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.

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:

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 savvy 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 Marketing, CAC (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.

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