-2 x -2 = 4. A negative number times a negative number is a positive number. We all learned that in math. It’s an important rule to keep in mind when you’re managing a SaaS business. Here’s why.
I recently discovered the wealth of resources for SaaS businesses compiled by David Skok on ForEntrepreneurs.com. One of his articles focuses on churn. Which, as you probably know, is the metric used to track how many of your customers stay customers over time. You can also call it attrition or cancels. Whatever term you choose, it’s a bad thing.
Improving churn is one of the key objectives of a SaaS business. The first goal is to simply figure out how to minimize the number of clients that cancel during each period. For SaaS companies with subscription-based pricing, it has a huge effect on revenue. The simple illustration I provided in the post “Beauty of Annunity” shows a decrease in churn from 33% per year to 25% per year on an initial base of 45,000 customers could increase revenue by $1.6 million over a six year period on a service priced at just $6 per month.
Churn is also the primary indicator for customer happiness and product fit. If you’re solving a real need and doing it well, people won’t cancel. The churn metric reflects on the whole organization. Did sales people set an expectation beyond what you delivered? Is the service stable and dependable? Are you on-boarding customers well? Is your customer service responsive enough?
This is the goal of retention programs: Minimize churn and you can significantly increase revenue over time.
The next topic that Skok covers is “negative churn” which brings us to our math lesson. Put simply, negative churn is getting more revenue from your existing clients, or upselling. In addition to your efforts to retain customers, you can ideally sell more things to your existing customers over time. If you can sell more services to your installed base, your annualized contract value (ACV) goes up, your monthly recurring revenue (MRR) goes up and you achieve the positives of negative churn. Here’s the graph that Skok includes to show the effect of negative churn on Bookings and Monthly Recurring Revenue:
As you can see, churn and its positive negative version — upsales — has a huge impact on the long-term growth of the company.
So what can you do to impact churn? Skok includes some great suggestions at the end of his article. Here are his bullet points:
– call your customers
– measure customer engagement
– figure out what makes your service sticky
– allocate best reps to save customers who call to cancel
– consider testing a longer-term contract
– test other factors that correlate to churn
Once again, his full article is accessible here: Why Churn is So Critical in SaaS
Building on Skok’s suggestions, here are some other thoughts about churn:
Create an easy-to-read “customer happiness” scorecard. As I mentioned, churn is really just a by product of an unhappy customer — or a customer who’s found a more attractive alternative. Publish a happiness index weekly that includes both hard data and soft data from multiple departments. I’d recommend breaking it up into three sections: metrics, internal assessments, and external assessments.
Some hard metrics:
– number of referrals (your customers are so happy they’re sending other customers to you).
– percentage of active users — what’s the total number of people who use the service divided by the total available accounts?
– frequency of use: are they using your service constantly, hourly, daily, monthly or hardly at all?
– depth of use: when they use the service to they go to just one page or use multiple components?
– have recent communications been positive, neutral or negative? Highlight any “firedrills” that have recently occurred.
– call your customers regularly and ask them for direct feedback. Ideally you can conduct these calls in person but short polls or questionnaires are helpful too as long as they don’t seem too robotic or cumbersome.
In parallel with your efforts to keep a handle on churn you should initiate programs to upsell your customers in an effort to achieve negative churn. Here are some suggestions:
– have well packaged add-ons that your customers will naturally want to plug in as they get more comfortable with the product. For example, offer an analytics package for an additional monthly fee or provide an option to use your product with customized layout and branding.
– offer discounts for additional users, seats or licences. This is probably the most common upsell technique. If a few people in an organization enjoy your service, there may be dozens, hundreds or thousands who will want to buy it. Many companies have succeeded at bottom-up selling where they get a foothold in one department or small group with a discretionary budget and then leverage introductions to other people in the organization. At Prospero we used this technique with individual media brands like ABC and eventually ended up negotiating an umbrella deal with all of Disney.
– sell services. Many investors and managers are hesitant to extend professional services. By definition they’re people intensive and therefore don’t scale well. In response to investor pressures we actually tried to throttle back the level of services revenue. This wasn’t a good decision. We learned that having an ongoing personal relationship with clients really helped solidify our relationship. At Prospero we sold SaaS-based social media applications — message boards, ratings, reviews, article commenting, etc. That was our core business. Nearly all of our customers asked for some assistance with moderation of the users and content posted on their site. This ended up being a significant source of income and, in fact, turned out to have a separate churn profile. Some clients used both our technology and moderation services. Others used just the technology and several came to us for moderation. Through this arm of our business, we learned a lot about what our competitors provided and the business needs of our clients. So it’s worth repeating: sell services.
Related resource: “Professional Services: your key to happier, more successful customers” by Chuck Linn of Open View Ventures.
– sell complementary products. In some cases you can generate more revenue by selling other products. There are several types of co-marketing or co-selling arrangements: finder’s fees (one time referral), ongoing commission on their usages, or becoming an OEM. You want to be careful that an other company’s performance doesn’t impact your brand or reputation, but be on the lookout for complementary technology and services that provides a more complete solution for your client.
With these programs in place you’ll have a good chance of minimizing a negative (churn) and maximizing a positive (upsells) to significantly impact your long-term recurring revenue.
Photo credit: DavidCole in Flickr