Plenty of ill-fitting customers will buy your solution if you let them. They are a tempting group, often having velocity in the pipeline. Make no mistake, they are also the devil.
Customer Retention is the Result of First Impressions
Marketing and selling inauthentically are the first two ways to increase churn, decrease up-sells and ultimately damage capital efficiency. I say the first two, because they’re literally your first impressions. How a solution is messaged, first in marketing, then in sales, impacts who is in the pipeline and what their expectations are.
When expectations are set accurately and authentically, buying is genuine and needs based. These are the ‘right’ customers. They may be harder to find. They may take longer to close. They may cost more to acquire. But, in the long run—even at first renewal—they will pay off. They’ll be faster to up-sell. Easier to renew. And less costly to service. Good fits are good for metrics, good for the P&L and good for your valuation.
Churn is such a major part of tech management that I can pretty much guarantee it will be a recurring theme for me when I wake up and write. You may tire of hearing me preach about paying for a customer only once and making sure that your cost to acquire a customer (CAC) pays off. I may tire of droning on about ‘land and expand’ — although I doubt it. But if your valuation is driven by revenue growth, it’s hard to argue that relentless attention paid to churn and expansion revenue aren’t well placed.
Saying “No” is Hard. Churn is Harder.
Saying ‘no’ to willing buyers is hard. For salespeople compensated based on contract value, it’s REALLY hard. Even for marketing, often assessed based on lead generation and velocity, it can be hard to willingly weed out the chaff. Surgical marketing takes a steady hand with a constant eye for future value versus present value to maintain a quality over quantity focus.
Organizational design often intentionally or unintentionally sets incentives. For example, if the sales team is responsible and compensated based solely on initial contract value (ICV), it may be more difficult for them to say ‘no’ to ill-fitting customers. If they are compensated on ICV as well as renewals, perhaps their initial focus is more aligned with longevity and lifetime value (LTV). What no one in the C-suite wants is an organization that’s great at lowering CAC, but lousy at preserving lifetime value. That’s what high performing acquisition combined with high churn looks like and it’s VERY expensive.
Rules of thumb for a healthy SaaS: Recover CAC in 6-9 months AND have at least 3x CAC in LTV. There are a lot of variables that go into those rules, but even if you slide them around based on your price point and model, they’re pretty good baselines that reflect on price, market receptivity and product fit. For example, I focused on three YEARS of LTV, which is significantly higher than 3x CAC. You can have one of those metrics without the other, but shouldn’t. (And, if you do have one without the other, it’s unlikely you’ll be around very long.)
Back to authenticity. It’s the watchword here. Everything goes back to portraying your solution accurately. Yes, your marketing and sales will frame it in the best light possible. But, don’t say it’s fast if it’s not. Don’t say it’s easy if it’s not. Don’t say it’s flexible if it’s not. Don’t says it’s cheap if it’s not. It’s NOT worth it to say anything it’s not.
From your first search ad, to your nurture emails, white papers, webinars, sales calls, follow-up emails, proposals and onboarding materials—tell the story authentically. If your product can’t handle the truth, you have bigger problems. But, if it can—if it really is a great solution to a real problem—then frame it accurately. When you do that, you’ll attract the right customers, who will buy more from you and remain customers for a very long time.