The archetypal software developer grew up on video games - which represents the very best example of a world-class user experience - and yet ironically many SaaS companies are ignoring the lessons they learned first hand.
Andreas is Director of Pricing & Monetisation at Notion Capital, helping founders to drive growth through pricing and monetisation excellence.
Delivering recurring revenue, and Product-led success.
It was 2011 when Marc Andreessen published his prediction over “why software is eating the world”. That’s over a decade ago. A lot can change in a decade, but a lot can also stay the same. The ubiquity of cloud technology has driven rapid progress across technology, processes, business models, but that doesn’t mean the industry is mature. I would argue that technology businesses are still catching up to understand some important implications of the shift to the cloud. Most technology businesses have adapted less to the change in market properties than they’d like to admit.
Markets are complex systems, and the properties of the technology and software markets have changed significantly since the advent of cloud infrastructure:
The most fundamental shift, the one that matters the most, and that technology businesses have least adapted to, is that risk has shifted from customers to suppliers. Pre-cloud, if a customer bought an expensive piece of technology, it was their responsibility to get the most out of it. The supplier already earned the majority of the revenue that the relationship would drive, so their incentive was to move on to the next prospect, not ensure the current customer maximised the value of their purchase. This dynamic has completely changed in a world where a supplier must not only close an initial sale but must keep that customer over an extended period of time to grow the account and recover costs of acquisition.
The need to drive value for the customer post-sale explains the rise of customer success both as a philosophy and as a function. However, I don't believe this shift has fully permeated technology businesses, in particular product organisations. Those of you that subscribe to the Frank Slootman view of customer success functions will empathise with this, “If you have a customer success department, that gives everyone else an incentive to stop worrying about how well our customers are thriving with our products and services” - Amp It Up. He believes customer success functions are driving a wedge between product and customers through misaligned incentives, shifting responsibility to a department that cannot actually fix the issues customers raise. Instead, he advocates that customer success is the business of the entire company. You may disagree with his scepticism over the virtues of a customer success function, but it's hard to fault his argument that customer success should be the job of the business and not just one function.
Many product organisations lose sight of driving customer success and are instead stuck on ‘feature treadmills’ building ever-complex feature-rich products. Technical competence is necessary but not sufficient to build a great technology business, what will separate the great from the good is UX and design competence. This is the belief of YuLife, an innovative group life insurance proposition. YuLife’s CTO and co-founder Josh Hart tells me “technology businesses are too focused on function and don’t think enough about building emotionally engaging and rewarding experiences”. This is what he means by UX competence.
Product organisations must think more deeply about how users will consume the capabilities they build and reallocate resources accordingly. The implications for monetisation should also be obvious, if you don't build products your customers actually use, and use to their full extent you won't get paid. Your ability to monetize is commensurate with your ability to drive consumption of the capabilities you build. At YuLife they accomplish this by building emotionally engaging and rewarding experiences for their users, combined with up-sell opportunities. For example, by subscribing to additional services, a user can earn rewards, and further customise their in-app avatar. YuLife is a B2B2C proposition, but they believe they can and should build engagement loops for their business users just as they have for individual consumers.
Closing the consumption gap, and why it matters
Assuming your product organisation is working backward from customer outcomes, building features that will drive impact for them, your focus then becomes the adoption and effective use of the features you build. If the customer does not use it, they gain no benefit. In the seminal book ‘Complexity Avalanche’ the TSIA explains the threat of what they term the consumption gap to technology adoption, which they expand on further to the post-cloud world and impact on monetisation in ‘Consumption Economics’. The consumption gap is the gap between what your solution promises, and the features the customer actually uses and hence the value they receive in reality.
If we think about your solution on two axes i) solution capability which represents how feature rich and capable your solution is, and ii) the consumption gap which represents the extent to which those features are adopted and consumed, we can visualise how investing in these two dimensions impacts customer delight. The green curve represents different combinations of capability and consumption for the same level of customer delight. What should jump out at you is that as the consumption gap increases it becomes very expensive very quickly to delight customers. This will drive massive inefficiencies in your investments.
As you invest in your solution and add features and complexity, it’s natural that the consumption gap will grow all else being equal. Therefore, the more complex your solution becomes the more you should be investing in driving consumption of that complexity. You should of course still be doing what you can to simplify where possible and remove technical debt, but a fundamental shift to consumption is also required. YuLife is extremely disciplined about removing features that are not needed and re-using existing mechanisms in novel ways to protect against this technical debt.
Product managers should be asking with each investment in capability what investments they need to make to drive adoption and consumption of that new capability. If you’re often launching new features which are poorly adopted across your customer base, it’s a sign that you’re either building features customers don’t want or features they are not ready for or don’t know how to consume. The upside of this is that investments in reducing the consumption gap will drive better returns on capital employed vs. building more capability.
Usage-based pricing and the consumption gap
The increasing popularity of usage-based pricing will accelerate the shift in focus from capability to consumption. By leveraging usage-based pricing, suppliers are putting more skin in the game, where the revenue they generate is a direct function of consumption. The greater alignment in incentives between suppliers and customers will lead to better outcomes for customers over the long run and expose suppliers to greater potential revenue upside.
The other key advantage of usage-based pricing is that it can act as a timely signalling mechanism for macro and micro headwinds. The graph below compares a subscription model to a usage model in the case of a customer that is progressively receiving less and less value from a solution. The subscription provides no signalling utility, everything looks fine until the account drops off a cliff. In contrast, the usage-based model provides a strong painful signal that investigation and course correction is required. One can argue that usage can be tracked and action taken regardless of the revenue model. That’s true, but in my experience, the pain of a gradual drop in revenue is a more powerful motivator for galvanising action than usage metrics simply trending down over time in dashboards.
What the video game industry can teach SaaS about closing the consumption gap
We’ve established why driving engagement and consumption is of critical importance to monetisation and how usage-based pricing is accelerating that trend through the alignment of customer outcomes and supplier revenue. Let’s now explore how one might reduce the consumption gap through the product itself rather than relying solely on a customer success function.
An industry that is particularly adept at addressing the consumption gap, and is worth studying, is the video game industry. For those of you unfamiliar with the industry, it may not be a ‘serious’ product, but it most definitely is serious business. The video game industry will generate around $200bn in revenue globally in 2022, in comparison, the film industry will generate around $140bn. Josh Hart at YuLife is a passionate gamer and has leveraged mechanisms successfully from gaming to drive very strong engagement.
There are four important reasons why the video game industry provides a valuable case study for the SaaS industry:
SaaS solutions have points one and two in common with video games. Both industries need to delight users not just customers, they both have a lot of complexity, and users are increasingly impatient, demanding quick time-to-value.
Points three and four don’t apply to SaaS, but they are key reasons why the video game industry does a better job than most SaaS businesses. A triple AAA video game title will require $100m’s of investment over a number of years to develop, market and launch. The commercial success of the title will depend on the success of the launch, there is little opportunity to improve the product once it's on the market and still impact commercial outcomes. With $100m’s at stake on launch day, and one shot to deliver a great experience, it’s unsurprising that developers do everything they can to ensure players have the best experience possible. As video games do not have the luxury of customer success managers to lead players to success, everything has to be achieved through the product.
Master Chief will save us
Master Chief, the main protagonist in Microsoft’s Halo video game franchise, and now a TV series by Paramount has a lot to teach us. In each episode of his struggle, he faces enormous challenges he needs to overcome. Usually some variation of saving the universe. That’s a big challenge (use case), in addition to many smaller challenges which need overcoming along the way. Master Chief may be battle-hardened and ready for any challenge, but the player (user) may not be. They may be completely new to the series, new to video games, or new to the challenges that lie ahead. So there will be a learning curve for all, to different extents.
The challenges are formidable, but our super soldier is well equipped with various tools (features) to tackle any challenge (use case) that lies ahead. The problem for the developer is that they’ve built a complex product that will be difficult to master. So how can they help the player consume and master that complexity so that i) the experience is instantly engaging and ii) players can smoothly progress up the learning curve, overcome challenges and finish the game?
Over the years the industry has developed a number of tactics to ensure that the player has a great experience. I’ve categorised and named these below for our purposes.
Capability matching: Developers want all the players of their game to have a fantastic experience. Players want to be challenged, but not frustrated. Since skill sets vary across players it is very difficult to provide the right level of challenge with one version of the product. So instead they create different configurations of the same game to match the skill sets of different players. They provide the player with the opportunity to select how challenging they want the experience to be at the start of the game. Depending on their choice, a number of attributes of the game will be modified to adjust to their skill-set appropriately.
Progressive feature enablement: If the developers were to enable all features from the get-go, it would be overwhelming for the player. There would be too much to learn, too much to digest, and much of it would not be relevant early on. The player has paid for all the features and complexity the game has to offer, but the developers make a very deliberate and conscious choice not to provide all the capabilities when the player is not ready.
This is the first paradigm shift the SaaS industry needs to learn. Match the capabilities you enable to the user’s ability to learn and digest that new capability. In the case of Master Chief, the first capabilities the player learns are fundamental e.g. how to move and look around, how to fire a weapon and navigate a map. As the player masters the basics, the developer introduces more advanced capabilities over time, matching the rate at which these capabilities are introduced to the player’s ability to learn and master them.
Game developers have a significant advantage in leveraging this tactic as they control the experience and know what the future holds for the player. The Technology & Services Industry Association (TSIA) developed the concept of consumption roadmaps as a way for SaaS organisations to put structure around the experience and facilitate progressive feature enablement. Customer Success organisations could partner with their customers to develop consumption roadmaps for different user groups based on what they want to achieve and their sophistication. Features could then be enabled based on these consumption roadmaps.
Context-relevant feature enablement: The second tactic developers use is to introduce new capabilities at context-relevant times. The developer provides what is required at the right time, just as the player needs to overcome a specific challenge. Introducing new capabilities at the right time gives the player a strong incentive to understand and adopt them. As the player will need to use the capability in anger soon after it is introduced it reinforces the new skill and moves them swiftly up the learning curve.
Context relevant guidance: In the case of Master Chief he has an AI companion called Cortana implanted in his head that accompanies him throughout his adventures. One of the functions she accomplishes is to guide the player on what needs to happen next and provides context to the tasks he/she must perform. There are also hints and tips which automatically appear when it’s clear that the player is lost and doesn’t know what to do. I believe Microsoft's decision to name their voice-activated personal productivity assistant after Halo’s Cortana is a nod to the fact that there is much that SaaS can learn from the video game industry.
Community: Video games attract energetic communities around them, superfans who share their experience of the game, and help those that struggle. These communities can appear organically, created and powered by the superfans, and officially by the developers. In the case of Halo they created ‘Waypoint’, an insider programme as a way to further engage with the community across multiple channels. Community is so powerful that it can cover up deficiencies of your product; that’s what we see with another recent video game ‘Hell Let Loose’, a military simulation set in WWII. It’s a brutally unforgiving game, with steep learning curves, and almost no support offered by the developers. A number of superfans have emerged for the game, creating extremely detailed content and walkthroughs which is plugging the gap in support, and helping other players learn and master the game. Leveraging the power of the community is a mechanism of support that is gaining greater focus and investment from customer success functions, something video games have been leveraging for decades.
Conclusion and key takeaways
Cloud computing has fundamentally changed the technology and software markets; business models have evolved and risk has shifted from customers to suppliers. SaaS product organisations should be thinking just as much about how they can drive consumption of the capabilities they create, as they do about which capabilities to create. This requires a fundamental shift in philosophy and capital allocation, but one which will yield better returns on capital employed. Product organisations should experiment with and leverage some of the tried and tested tactics game developers have used very successfully over multiple decades to address their solution’s consumption gap and drive customer outcomes.