When it comes to cash, most people agree that they are worth more today than tomorrow, but is that also true for Annual Recurring Revenue (ARR)? It seems like it - if you’re looking at how most companies act.
If you have the possibility to bring in a new, big client this week at, let’s say, 1 million SEK in ARR, there will be no limits to how much effort you put in. From highest management to individual developers - everyone’s ready to drop everything in order to seal the deal with the new potential customer. Compare this to the risk of losing the equivalent amount in 12 months, and how do we act then? Is it the same drive, commitment and focus?
When asking investors who value SaaS-companies, the answer is obvious: ARR is worth at least as much in 12 months as it is today - maybe even more. This is due to the fact that Net Revenue Retention might be the most important key performance indicator for a subscription-deal, e.g. how good we are at renewing and increasing the value of existing deals (read more about this here in a great article by Tomasz Tungus).
This isn’t new, but still hard to turn into reality and make it an area of focus in a business. Here are five common excuses that are operational obstacles to improve retention and not burn ARR:
- 1
”Churn is not a problem for us” (part 1)
- 2
”CHURN IS NOT A PROBLEM FOR US” (PART 2)
- 3
”OUR CUSTOMERS ARE SPECIAL”
- 4
”WE'LL DEAL WITH IT WHEN IT BECOMES A PROBLEM”
- 5
”NOW WE CALL OURSELVES Customer Success”
“Churn is not a problem for us” (Part 1)
There’s no fun in talking about churn, that’s a fact. It stings, it’s uncomfortable and we all want to be positive and look ahead, but that doesn’t mean we're fooling ourselves. It’s common - we’ve done it too - to excuse churn cases. "It’s due to a restructuring within an organization, an acquisition, bankruptcy" and so on. That means you don’t look at the actual numbers. If you’re not measuring gross churn today - both in terms of downgrades and lost customers - you’re definitely losing ARR. (Read more here about how to solve churn for real)
“Churn is not a problem for us” (part 2)
If you keep track of the numbers and still do not think churn is a problem, what then? Yes, there are products that have low churn, there may be lock-in effects in how the product is used (business system) or in what the agreements look like (three to five year agreements), but then, instead, it’s about our own philosophy of how we perceive the customer. Do we set the bar at the lowest level possible - that they merely remain as customers - or do we aim higher than that?
Our experience in this category is that it’s particularly dangerous to talk in terms like “churn is not a problem for us” even if it might be true at a specific moment. Partly because things change quickly and partly because there usually is a lot one can do in 1) how happy the customers are and 2) how much additional sales one can do. There’s a lot more to get in ARR in this category through better price strategies, packaging and add-on sales (Here’s more on SaaS pricing, plans and expansion.)
“Our customers are special”
Of course there are exceptions, but one is rarely unique when it comes to the type of customer/user one has and what they’re looking for. Thinking that your customers are special may cause a locking of the mind and stop you from taking important steps forward.
This then becomes the excuse for not measuring customers' use of the product, for not realizing potential in upgrades/additional sales, for not automating or for not working with retention forecasts. In each part, there are both obvious risks of churn as well as missed potential in upgrades.
Common reasons for this are the lack of internal work on who the ideal customers are and/or that there’s a lack of clear use cases for your different customer types. (Here is a great article by Lincoln Murphy on identifying their ideal customers and also “bad fit” customers.)
“We’ll deal with it when it becomes a problem”
If you’re in an entrepreneurial company under growth, you’ve got to pick your fights. This can thus easily become an environment where you put out fires. When it comes to current customers, that’s a disastrous strategy; not only is it expensive as it multiplies the work efforts and has a bad effect, but it’s also a negative spiral where reactive behavior feeds more reactive behavior.
If you switch to being proactive, where you control your time and continuously prioritize activities with a clear goal for the customer, you create a retention-machine. It’s not in the short term but in the long term (12 months+) that you get to see the beautiful results. (How do you then become proactive instead of reactive? Here is a webinar that goes into depth about it.)
“Now we call ourselves Customer Success”
Just because a team or department has been named Customer Success doesn’t mean that it delivers accordingly. How important are existing customers? What key figures do we track? Where on the agenda on management’s meetings will it appear? What level of depth do we go to, to understand the underlying problems of either having too high of a churn, too poor additional sales or declining commitment from our own part? How are those working with existing customers liking it? Do they move on as soon as possible or is it where everyone wants to be?
Existing customers, Customer Success and a strong development in ARR are about which leadership is in place. What questions do we drive, and what is important in what we do? Do we set a good example in our actions for everyone to follow?
Jeff Bezos has made customer obsession his main mantra on Amazon (read more here for inspiration). Where do you and your organization stand? Here are a few questions for an evaluation:
- How do we act when a customer terminates an agreement? (Do we learn or do we blame something else?)
- Do we conduct customer surveys (NPS) in a structured manner? (Do we want to hear their answers?)
- What do we celebrate internally: invoicing or customers' success? (culture)
- How many of the latest releases are used by customers today?
- How are the people who take care of the customers doing? How long have they been working and do they want to stay? (culture)
We have our own experience of the above excuses; we have made the mistakes, but we have also transformed it into a company-strength internally. Then you get the results. In other words: stop burning ARR today.
If you want to talk more, feel free to book a meeting with me - here is my calendar.
// Johan