April 30, 2018
Every SaaS business is focused on growth. The equation is simple: get more customers, win more revenue, raise another round. Rinse and repeat. But this focus on topline revenue blinds companies to an important reality. Customer retention revenue is MUCH more important for building a scalable business.
It’s easy to avoid thinking about customer retention when you’re growing at 10% month-over-month and the board is happy. But if you don’t make preparations, the churn monster will rear its head and bite you. And when it does, the results can be catastrophic.
Still don’t believe me? Then let’s walk through five reasons customer retention revenue is more important for your business than new sales.
Salespeople are expensive! It takes hunger and persistence to go out and close deals that drive topline growth. And that skillset doesn’t come cheap. Depending on your product price point & variable incentive structures, on-target earnings for your best sales reps can be hundreds of thousands of dollars each year. That’s on top of all the sales support required – sales development representatives, sales operations, sales trainers, and sales enablement.
And if your sales reps don’t make the grade, your company still incurs significant costs to replace them.
In contrast, customer success managers require many fewer resources and can support a broad portfolio of existing customers. A recent survey conducted by David Skok & KBCM Technology Group found SaaS companies were spending $1.15 to acquire one dollar of new customer ARR. In contrast, it only cost $0.15 to hold onto a dollar of customer retention ARR.
Did you catch that? Companies are spending 15% more money than they are receiving to win a new customer. Yet it only costs 15 cents on the dollar to retain an existing customer. That makes net new customer acquisition 7.7x more costly than customer retention.Companies are spending 15% more money than they are receiving to win a new customer.Click To Tweet
When it comes to building confidence, customer references are extremely powerful. When making an enterprise sale, they are absolutely vital. But you need real happy customers to provide this valuable social proof. If your customers are dissatisfied and walking away at the contract renewal date, that’s a problem.
Very early stage companies may get away with a lack of references. But once you’ve been on market for a while, expectations will shift. And the burden of proof will be on you. That means customer retention vital for your net new acquisition strategy as well.
If you think that the sales process stops once you’ve signed a customer, you’re dead wrong. Existing customer relationships can be expanded to drive new revenue at a significantly lower cost.
Think about it. The customer success manager has direct access to business leaders and product users within an organization. If the product is working well, those same individuals stand to benefit and gain clout by being the “hero” who introduced a value-adding solution elsewhere in the company.
By beginning with a small core of satisfied customers, a CSM can quickly move to different departments and geographies, implementing the same solution without too much explicit selling. Instead, the path is paved for them via internal introductions & glowing referrals. Furthermore, keeping your existing customers happy builds significant trust. And that trust is important for selling new products into this pre-established channel.
Taken together, upsell & expansion revenue are two important pillars of a land and expand strategy. And they are still cheaper than new customer acquisition. The same survey found that expansion revenue cost $0.30 per dollar ARR and upsell revenue $0.57 per dollar ARR. While not as “cheap” as retained revenue, those figures suggest net new acquisition is 4x the cost of expansion and 2x the cost of upsell.
Every part of your business is connected. Customer retention & net new sales is no different. One of the biggest problems for customer churn is that it makes the rest of your team run twice as hard just to stay in place. If you have aggressive revenue targets and customers leaking out of your business, sales must first recoup the lost revenue before they can make a dent against the topline growth target. Check out the example below:
As you can see, a company with an impressive 10% month-over-month growth rate can still end the year with a measly 42% annualized growth if monthly churn is at 7% (if your churn is that high, there is a serious problem). Reducing customer churn by a couple percentage points is enough to double annual growth to 80%. And shaving an additional 3% off of the monthly churn will land you at a very attractive 150% annualized growth.
The only way to hit ~150% annual growth figure with 7% churn requires net new sales jump up to 15% month over month. That means increase sales team productivity by 50% just to get in the same place & plug the gap. Sound difficult? You bet it is.
Low customer retention doesn’t just create more work for your sales team. It also forces you to wander blindly instead of charting a course for your business. Retained customers serve as a compass for your business strategy. Once you identify customer segments that are best served with your product, you can focus your sales & marketing efforts against these ideal customer profiles.
This strong understanding of who benefits most can then be used to refine your product strategy and develop additional capabilities to better serve the needs of the target segment. This is a virtuous cycle that drives sustainable, long-term growth.
There are many paths to growth. That’s why focusing on customer retention is so important.
It allows you to accelerate growth by working smarter, not just harder. And keeping churn low actually makes life easier for your sales reps by reducing their workload and giving them more focus.
There’s no excuse: a focused retention strategy leaves you with happy investors and more money in the bank.