Your business will fail if it doesn’t understand its customers.
This should not come as a shock. New upstarts displace previous market leaders by serving customer needs better. We have all experienced several disruptions in our own lifetimes. Netflix killed Blockbuster and heralded in an age of content streaming services. The iPhone replaced Blackberry as the dominant mobile phone.
In both cases, the disrupter had a differentiated customer insight. That insight drove business strategy and created a superior customer experience. Netflix recognized that the experience of renting movies from a physical store sucked. And the Apple understood smartphones were no longer limited to enterprise use. Instead, they were becoming consumer products in their own right.
So understanding your customers is important. But how should you tackle the problem? The buyer persona is a powerful tool to use.
What is a Buyer Persona?
A buyer persona describes a fictitious customer that receives a ton of value from your solution. These profiles reflect real customers you serve.
Each persona will include personal and company details. According to HubSpot, there are several elements common to such personas. Those include:
Job details (job role, job title, knowledge & tools used)
Goals (what is the individual customer responsible for?)
Challenges for individual in role
Company details (size and industry)
Personal details (age, education, marital status)
These details provide a clear, concise summary of a company’s typical customers.
Yet something is missing here…
How Buyer Personas Fall Flat
The traditional buyer persona is not very rigorous. In fact, it is completely qualitative. And that isn’t good enough if you want to use it in the real world.
The big question that a standard buyer persona fails to answer is this: “What makes a customer ideal?” Unless you are running a charity, the definition of best comes down to one thing – money. That’s why it is odd that there is no description of how much value a customer persona generates.
The fix for this is obvious – add some numbers to these personas! There are a couple additions to include right away:
Percentage of existing customers matching this profile
It is important to know how many real customers match this persona. While each persona is a composite, it should still be easy to tie back to real customers.
Your buyer personas should represent a significant proportion of the customer base. This is a good test of business health. If very few actual customers match your customer personas, watch out. That suggests a big customer risk due to a fundamental lack of understanding of who you serve.
If your buyer personas are not representative of your actual customers, you need to create new ones to provide better coverage.
Annual customer spend
This is another no-brainer for inclusion. How much money does each persona spend with you? This can vary based on goals, challenges, as well as company and industry. But there should be some commonality within a persona. If there’s no clear pattern, try to subsegment the persona to identify the distinct groups.
For subscription-revenue companies, there is one more metric that should be in your personas…
Including churn in buyer persona
Only one thing matters for subscription businesses when defining an ideal customer. Customers who pay the subscription fee, month-after-month, without canceling are the golden ticket.
This should not be a surprise. The recurring revenue model shifts what determines value. Long-term customer relationships matter much more than the initial sale. According to venture capitalist David Skok, the ideal SaaS payback period is 12 months. Payback here means recouping all the sales and marketing costs used to win the customer.
Your business will not scale if customers only stick around long enough to pay back costs. Thriving companies have average customer lifespans extending well past the payback period.
That’s why churn is vital for your buyer personas. It helps you identify which customers are most likely to stick around. Those sticky customers are your best customers.
Customers who pay the subscription fee, month-after-month, without canceling are the golden ticket. Click To Tweet
Churn has some other benefits when included in buyer personas:
Helps you to understand tradeoffs between segments
Some customer segments are less attractive than others. When you rely on a qualitative buyer persona, it is hard to make this distinction. If you use churn to compare segments instead, this becomes obvious.
Let’s say you have two customer segments with similar annual spend and acquisition costs. If one of those profiles had a churn rate three times higher than the other, it is definitely not “ideal. You are much better off building a business focused on serving the low-churn segment.
Helps you optimize multi-segment strategy
Many businesses target customer segments with very different churn rates. That can work if the math makes sense.
One company may have high churn, but customer acquisition costs are very, very low. Think of freemium products like Dropbox or Spotify. These businesses rely on viral marketing to drive growth. With low acquisition costs, the payback period is shorter. That makes higher churn more tolerable.
Big enterprise sales are notorious for being difficult to land. Sales cycles can last more than 12 months. The deal itself may involve sales, engineering, and product resources to bring to a close. All that means sky-high customer acquisition costs.
But the juice is definitely worth the squeeze.
The biggest enterprise contracts are worth many millions of dollars each year. Back in 2014, Salesforce earned more than 20% of revenue from just 100 customers. At the time, they had more than 150,000 customers and more than $5 billion in revenue. That means those 100 customers were worth about $10 million apiece.
What’s more, big organizations don’t churn like small companies do. These deals may have a multi-year commitment. Combine a big payout with extended guarantees of no churn, and you have the recipe for an amazing business.
Most subscription businesses do not look like Salesforce. They don’t resemble Dropbox either.
Your pricing, acquisition costs, and churn rates probably fall somewhere in between two extremes. If that is your position, there are no obvious choices to make. Instead, you must be thinking about all your price points. Pricing must be high enough to ensure a reasonable payback period. But if it is too high, it can increase churn.
Sounds complicated, right? That’s because it is. Without a churn-quantified buyer persona, you aren’t even asking the right questions. Churn reveals the complexity of your business model and forces you to make hard choices necessary for growth.
Buyer personas are powerful tools for focusing your entire team. Quantifying the profile is critical for identifying what exactly makes the customer attractive.
For recurring revenue and subscription businesses, churn is a vital component of a buyer persona. It helps to make tradeoffs clear between go-to-market strategies. You need that clarity to optimize strategies to match market opportunities.
Still using qualitative buyer personas? Time for an upgrade.