Customer Retention: How a 1% Improvement Affects Annual Recurring Revenue

By Jeff Klebine, VP of Advisory at Navint

In the age of recurring revenue, customer retention is paramount—and yet, many companies fail to invest in an effective retention strategy. In fact, research shows that companies spend anywhere between 5 and 25 times more on acquisition efforts than on retention—this despite the latter tending to have a bigger impact on the bottom line.

Complicating matters, many transformation initiatives, such as customer self-service features, e-commerce channels and automatic billing, which were intended to improve the customer experience can actually increase friction if not properly implemented. These pain points, which can include service interruptions, inadvertent service changes or inability to reach support in a timely manner, can actually increase customer churn. Over time, these small leaks in the customer base accumulate, creating a measurable drain on the organization’s revenue.

 

Understanding the value of a 1% change in customer retention

One percent may sound like an insignificant number, but when it comes to retention in a recurring revenue business, that minor shift can be the difference between missed revenue projections and double-digit growth.

To illustrate the importance of retention, let’s take an example of a subscription-based software company with 200,000 customers and a primary revenue stream from $50/month subscription. This equates to a monthly recurring revenue (MRR) of $10MM and an annual recurring revenue (ARR) of $120MM. The company is valued at five times their ARR, or $600MM. In this example, the company has a monthly customer growth rate of 7 percent and a monthly churn rate of 5 percent.

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 percent monthly can positively impact the company’s revenue and valuation trajectory with a 16 percent jump in ARR and approximately $94.5MM increase in valuation.

 

Customer Retention Positive One Percent

Customer Retention Positive One Percent

On the other hand, the next table highlights the negative ripple effect when retention slips by one percent over the base case. Churn then increases from 5 to 6 percent monthly. In this scenario, the company ARR is impacted by 14 percent and valuation trajectory falls by approximately $85MM.

 

Customer Retention Negative One Percent

Customer Retention Negative One Percent

 

 

5 steps to improving retention within the recurring revenue business

In order to build loyalty and affinity with today’s continuous customer, companies need to operate in a way that builds trust and respect. They must proactively and effectively engage and communicate with customers throughout the lifecycle of the relationship, especially when internal changes are occurring. When customers experience challenges, these issues must be addressed quickly and effectively in order to retain the customer.

At Navint, we help companies create a lead-to-revenue strategy that includes maximizing retention. While every client’s journey is unique, our approach usually includes the following steps:

  1. Leverage data and analytics to understand what motivates the customer to take actions, such as subscription renewals or purchasing additional products, and predict future activity.
  2. Break down the organizational barriers between sales, customer service, operations and technology to enable cross-functional data sharing, unify the customer experience and work towards the common goal of serving the customer.
  3. Identify points within the customer journey that may experience friction during the deployment of a transformation initiative; proactively solve those issues and communicate with the customer about the steps being taken.
  4. Share organizational goals and work collaboratively to succeed in meeting those objectives across the business. This may require modifying incentives to reward the team as a whole, instead of individuals.
  5. Clearly communicate the retention plan within the organization; have the executive team champion this new way of working and dedicate a clear leader to manage this initiative.

Customers are more engaged than ever, and they expect a connected and frictionless experience. Proactive customer service and timely engagement are key to maintaining and retaining customer loyalty, especially through transformative initiatives. To learn more about developing an effective customer retention strategy for your recurring revenue business, contact us at info@navint.com.

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