Challenge: Justify Investments in Customer Programs
Certainly in the early stages of growth for SaaS companies, acquiring new customers is the primary focus. However, a hidden value remains with your existing customers. ‘Land and Expand’ growth models fuel growth rates of the most successful B2B SaaS companies. But there is a hidden gem lurking within your customer base – churn avoidance.
As we know, long term success is based on a negative net churn rate — which shows that the amount of revenue from existing customers grew, even with some customer revenue that churned. Here is a simple example. Lets say a company has a negative net churn rate of 115%. At face value, this could mean that some customers expanded their revenues by 30% but another 15% of customer revenue was lost due to churn — leaving the total negative net churn rate of 115%. While a very simple analysis, this shows the ‘tax’ that churn places on growth – namely 15%. Improving net retention improves company valuation in two ways – both in growth rate and net retention which are often multiplied to calculate company valuation.
So it’s clear that if a company avoided churn, the growth rate would be higher. But how much can or should a company invest in churn avoidance? Well, here is some simple math. If a growing company has 100 customers with a $40K ARR, they might experience a total customer churn of 10% of accounts annually (10 accounts churn completely for $400K in total ARR churn). If 25% of this churn was avoidable through interventions, this would save $100K ARR annually. If we think of investments with a 1 year payback or CAC, then we would be willing to spend another $100K on annual programs to avoid this unnecessary churn. Voila – budget for the programs! And these programs might help promote customer expand plays — so you could see a return even greater than just churn avoidance.
OK – so it’s clear that companies should invest in resources to avoid unnecessary churn. But where to place these investments? According to Carl Gold, Chief Data Scientist with Zuora, programs addressing customer churn fall into four categories:
- Customer Marketing
- Product Enhancement
- Customer Success
- Pricing & Packaging
More specifically, from my experience there are a number of more specific programs you might consider in each of these areas (there are likely many more):
- Customer Data Analytics: Identify and measure key predictors of customer success and churn
- Customer Conference: Great way to provide training and share success stories
- Customer Workshops: Training for existing and new users
- Product Features: Accelerate development of key features to prevent churn
- Customer Success People & Tools: More resources for front line CSRs
- Customer Community: Create a place for customers to answer questions and share success
- Product Value Packaging: enrich value for customers most like to churn
Every company will have a unique product and market situation to guide their customer program investment decisions. This analysis is merely to draw awareness to the ROI of these programs, as I believe they are under-invested in the majority of companies. Strategically selecting customer program investments can improve your growth rates by both reducing churn and increasing expansion rates.
Many of these programs require tight integration between marketing, sales, product and customer success. Creating cross-functional teams to identify, select and run these programs is likely the hardest part of the process. But for those companies who embed these programs from the start, they can increase growth rates and company valuation.
Lesson: Identifying and remediating avoidable churn can pay significant dividends in terms of company growth rates but requires careful cross-functional planning.