Customer Retention: The One Percent Improvement Payoff During Transformative Initiatives
By Jeff Klebine, Senior Manager at Navint
Over the past several years, businesses have shifted their growth strategies from one-time transactions to a recurring revenue model. This sea change has been driven by the businesses as well as the customers’ desire to subscribe to services. Today’s new customer, the Continuous Customer™, is always “on.” They expect near real-time communication, are constantly interacting with your product, and are continually evaluating whether to renew the relationship or seek other alternatives. Customer retention, and therefore customer success initiatives, are paramount.
Companies spend anywhere between 5 and 25 times more on acquisition than retention, yet most companies still employ dated customer retention strategies. Waiting for a customer to call, email, or message with a complaint is not only reactive, but it’s a sure-fire way to slowly erode your subscriber base. Today’s customer retention strategies need to be proactive, engaging, and rewarding for the customer, from the moment they express interest in your service. But often the initiatives meant to improve the customer experience or the internal operations cause unintended customer churn, i.e., customers canceling their subscriptions. How do we prevent this from happening?
Be Aware That Transformative Initiatives Can Negatively Impact Customer Retention
When working with clients in fast-growing, recurring revenue businesses, we often find Chief Revenue Officers (CROs) and Customer Success executives frustrated by rapid product diversification and/or scale-enabling technology projects. This may seem counterintuitive because new products, services, bundles, and enabling technology (e.g., subscription billing, ERP, customer self-help, E-commerce) are necessary to scale the business. But many times, these initiatives meant to help the business grow can also have a negative impact on customer retention.
It starts innocently enough. Launching transformative initiatives causes a false sense of security that customers are not being impacted because the volume of complaint calls remains at its pre-initiative level. Yet customers notice that something just doesn’t “feel” right about the service, the level of engagement, or the relationship in general, and retention metrics begin a modest decline. We may attribute the decline to a failed marketing campaign, a hiccup in sales execution, or seasonality. But what’s really happening is that internal friction felt during the transformation is being mirrored in the customer experience. Subtle changes such as service interruptions, inadvertent service changes, inability to reach support in a timely manner, or incorrect billing due to the transformation are causing the churn. Over time, these small leaks in the customer base add up and hinder the ability of CROs to achieve their customer retention goals, despite their best efforts.
Understand How a One Percent Change in Customer Retention Impacts Overall Revenue
One percent may sound like a small number but it can be significant. Increasing customer retention by just one percent will cause other key growth metrics to increase by double digits. A one-percent loss, on the other hand, will cause a company to miss their revenue projections.
To illustrate the importance of one percent, let’s look at a simple but realistic example, through the lens of a fictitious subscription-based SaaS company. They have 200,000 customers, and their primary revenue stream is a $50/month subscription. Other details are as follows:
- Customer base of 200,000 customers
- Monthly Recurring Revenue (MRR) of $10MM
- Annual Recurring Revenue (ARR) of $120MM
- Monthly Customer Growth rate of 7%
- Monthly Churn Rate of 5% (95% Customer Retention Rate)
- Company Valuation @ 5X ARR = $600MM
The table below highlights benefits and the positive ripple effect yielded solely from increasing retention by one percent over the base case. Decreasing churn from 5% to 4% monthly can positively impact the company’s revenue and valuation trajectory with a 16% jump in ARR and approximately $94.5MM increase in valuation.
Conversely, the table below highlights the negative ripple effect when retention slips by one percent over the base case. Churn then increases from 5% to 6% monthly, the company ARR is impacted by 14%, and valuation trajectory falls approximately $84.9MM.
Focus on Preserving the One Percent During Transformations
Simple enough to say but hard to do. At Navint, we’ve helped companies successfully manage through their transformation initiatives, while protecting their customer base against self-inflicted churn.
Some key steps include the following:
- Discover what drives the customer to take actions such as renewing their subscriptions or purchasing additional products.
- Break down the organizational barriers between sales, customer success, operations, and technology so you can work as one team.
- Identify risks that result from the transformation and may impact service.
- Share organizational goals and work collaboratively to succeed in meeting the goals of the team. This may require modifying incentives to reward the team as a whole, instead of as individuals.
- Clearly communicate the plan, both internally and externally. This should be done by the executives of the company.
For some, external transparency may seem like an alarming topic. Historically, companies have operated on the premise of “If we tell customers what we are doing, they might leave.” But in today’s subscription economy, companies need to ask, “If we do not engage nor act transparently, will we breach customer trust and cause our customers to leave?” Once trust is broken, swift action is required as a “do nothing” strategy will consistently result in high levels of customer churn. To keep trust intact, the Customer Success organization must proactively and effectively engage, survey, and transparently communicate with customers throughout the lifecycle of the relationship, especially when internal changes are occurring. When customers experience challenges, as they will, the challenges must be addressed quickly, and with urgency, to maintain customer retention.
Customers are more engaged than ever, and they want a connected and frictionless Continuous Customer experience. Customer Success initiatives and timely engagement are key to maintaining and retaining customer loyalty, especially through transformative initiatives. It’s up to the leadership teams to see the bigger picture of the Continuous Customer experience, across the entire organization, so that customer retention goals are achievable. As the famous Yogi Berra said, “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”
Want to discuss your customer retention strategy? Navint helps clients develop customized go-to-market, lead-to-cash, and retention strategies that enable customers to frictionlessly buy, renew, and add-on products and services throughout the Continuous Customer lifetime. Contact us today.