It’s Not a Software Story - It’s a Business Story

We all recognize that over the last 15 years, SaaS has become the dominant model for distributing and consuming software. Who wants to own software, and deal with the headaches of buying the hardware, installing the software, backing it up, dealing with upgrades, and getting calls in the middle of the night when it breaks? Once you try Salesforce.com, there is no going back to Siebel.

But while most people think of SaaS as strictly a technology vehicle, it’s given rise to a far more fundamental change, and that’s the birth of a new business model — subscriptions. This business model isn’t limited to SaaS — it’s actually in every part of your life. To see how this happening, indulge me in a little history lesson.

For basically the entire 20th century, we lived in a product economy. Companies designed, built, sold, and shipped physical things under an “asset transfer” model. Business was about inventory, shelving, and cost plus pricing. The relationship between seller and buyer was based on discrete, often anonymous transactions. The sign by the cash register summed it up: “All Sales Final.” Early retail pioneers like Sears Roebuck and Macy’s had minimal insight into who was actually buying their products, or how they were using them.

When Henry Ford’s first moving assembly line went into operation in 1913, it was really just an extension of manufacturing principles first put in place during the Industrial Revolution of the 1800s. The assembly line wasn’t just about maximizing efficiency through discrete repetitive tasks, it was a metaphor for how a company’s product can dictate its supply chains, manufacturing processes, distribution channels, and management layer.

The product was the only governing principle — it organized everything across a perfectly straight line. The actual people involved in making, buying, and selling the product were entirely disposable. Henry Ford’s customers could famously pick any Model T color they wanted, as long as it was black.

The result of all this relentless efficiency was that Henry Ford’s cost per unit dropped precipitously, allowing him to flood the market with cheap but durably made cars. Model Ts only came in black because with one automobile coming off the line every three minutes, that was the only color that would dry fast enough.

Then once they established market share, the thinking went, companies could start to gently raise their prices, and make money off the difference, or the margin. The margin ruled everything (and a little planned obsolescence never hurt).It’s difficult to overstate the power that big post-war American corporations had. They organized themselves around strictly delineated product divisions, and didn’t have to answer to anyone. There were no call centers, no customer service reps,and in many cases, no returns, period. This model didn’t work particularly well when it came to customers like you or myself,but it shipped units and kept board rooms happy.

The emergence of Oracle ERP systems in the eighties only exacerbated this problem. These systems did a good job of measuring operational efficiency: raw materials, inventory, purchase orders, shipping, payroll. They did a lousy job of measuring actual customer experience. But companies tend to manage what they can measure, and so executive teams became hopelessly product-focused, both organizationally and strategically.

This decade also saw the ascendance of supply chain economics. The goal was to match supply and demand with the least inventory possible. It was nirvana for engineers and management consultants, who were threatened by the new electronic products and efficiencies coming out of Japan.

“Just In Time Inventory” meant that warehouses full of stuff just sitting around were the ultimate enemy. “Total Quality Initiative” meant that the work of improving processes was never over. Michael Dell built an empire based around this discipline.

Then around twenty years ago, corporate America woke up to the realization that all this relentless focus on productivity was coming at a cost, namely the relationship between the vendor and the customer. The customer was a complete unknown, a receptacle at the end of a distribution chain whose sole purpose was to “consume” the products companies made.

But as it turned out, many of these new consumers were having difficulty getting their new products to work. And how did corporate America discover this? Their receptionists were getting angry phone calls. So what did the big companies do to address this problem? They set up customer service departments!

When in doubt, build another vertical silo — they launched market services, technical support lines, warranty contracts, and maintenance groups. The customer had truly arrived — she had her own department now. And that department was located way down at the far end of the supply chain, just past the loading dock.

The nascent software industry was no exception to this mindset. As we approached the turn of the century, companies like Oracle, Siebel, and others were creating a needlessly complicated product that was sold by a mercenary sales force and promoted by a parasitic systems integration industry. Everyone made money — that is, everyone except the customer!

Half the installations would never see the light of day, and even those that were deemed a “success” were hated by the end users. The industry had completely lost sight of their customers: who they were, what they did on a daily basis, what they liked about their work systems, and what pissed them off. It was time for a change.

At the same time, many of us looked on in wonder at this new experience being introduced by the Internet. This is what we wanted, to build a new kind of user experience, where using software would be as easy as buying a book on Amazon.

But as we started building business plans on the Internet, we realized this required us to change our way of thinking. We had to reevaluate the whole purpose of a software company, changing the fundamental question from “How many products can I sell?” to “What does my customer want, and how can I deliver that as an intuitive service?” It wasn’t just about just shifting units anymore. It was about growing and monetizing a dedicated customer base.

What about the SaaS model forced us to think of customers? Sure, technology drove us to offer what we did over the Internet. But that required us to think of what we did as a service, something that people subscribed to, and that forced us to put ourselves in a position where we were always pleasing the customer. All of a sudden, we cared less about what product features sounded cool; we focused on what customers were using, what they needed.

Over the past decade, the Internet, spread by mobile technologies, has forced more and more businesses to start thinking the same way, to take a “customer first” mindset. Amazon, Netflix, Zipcar, all reinvented what they did as a service. They tracked customer preferences, tailored their offering to individual needs, and always took the long-term view of creating lifetime customer value. The focus shifted from the transaction, to the customer.

So instead of selling static products that evaporated after check-out (along with their customers), or “set it and forget it” on-premise installations, they could offer ongoing services that resulted in smart, responsive relationships. Running on a subscription model, they could offer lower up-front costs, continuously improve their offering, and learn way more about their customers through usage and behavior analytics.

Today everything is moving to a Subscription Economy: media, transportation, agriculture, health care, consumer goods, education. Consumers want customized experiences. And they want continuous improvement, not planned obsolescence.

One simple but effective way of looking at this is that companies have started to sell outcomes, using their product as a means to an end. Uber and Lyft sell you the ride, not the car. Caterpillar used to sell movers to construction companies. Now they ask them how much dirt they need moved. Health trackers are throwing in their actual product for free, in return for a 12-month subscription to their analytics platform. Teslas update themselves with the latest technologies and become smarter over time, so you don’t need to buy another car.

To sum up — this isn’t a software story anymore, it’s a business story.