In a subscription business, customer retention is as important as customer acquisition. SAAS Capital has put together a nice set of slides on the impact of churn that shows this clearly.
If 2 subscription businesses have the same monthly recurring revenue and the same customer acquisition cost but one has 5% annual churn and the other 20% annual churn:
- Over 5 years, the business with lower churn will have 40% higher revenues and 50% higher growth
- The business with lower churn will have a valuation that is 2x that of the high churn business.
So customer retention matters.
Here are four steps to customer retention and churn reduction.
I recently discussed these points on a joint webinar with Zuora and SAAS Capital.
1. Track customer retention and churn in a way that helps you address the root causes
Every subscription business I talk to is tracking customer retention and churn. However, many are tracking it for the purpose of financial reporting.
To get at the root causes of churn, consider the following:
- Separate upsells from losses. It's nice to include the upsells in your churn numbers for financial reporting. Negative churn looks great. But it doesn’t give you insight into what is happening with your churn.
- Even if you sell a yearly subscription, track monthly churn especially if you bill monthly or quarterly. That way you can see how things change and improve as you change your product and pricing.
- Track cohorts so that you can find patterns such as a high number of cancelations a few months after sign up and then again a high number of cancelations at renewal.
2. An executive needs to own the retention number and the organization needs to be structured for customer success.
Who is responsible for retaining customers and stopping churn?
- First answer: Everyone. Should be a public number within the company that everyone is aware of and that everyone is motivated to address.
- Second answer: If everyone is responsible, no one will do it. A particular senior management team member needs to be held accountable.
Where should it sit in the organization? We see a big difference between B2B and B2C/B2SMB:
- If the organization has more customers that are lower value, in other words B2C where you can’t afford to spend time personally studying and relating to each customer, then customer retention is a marketing function. Retention Marketing.
- If an organization has high value customers, named accounts, then I’m seeing in order of frequency among the organizations with which we work (1) a Customer Success team that reports up to a VP of Customer or Chief Customer officer (2) a part of the Sales team with Account Executives (3) Customer Support.
Part of the decision about location relates to compensation. Do you want your hunters and farmers together and do you think they should be compensated and motivated in the same way. Many organizations worry that introducing quota’s results in an unhelpful change in the CSM’s consultative relationship. So they keep them separate and bonused off of retention and satisfaction.
My strong preference is for (1) a Customer Success team reporting into me. Customer Success is priority #1 and so our organization is structured that way.
Tomorrow, I’ll cover the last two steps: