It’s time to build the next generation of SaaS
As I’ve spoken with investors over the years, a common theme in the software-as-a-service (SaaS) sector is the use of “engagement” to measure the value of software. On the surface, this makes sense — if users put time and effort into software, that must mean it’s valuable to them, right?
If your business model relies on advertising impressions to make money, time spent and actions taken are still good indicators of value. But for a growing number of software companies that don’t monetize impressions, user engagement is on its way out as the dominant value metric. As automation goes mainstream, users will increasingly expect software to operate invisibly.
The SaaS world needs to take note and start building for this reality now.
We all know that automation has gone mainstream, but sometimes we forget how long things have been trending this way. Just a few decades ago, most businesses in America tabulated their financials manually — they literally had to close their physical books. Today, most big businesses and millions of small ones use accounting software to do the work automatically.
As people experience automation in more and more daily contexts — from paying the gas bill to ordering a taco — “do it for me” has quickly become the expectation, not the exception. In fact, if you founded a SaaS startup today on the value of user engagement, I’d bet you’d be staring at the daunting prospect of a major product pivot away from engagement and toward automation right as soon as you try to raise your Series A.
To understand what needs to change in B2B SaaS, it’s helpful to think of its evolutionary arc in three distinct phases. Currently, we’re in Phase One. Today, most SaaS platforms are essentially frameworks (sometimes very powerful ones) that help users do jobs themselves. As we head into Phase Two, users will input some general rules and the software will handle a bunch of tasks automatically. Eventually, in Phase Three, users will just switch on their SaaS product and the system will figure out what to do without any additional guidance.
Some companies are already moving to Phase Two. Shopify, for example, describes its Kit application as a virtual employee that you “hire” to automate small business marketing. In addition, Intercom announced a product called Operator with a marketing email that said the bot “takes care of simple tasks so you can focus on things only a human can do.” These are very public declarations that the software’s value is based on automation, not engagement.
For the rest of the SaaS industry to make the leap, a few things need to happen:
We need a new product philosophy
When user engagement is your north star, you build software designed to captivate users. The unintended side effect is that users become enslaved to technology instead of liberated by it. If you’re a recruiter, for example, you need software that takes over administrative tasks so you can focus on the truly human elements of your job, like evaluating the soft skills and organizational fit of a human candidate.
To do that, product teams need to get deeper than problems, solutions, features, and benefits and move toward “jobs theory.” Every user has discrete jobs they must do, and often these tasks are hard to uncover. For example, if you build accounting software, you might assume that the product’s value comes from flowing financial data into tables and crunching the numbers. That’s a good first step, but what else can the software do to save time? If you find out that closing the books takes an accountant 5–6 hours, for example, you can add tremendous value by automating that one specific action.
Data should come first
If Phase One requires users to input data manually, Phase Two puts the onus for data collection on the software itself.
Make no mistake: One of the biggest challenges when building automated software is collecting and curating data before the user ever logs on. In most cases, it requires significant upfront investments in data acquisition and curation through partnerships and other means. That’s a big challenge, but it’s going to become table stakes soon. Software alone won’t be sufficient — it will need to bring its own data to the table.
This will presume that data is considered at the beginning of any development process, not just added as an afterthought. That will require rethinking the interactions between different functional teams that build software.
SaaS metrics must change
User engagement is measured by time spent and actions taken — relics of advertising business models. Automation flips these metrics upside down and completely changes how SaaS should be evaluated.
Instead of engagement metrics, SaaS companies should start measuring true value-delivery metrics such as “Time Saved,” and “Jobs Done.” These measures tell a powerful story about the freedom that can be unlocked through software and have more meaning to the end user than sessions logged or time spent.
Phase-Two SaaS should also track metrics like “Helpful Ratio” (how many users find a particular insight or data-driven suggestion useful), “Time to Wow” (how long from the moment a user signs up until they see value in your software), and other measurements of utility over usage.
Because investors have historically associated high engagement with higher value and lower churn, investors often view lack of engagement as an early warning of future churn. Maybe that made sense in the past but what happens to this proxy metric when value delivered goes up specifically because engagement goes down?
Founders and investors should start talking about how they can incorporate next-generation metrics into their reporting right now. Even if engagement metrics are needed for specific reasons — or as a bridge to the future — they shouldn’t be considered the only measures of product value. For example, every SaaS company should start measuring jobs done and time saved for their users, and build a way to monetize those results. And investors should expect startups to build these automation and value-delivery considerations into their product roadmaps.
Like all evolutionary forces, the next-gen SaaS movement is happening and won’t be stopped by inertia. The transition will benefit everyone, and software companies that catch the vision will reap the rewards. It’s time for founders, investors, and product and engineering teams to get onboard.
