Customer retention is the lifeblood of a SaaS company. If your customers are not renewing, they are churning. And if your company’s churn rate climbs high enough, revenue stalls. But with the power of customer success, modern SaaS metrics and the sage advice of those who have overcome many challenges like these – there’s hope!
Last week we attended a great webinar hosted by our friends at SaaS Capital which discussed the impact of improving retention and customer success best practices. Moderated by ChurnZero marketing director Cori Pearce, the webinar was presented by SaaS Capital managing director Rob Belcher and ChurnZero CEO You Mon Tsang.
Throughout the webinar, Belcher and Tsang shared their unique wisdom on the subject of customer retention, customer success, and how to bring these things (and many more) together to lead your SaaS company to a place of stability, growth and longterm success.
It’s not easy to summarize a presentation this fantastically informative into a short article like this, but we’ll do our best!
1. Customer retention is a make-or-break.
Tsang and Belcher don’t mince words when it comes to customer retention and the trials your SaaS company will face when retention rates are poor. While most subscription-based startups have a loose understanding of the importance of retaining customers, many don’t grasp the wide spectrum of damage that poor retention can have on a company over time. A commonly used bandaid for poor retention is new customer acquisition – but this is not a solution. In fact, customer acquisition is a separate issue altogether. Ignoring the value and importance of existing customers in pursuit of new customers is a trap many new startups fall into – and one that most don’t get out of. As Jason Lemkin of SaaStr says, “Growth is good, but retention builds empires”. Tsang himself makes things even clearer, pointing out the impact churn can have on your company’s valuation: “If you have great new sales but poor retention, you’re not going to get funded”.
Simple as that.
2. Churn impacts the things that matter most.
Digging a little deeper into the other side of what’s mentioned above, Rob Belcher shines some light on the areas of your business that churn will effect most. With SaaS companies being largely valued by their potential to throw out free cash in the future, a high churn rate will eliminate any possibility of high valuation and investor interest will diminish before it even begins. Belcher points out that the four metrics which matter most in the valuation of a SaaS company are revenue level, growth rate, addressable market, and unit economics. Other than retention itself (which we discussed above), these four metrics decide a lot about how attractive your company is going to be to potential investors – and when they reflect a high churn rate, you’re not going to attract much of anyone.
3. New customers are expensive.
Very, very, very expensive. More expensive than most people realize. Tsang points out that most SaaS companies spend 6-24 months of a new customer’s revenue just on the acquisition of that customer alone. Let’s take a second to really think about that. If the first 6-24 months of a new customer’s partnership with your company are really spent paying for the sales and marketing to acquire that customer – how is your company ever going to achieve real growth without retaining at least the majority of those customers? To put it bluntly, you’re just not. Tsang goes on to point out that the cost of retaining a customer is typically 8-15% of the revenue generated by that customer. That’s 1-2 months of revenue every year that you’re bringing in from that customer, as opposed to 6-24 months of customer revenue each time you have to replace that customer with a new one. Those are some powerful numbers to consider.
4. Everything compounds.
Belcher spent some time discussing the inherent compounding nature of a subscription-based company, and pointed out that anything ongoing (such as a subscription) will compound over time. But what exactly is it that’s compounding? To put it simply – everything. Both the good things and the bad things compound, and when your entire company is based on the model of recurring revenue, it’s important that you make sure that the things compounding and recurring are positive things. Belcher shared a slide from a study recently performed by SaaS Capital which shows that for every 1% increase in revenue retention, a SaaS company’s valuation increases by 12% after 5 years. While this is already impressive enough, let’s not forget this is a metric based off of a 1% increase. Imagine if your revenue retention increased by 6%, 10%, 20% or more. What compounds over time inevitably becomes a powerful thing. Make sure that power is working for you, and not against you.
5. Don’t build a team of heroes.
Toward the end of the webinar, Tsang shared some of the common blind spots he sees in many customer success teams, and took a minute to caution against one in particular. Speaking directly to customer success leaders, he warns not to build teams of heroes, but rather teams of contributors. Tsang defines “heroes” as the people who operate under the “whatever out takes” mindset, going above and beyond day in and day out to gain each customer’s renewal. Though this approach may work very well when a company is small, Tsang points out that at some point, something breaks and things begin to be overlooked when each person’s contributions are not carefully supervised and evaluated. For this reason, he urges CS leaders to build teams of “contributors”, which he defines as people with clearly assigned tasks, carefully organized processes, and a laser-focus on getting things done at the proper time, in the proper way. Every organization requires organization. Makes sense, right?
What are some of your takeaways?
Rob Belcher and You Mon Tsang never disappoint, and this was no exception. Each offered some fantastic points, shared some powerful insights and left us with some great takeaways.
Did you attend this webinar? Let us know if you have any takeaways of your own, or if you have any questions or comments about the ones we listed above.
Thanks for reading!