportionately (and have been for years).

Not everyone, though. Some SaaS companies quickly realized the importance of retention. Indeed, they saw that an initial sale didn’t matter much if a new account canceled three, six — even 12 months later. They realized they couldn’t possibly sustain growth if they churned the customers they brought in. These people know how to play the game of SaaS.

Today’s SaaS pros realize that retention is the biggest revenue opportunity in SaaS. An initial sale might get you $500 in the bank when you convert that deal. But retention, retention will bring in that amount times the number of months the account stays active. And why? Here’s some fast math on that point:

  • 1 month (initial sale): $500
  • x 12 months = $6k
  • x 24 months = $12k
  • x 36 months = $24k

Indeed, the revenue opportunity from retention is exponentially larger than the initial sale. Execute well in this second phase, my friend, and you will build a solid, sustainable SaaS business. Excellent!

But wait (there’s more) — if you want to build a great SaaS business, crush the competition, and have a shot at an IPO, you’ll have to master the third phase of the SaaS revenue model: Expansion.

SaaS Revenue Model Phase 3: Expansion Revenue

Often overlooked, always important — this is where the true secret to SaaS growth lies. Savvy SaaS teams quickly realized that they could drive revenue growth by expanding existing accounts. Upsells, cross-sells, and any any other sells that could generate additional revenue from existing customers became SaaS staples. And it worked, mainly because the opportunity for second-order revenue was huge.

Just look at what happens when a SaaS company masters this phase:

impact of upsell on growth performance in the saas revenue model

And why? Expansion revenue is the root of the most magical of all SaaS metrics — Net Negative Churn.

What’s Net Negative Churn?

It’s simplicity itself! Here, take a look:

 Churned Revenue – Expansion Revenue = Net Churn

Stay with us here. Churn is generally expressed as a positive number, so if expansion revenue exceeds it, then Net Churn is negative — that’s good. You don’t want churn, you want Net Negative Churn.

That way even if you never close another deal (who are we kidding, you’re a SaaS pro!), your business will continue to grow. Like magic.

Ready to master the three phases of SaaS Revenue? Get a demo of Sherlock.

Want SaaS Success? Make Organizational Shifts

You understand the realities of the three phases of SaaS revenue. Excellent! But that’s only half the battle. The other half is executing against it. You’ll need to shift the way you look at adoption, customer service, sales, and even marketing. Thanks to the SaaS model, the operations of software businesses are changing.

A Focus Shift for Your Sales Department

You’ve got a sales team. They might even be really good at what they do, but they’re going to require a makeover as SaaS companies tune-up their revenue model. In the old days, your sales team was singularly focused on identifying new prospects, pitching your solution to them, and closing the sale. While those goals still exist in a SaaS sales department, the department must shift its focus toward a more supportive role, especially in companies that offer a try-before-you-buy experience.

The Emergence of Customer Success

Once the early SaaS pioneers realized the importance of retention, they understood that the traditional post-sale approach wasn’t good enough. Building a strong retention revenue game is no longer about a reactive customer support approach, but more about building a proactive Customer Success operation.

A Customer Success operation that makes sure a SaaS product is properly adopted and integrated; one that drives education and oversees reactive support; A Customer Success operation to ultimately improve retention rates. Customer Success teams are no longer just passive caretakers of your client, but active drivers of revenue.

Enter the Chief Revenue Officer

Nowadays, SaaS pros (that’s you!) have come to understand the need for continuity across the three phases of the revenue model (that’s you, right?). If so, you need to replace the wall between your sales and customer success teams with a bridge. Siloing revenue responsibilities can lead to misaligned compensation systems, infighting, and an unhealthy revenue base.

What good is selling a new deal if you know it’s not a good long-term fit for the business? How do you coordinate your on-boarding efforts? How do you plan your expansion efforts?

These are the questions you need to ask if you want to win the game of SaaS. (You do, right?) Sophisticated SaaS leaders have realized this and are starting to organize Sales and CS under a single management point, a new role — the Chief Revenue Officer (CRO).

The CRO connects the full revenue lifecycle. She’s fully responsible for designing strategies and driving revenue growth across the three phases of SaaS revenue. Having one person responsible for that means no more throwing customers over the fence and forgetting about it, no more signing bad deals, no more churn (well, lower churn).

Product Engagement: The Key to Mastering the Three Phases of SaaS Revenue

The SaaS revenue model is absolutely dependent on product engagement. Product engagement tells us so much about our customers: who uses our solution? How do they use it? Where are they integrating? Where are they not integrating? You need to know the value you’re giving individual customers. You need to know how engaged they are — in every phase.

With this data on hand, SaaS companies can better prioritize where their marketing, sales and customer success teams spend their time and effort, maximizing their ability to create longstanding relationships with uniquely qualified customers and prospects.

Let’s examine the role product engagement plays in each revenue phase:

Product Engagement in the Initial Sales Phase

It’s a try-before-you-buy world. You offer a free-trial or a freemium option of your product, thinking it’ll give a customer the ability to use your product without ever talking to a salesperson. You’re right, but this also means that SaaS salespeople are almost always selling to accounts and users who have actually used the product.

Don’t waste that trial time by letting potential customers play around on their own. By measuring product engagement in this phase, tracking whether or not they are “activated”, and learning about which users on an account are getting the most value, you can ensure you’ll close the deal and go after the right leads.

For example, if you have 100 prospects in your system, a small sales team might be able to reliably focus on building relationships with 20 of them. Using engagement data to determine which of those 20 prospects that they should focus on not only helps to improve their success rates, but it sets the stage for improving retention and expansion revenue down the line.
Product engagement is an essential component in the initial sales phase. In fact, the Product Qualified Lead (PQL) has become a key part of the sales process for many SaaS businesses. Measuring and qualifying potential sales based on how they are engaging with the product during a trial is more effective than any other form of qualification and helps to drive more efficiency in a sales process.

Product Engagement in the Retention Phase

This is where product engagement shines naturally. Every SaaS business has a small percentage of accounts that continue to pay even though they aren’t using the product. Sounds great? Not so much. It’s impossible to build a strong SaaS business on these customers. If they’re not engaged, they’re going to churn.

As a future SaaS superstar, you need to keep a sharp eye on overall engagement levels for your paid accounts while your customer success team needs to know:

  • The on-boarding progress of newly converted accounts;
  • The engagement and adoption rates of all key accounts;
  • Exactly which features are being adopted by each account and user;
  • Which paid accounts are showing drops in engagement;
  • Which users are showing drops in engagement

All of this data needs to be at the fingertips of your CS team if you are going to execute well during this retention phase. There can be no fishing, no guessing — no question.

Product Engagement in the Expansion Phase

This one’s elementary — unengaged accounts don’t expand. It doesn’t matter how many employees an account has, how many departments, how many different offices — if they aren’t using the product, then they aren’t going to expand.

Product engagement is a leading indicator of expansion revenue opportunities. Just as product engagement serves as an essential qualifier for new trial signups (i.e. PQLs), it also determines whether or not an account is prime for expansion.

Measuring product engagement levels of existing account users is a great way to identify expansion opportunities. User not using the product effectively? Don’t waste your time trying to convince them to expand. User loving your star feature? Give them a call and upsell.

In short, strong execution in the expansion phase is dependent on smart visibility to the engagement of your existing paid accounts.

Build a Winning SaaS Revenue Operation

In order to build a great SaaS revenue operation, there are three truths teams must accept:

  • SaaS revenue goes well beyond an initial sale. There are three essential phases of revenue and a SaaS business must execute well in all three phases in order to become great;
  • Building a management structure that provides continuity and strategic consistency across these three phases of revenue will ensure the best shot at success;
  • Product engagement is the key to winning the game of SaaS. Great SaaS operations understand this and find a way to bring this data to their team in the most actionable way possible. Great SaaS revenue models seamlessly integrate product engagement insights into every part of their customer facing operations.

Do you want to build a winning SaaS revenue operation and become a great SaaS organization? Try Sherlock today.

Drive (or Start) Your Product Qualified Lead Process

Got a free trial? What about a freemium model? You need a way to assess leads based on their engagement with your product.

Enter the product qualified lead, i.e. a lead that is qualified by actually engaging with your product and finding it of utmost use. By incorporating product engagement data into your sales process, you help your sales team become better informed about their incoming leads. Excellent! But you also help them become more efficient overall. Quite remarkable for just one little tweak!

While demand for this data in the sales process continues to grow, execution is still hampered by:

  • The challenge of getting product engagement data in a format that can be easily used and understood by a sales team
  • The difficulty of getting it in a place sales can easily take advantage of it

So what are PQLs anyway?

While the point of this post is more tactical, I will give a quick overview of PQLs – as a concept – here. I will also link to some good articles at the bottom of this post that will allow you to dig in more. 

At a high-level, here is a quick definition of PQLs are:

PQL = Product Qualified Lead

For SaaS businesses with a “try before you buy” (ie – a free trial or freemium) model, a Product Qualified Lead is a user (or account) that is “qualified” based on how they are engaging with the product. And by “qualified”, we mean how likely they are to convert into a paying customer. The logic goes – if an account is highly engaged during a trial period, it is more likely to buy than an account that isn’t. 

The accounts that are highly engaged during a trial period would be considered “Product Qualified Leads”. 

MQLs, SQLs, and PQLs…oh my!

Of course, qualifying leads for a sales team is not a new phenomenon. In fact, qualifying leads, as a practice, has been around for as long as there have been sales teams. The practice of qualifying leads is an essential part of any sales/marketing process because it allows salespeople to prioritize their time and focus on the leads that are most likely to convert. And this ability to focus on the right leads results in higher conversion rates (and a more cost efficient sales process). 

Want to learn how Sherlock can help optimize your trial conversion? Click here.


Traditionally, there have been two main types of qualified leads – the MQL (Marketing Qualified Lead) and the SQL (Sales Qualified Lead).

Marketing Qualified Leads are leads that have shown an initial interest in your company, brand, content, or product – enough to “opt-in” to some marketing initiative. MQLs are usually created when someone signs up for your newsletter or downloads a whitepaper or drops a card at your tradeshow booth AND they meet some kind of demographic criteria like industry, company size, title, etc. These are leads that have expressed initial interest and have some relative fit with your target market. These leads deserve attention but are not quite ready for a personal touch from a salesperson. 

SQLs, on the other hand, are leads that have moved further up the interest curve and have taken actions that justify attention from a salesperson. Typically, a lead would move beyond an MQL to a SQL by visiting your site several times, perusing your pricing page, downloading subsequent whitepapers, or requesting a demo. Lead scoring models were developed to help quantify these activities and ease the SQL process. Once a lead scored above a 50, for example, he/she would become an SQL and trigger action from a salesperson.

For a long time, this was enough when it came lead qualification. But not anymore. Modern “try before you buy” SaaS models (which are most SaaS models these days) dictate that product engagement become a qualification vector (maybe THE qualification vector) for any potential customer. Thus the PQL was born as a natural extension of this qualification process.

Makes sense, right? No brainer. The vast majority of modern SaaS businesses should be using some kind of product qualification in their sales process. But the question is – what do you need to make this process work?

5 Things You Need for a Proper PQL Process

There are five basic requirements for building a proper PQL process. They are:

1. Ability to track and score product engagement 

Obviously, tracking engagement in your product is step one. You can’t qualify an account based on product usage if you aren’t tracking product usage. But this is just a starting point. You should also be able to score and rank your users based on how frequently they are using the most important parts of your product (learn how to do that here). Giving your product engagement data this context will allow your sales team to receive this data in a format they can actually use. Don’t dump a truckload of event data on your sales team and expect them to make sense of it. Won’t happen. 

2. Track and score product engagement at the account-level

This is super obvious – so much so that it’s very easily overlooked. As a SaaS business, you don’t sell software to individual users – you sell to teams, to organizations…to accounts. This means only tracking product engagement at the user level is not helpful. You need to be able to aggregate this engagement data at the account level. Without this ability, your PQL process will become more frustrating than helpful and your sales team will likely abandon it. 

3. Ability to identify the most engaged users on each account

When working a sale, salespeople are always looking for the right “entry points” into an account. They look for people who are going to become their internal champions – a user who will help sell the product internally. Therefore, having insights into the engagement of each user on an account is essential for driving a sales process. The users most engaged with the product will become the “case studies” to be used when trying to sell to other decision makers. This is key, key data for your sales team.

4. Ability to track Activation Rates

The goal of any trial process is to drive users and accounts toward “Activation.” Every product has a different definition of Activation, but it’s generally the three, four, five specific actions that allow a new account to experience “first value.” A good PQL process will include insights into the Activation progress for every trial account. Which accounts are fully Activated? Which ones are almost there? Which ones are way off? These are all essential questions your sales team are asking and which that should be easily answered in your PQL process. 

5. Easy access to all this essential data

Having this product engagement data is one thing. Getting it in the hands of your sales team is another. If your sales team doesn’t have immediate access, they aren’t going to use it. That is why you need to have all this data packaged up in a way that it can be easily understood and easily shared with the tools your sales team is using on a regular basis. 

Conveniently (🙂), Sherlock does all of these things. See below for how to use Sherlock to drive your PQL process.

How to use Sherlock to Drive you PQL process

Sherlock was built to help you truly understand the engagement level of your users and accounts – from first signup to conversion and beyond. As mentioned above, it does everything you need for shaping your PQL process. With Sherlock, you can:

  1. Create an engagement model which allows you to score and rank all users and accounts based on actual engagement with your product; 
  2. Easily access insights into the engagement level of all users on each trial account;
  3. Define “Activation” for your trial users and accounts and track their progress toward “first value”;
  4. Connect these engagement scores and activation rates with Salesforce, Intercom, Slack, and others to give your sales team easy access to the data;

For those looking for a step-by-step guide for setting up this process in Sherlock, here it is (also here):

Step 1: Connect your product data with Sherlock

If you are using Segment.com for your product data, you can simply flip a switch and have your product data sent to Sherlock immediately. Alternatively, you can start implementing your data with Sherlock with our custom tracking script (coming soon). 

Step 2: Set up your first scoring profile 

This is part of the basic set-up for Sherlock. This is where you will score the engagement of your product events and create your first Sherlock scoring model. Once you do this, all your users and accounts will magically be scored based on how they are engaging with your product.

Step 3: Define Activation criteria for trial accounts

By defining what it means for an account to be “Activated”, you can start tracking the Activation rate of all your trial accounts. Activation rates will be displayed as a percentage (between 1-100%) based on what percentage of the activation criteria a user/account has met at any given time. 

Step 4: Connect Sherlock with your other tools

By connecting Sherlock with other tools (either directly or via Segment), you can get this essential data to your sales team where they can take action. You will send Engagement scores and Activation rates for all your accounts and users to these other tools. Your users and accounts will also be tagged with any Sherlock segments into which they fall. 

No Reason to Wait

At this point, you should have everything you need to build your dream PQL process. You’ll have all the essential data points on account and user engagement, activation, and adoption. And you will have a way to give your sales team easy access to this data. 

The next step will be building the internal process around this data. Obviously this will vary based on your existing team and process, but one thing is sure – you can’t wait any longer on this. If, at this point, you don’t have a PQL process in place – or you have a very poor one – you are behind. All modern SaaS operations are moving in this direction and we predict this will become standard in just a year or two. Not only will this type of process make the lives of your salespeople much more manageable, but it will also make them more efficient – which should translate to better conversion rates and, ultimately, and improved CAC.


Related Posts:

The Three Eras of the Software Industry

We find ourselves in what we consider the third epoch of the software industry — The Era of Engagement. It’s more than just a grandiose label, it’s why Sherlock exists, and why you need to focus on your product engagement if you want to grow revenue.

The Three Eras of Commercial Software

Generally speaking, we can say that there have been three major “Eras” of the commercial software business. For the purposes of this discussion, we will be talking exclusively about B2B software. We call them:

  • The Era of Sales (1990s)
  • The Era of Marketing (2000s)
  • The Era of Engagement (Now)

We named each era based on what mattered most to a software business during each period. Let’s dig in.

The Era of Sales (1990s)

We refer to this first period in the commercial software world as the Era of Sales because new sales were really all that mattered.

This was an on-prem world. The web was really just getting started. There was no “Cloud”, no way to sell your software online. During this period, any company that wanted to use a piece of software had to install that software on and serve it from their own servers.

During the Era of Sales, software was only sold to big companies. All software was enterprise software. It was sold in multi-year, multi-million dollar contracts by big, fancy salespeople with shiny shoes, $2,000 suits, and huge expense accounts.

Each deal was worth huge amounts of money, so you’re CAC could be as high as you needed.

The contracts lasted years and there was no easy way for negative word of mouth to spread — no forums, no G2 Crowd, no social media. Companies didn’t care how successful customers were with the product after the deal was closed.

There were very few (if any) options in any given software category, so switching costs were not really a factor.

All that really mattered was that a customer signed the contract and sent their check. Period.

During this epoch, a bad product with a great sales team could be very successful. If you were a software salesperson, these were your glory days.

The Era of Sales.

The Era of Marketing (2000s)

Enter the internet. It redefined what it meant to exist on this planet. The software industry did not go untouched.

For the software industry, the web greatly reduced the cost of distributing and implementing software. For the first time, software didn’t need to be sold by big, expensive salespeople or require months-long implementations on local servers. A buyer could find a product she liked, enter a credit card number, and start using it. Revolutionary, my friend.

The emergence of the Cloud and open source software also made it cheaper to actually build a software product. You could now build and distribute a software product with comparatively little (relative to the Era of Sales) investment in people or infrastructure. This resulted in more products in the market and a new business model that could support lower price points. A business model that would turn the industry on its head: the SaaS model.

Software-as-a-Service. The idea behind this model was to make purchasing software more analogous to a utility, like electricity. Use it, pay for it. Don’t use it, don’t pay for it. Gone were the days of the huge, multi-year contracts. With the SaaS model, buyers could subscribe to a software product on a monthly basis and decide to cancel a month later if they wanted.

Lower price points and no long-term commitments represented a complete 180-degree shift from software in the Era of Sales. This meant that each customer was not worth millions of dollars. In fact, far from it. More importantly, the revenue from this model was also far from guaranteed. So a company needed to be much more careful about how much they spent on acquiring each new customer.

In short, the SaaS model demanded more customers for less money.

Ultimately, this became the problem of the marketer. The key to the entire SaaS business model was efficiency in customer acquisition. It was an enormous challenge which ultimately led to the explosion of new marketing practices, strategies, tactics, and tools.

In this era, good marketing could cover up for a bad product — for a while, anyhow. At least for long enough to raise another VC round and keep you alive.

That’s the Era of Marketing. Things are getting complicated.

Want to survive in the Era of Engagement? Sherlock can help.

The Era of Engagement (Now)

Here we are. This third epoch of the software industry is not necessarily the result of any major, transformative shifts like the web was to the Era of Marketing. Rather, it is a continuation and amplification of the trends established in the last era.

For example, open-source software has continued to improve and expand, as has Cloud infrastructure. Cloud delivery has become progressively cheaper, making it feasible for many people to launch new software products. Predictably, this has led to an explosion of new products (check out Product Hunt for a daily — yes, daily —list of new products hitting the market) and a virtually endless list of options for any software category.

This graphic famously shows the logos for products in the Martech space as of April 2018. Yes, just Martech:

marketing technology landscape 2018

The Martech 5000

There have been some other developments that are driving this age as well. For example:

  • The rise of social media and review sites such as G2 Crowd. These platforms have made it much easier for word-of-mouth feedback about a product to spread, whether positively or negatively.
  • More aggressive acquisition strategies. Companies have become more aggressive about their acquisition strategies, introducing not only free trial models but also free versions of their product (freemium models). In fact, it’s very hard to find a product today that doesn’t have some kind of free trial option. For those who lived through the Age of Sales, the idea of a business being able to use a piece of software for free is mind-blowing.
  • Easier access to data. Database integrations along brilliant services like Segment and Tray.io have made true data portability a reality for any company.

Endless competition, virtually non-existent switching costs, try-before-you-buy business models, oh my!

This is the reality of the modern software business. The truth is that building a product and getting people to try your product are now easier than ever, but actually getting people to actually pay for and stay loyal to your product has suddenly become harder than ever.

This is why product engagement is what matters most for today’s software businesses.

Late in the Era of Marketing, with the emergence and success of the SaaS model, people started to pay attention to product engagement. The idea that customer could (and would) stop paying for a product if she wasn’t using it became a concern. Product engagement was starting to become a concern in regards to how it impacted churn.

But in today’s age, product engagement is much more fundamentally important. Today, it is the main growth driver of a SaaS business. Without product engagement:

  • Trial (or free users) will never convert to paid
  • There will be no expansion across an organization
  • There is no word-of-mouth or salable sales
  • There is no retention

Not to mention the fact that, without product engagement, it is very difficult to raise funds. The days when you could raise your way out of bad product engagement are pretty much over.

Welcome to the Era of Engagement.

Survival and Success in the Era of Engagement

OK, so we’ve arrived in a new age of the software industry, one dependent on high levels of product engagement. So what can a new SaaS business do to thrive in these treacherous times?

Just like with any evolution, survival requires adaptation. It requires a recalibration on how you think about some of the major parts of your business. For new products and new companies, it takes an acknowledgment of what’s important in the current times and a plan to execute accordingly.

The move into the Era of Engagement requires a rethinking of:

  • The makeup of a modern SaaS organization
  • The tools needed to run the business
  • The KPIs that define the health of the business

A little more color…

The Modern SaaS Organization

Both the makeup and epicenter of software organizations have evolved quite a bit throughout the three ages of the industry.

In the Era of Sales, the most important department for a software business was—you guessed it—the Sales department. Sales teams ruled the roost. Top salespeople were worth their weight in gold (and paid about that). It wasn’t crazy to see more salespeople than engineers at a software company during this period. As the sales team went, so did the business.

Then, during the Era of Marketing, the focus shifted to the Marketing team. The best companies were the ones that figured out how to bring in the most leads at the lowest costs. These companies could better compete on price and/or earn better margins. During this time, marketers ran the show.

Now, during the Era of Engagement, the organizational focus has shifted again, but in a slightly problematic way. Product engagement has become essential for growth and success in this age, but there is no single department that owns product engagement. In fact, you could argue that everyone is, in some way, responsible for driving engagement in a SaaS business. But without getting too philosophical, there are definitely two departments that have emerged as the focus of operations in this age: Product and Customer Success.

These two teams have become the most important teams in a SaaS organization because they have the most impact on driving continuous product engagement. These teams are charged with identifying, building, and ensuring the adoption of the most engaging set of features possible. Together, these two teams are key to sustainable success in this Era of Engagement.

Tools

With each age of the software industry came a category of tools that were built to support the most important business processes of that age.

In the Era of Sales, the CRM emerged as the most important tool for any software business. Helping a sales team effectively manage deal flow was essential, as losing track of a single deal was very costly. As a result, the CRM became an absolutely essential tool for any operation.

The need for marketing efficiency in the Era of Marketing led to the emergence of marketing automation tools. Remember, during this age, price points started to drop in a big way. In order to build a sustainable business, it was imperative to drive down the cost of acquisition. This is where marketing automation tools came into play, quickly becoming a must-have for any software operation.

Now, the Era of Engagement demands a new category of tools—ones that help a company understand and drive product engagement throughout an entire customer journey. For lack of a better term, we’ll call these product engagement solutions. These are tools that help you track and understand your users, trigger in-app and email messaging, gather user feedback, deliver educational resources, manage support requests, and so on. This category of tools is young, but growing very quickly, and saavy SaaS companies are beginning to fully appreciate the importance of building a solid product engagement stack. In many ways, a full suite of product engagement tools are the first (and most important) tools most modern software companies will purchase.

New KPIs

Just like with key departments and tools, each age of the software business evolution has also demanded its own set of key metrics, or KPIs.

In the Era of Sales, the metric that drove a software business was bookings. At the end of each quarter, all that mattered was how many contracts were closed and for how much committed revenue and how much revenue was booked during the period.

In the Era of MarketingCAC (Customer Acquisition Costs) emerged as a key metric. The focus was on how much you spent on marketing and sales to acquire a paying customer. This number simply had to be driven down by more and more efficient marketing. Companies that didn’t manage CAC during an age of lower selling prices simply didn’t make it very far.

Now, in the Era of Engagement, product engagement is the core KPI for any and all SaaS businesses. Product engagement is a leading indicator of paid conversions, retention, and general growth, and it needs to be measured and managed. It’s still early in this age, so not all companies have adopted product engagement as a KPI, but they should—and they will.

In Conclusion

In the grand scheme of things, the software industry is an incredibly young industry. But despite its youth, it has already undergone tremendous change. Distilling these changes down to three major “ages” may be too broad of an approach, but at a high-level, it’s pretty accurate.

Evolution is often scary, and it comes with a great deal of ambiguity. The old rules no longer work and the new rules have yet to be written. They bring far more questions than answers and require new thinking and new approaches. Naturally, this creates risk and with risk comes anxiety.

But at the same time, evolution presents opportunity for those who are nimble enough to adapt, and for those who can start fresh without the limitations of the old ways; opportunities for those who can recognize the needs of the new market trends and build appropriate solutions.

And here we are. The shift toward product engagement is real. The most successful SaaS companies of this age have made product engagement their top priority. They have proved that, when done right, product engagement can go beyond churn prevention and can actually serve as the main growth driver of a SaaS business.