Friday, 21 June 2013 10:57

The Second Phase of SaaS : Retention, Churn, and the Burn

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The first phase of SaaS is a land grab. The second phase of SaaS is maximing revenue per customer, and minimizing churn. Customer retention, or churn, is a key metric on the radar of every executive. You simply cannot build a sustainable business without measuring and maintaining an acceptable level of retention. Now what that retention rate is for your business will depend on the industry, but it is important to identify and fix churn issues that are in your control. The cost of acquisition is the leading economic factor in reducing churn. It simply costs more in sales and marketing to bring in a new customer than maintaining and growing the customers you already have.


The Economics of Churn

To get $1 of new Annual Contract Value the customer acquisition cost (CAC) is: $0.93 for a new customer $.28 to upsell existing customers $0.16 for a Renewal *based on a survey of Private SaaS companies by Pacific Crest The cumulative effect of a low churn rate can have a significant and immediate effect on available revenue and it doesn’t take long to compound a substantially higher valuation. For this reason churn is a figure scrutinized by venture capitalists. The compounding effects of lower churn rates are customer referrals and a propensity to consume a higher volume of services. A higher retention rate also means a higher predictability of future cash flow streams and less risk for a potential investor. A company with 95% retention could get a multiple of 6.5x while one with 80% retention might get 5x. Once companies get the right accounts, they might be able to say they don’t need any more customers; they need to grow the ones they have. That’s how powerful this customer retention message is.

Retention Before the Sale

Retention starts by selling to the right customers.
  • Review your perfect prospect. As your business evolves your target customer will also change.
  • Adapt marketing and sales initiatives to focus on your ideal prospect. Time and money spent on the wrong prospects does not scale.
  • Your sales process should set and manage expectations of value to guide the customer relationship after the sale. Set up and agree to dates for reviewing the proposed value and targets after implementation

Retention After the Sale

Retention is proving you are still relevant
  • The leading cause of churn is a discrepancy in the customers perceived value
  • You must define and continue to show value under the SaaS agreement because the no software platform makes it less painful for customers to switch

Formation of a Customer Intelligence Team

When do you start attacking churn? Look at they have been throwing money at sales and marketing(2.5-3 times annual revenue) to simply grow big and grow fast. Smaller companies simply cannot afford to get this customer intelligence off of the ground because it does exhibit economies of scale. The more customers you have, the greater the benefit a customer intelligence team can produce. More customers equals more obvious and visible trends in your customer base. You’ve already spent a lot of money gaining insight and knowledge about your prospects in order to make the sale, so it’s important to maintain the continuation of key knowledge. Have you experienced a customer advocate who sponsored your sales team through the buying cycle change roles or leave a company? The customer intelligence team should have a pulse on that situation in order to prepare for customer renewal.

Become customer centric when you can scale retention efforts
Predicting the likelihood of a customer attrition event

Identifying behavior that precedes customer attrition can help you reduce churn. Measuring engagement or adoption offers insight into the value expectations you set and it’s easy to do. The number one reason why a company won’t buy your solution is indecision because an executive doesn’t believe there people can do it. Before the sale you have to prove that they can and after the sale you have to prove that they are. Measuring engagement or adoption with data analytics can help you confirm and manage adoption. Create signals internally when there is a slow-down in user logins. Slowing login and failure to complete critical tasks in your application is a sure sign of imminent account problems. Even deeper in your application, include monitoring of users who continue to login, but fail to get past certain steps in the process. Use this information to provide helpful hints, additional training, and send the information to your product development team for improvements.

Getting more from accounts

The quickest way to undermine a retention focus is to throw so many bodies at it that it becomes more expensive than your original problem. Instead of 1 person for every 10 accounts you need to be thinking big. Maybe 1 person for every 50 accounts. Utilize positions you already have to eliminate the gaps in account ownership after the sale is completed. A sales team is compensated for hitting sales related metrics, your customer intelligence team should be accountable for specifically reducing churn and maximizing per customer profitability. You also want to form a customer intelligence team that includes some hunters. Traditionally relationship builders are set up to field support questions and concerns, but that is a lagging indicator of problems with your account. With a better grasp on the account after the sale, you have more leverage to appropriately send sales reps who can challenge accounts and discover cross-sell and up-sell opportunities. This closer relationship will also afford the opportunity to possibly develop new products to expand the horizontal offering.