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SaaS Providers: Growth Requires Proactive Customer Retention

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Eliminating customer churn is the key to revenue — and valuation — growth for your SaaS company. It actually starts by first thinking like a “service provider” and not a like a “software company.”

Bessemer Venture Partners has two great quotes about customer churn and SaaS Vendors:

  • “The only acceptable reason to lose a customer is death (bankruptcy) or marriage (acquisition).”
  • “The most important part of Software-as-a-Service isn’t “software;” it’s “service! Support, support, support!”

If you put those two quotes together, you have the recipe to grow a SaaS business: eliminate churn by providing amazing service.

But customer retention actually starts before the sales process begins, through what I call “indoctrination” — getting top-of-mind with your market and getting them to know, like and trust you. From there, you set the stage for long-term customer retention throughout the sales process by not overselling (and under-delivering), managing expectations, simplifying on-boarding, ensuring customer adoption, etc.

Your goal as a SaaS provider should be to get your customer engaged with your service as fast as possible (this is relative by category, obviously) so they quickly begin to “realize value” and get out of your service what they thought they would.

Of course, customers that are actively realizing value from your service are not just less likely to churn out; they are more likely to fight to keep your service active in the face of budget cuts, competing vendor offers, etc.

And customers that are actively realizing value from your service are also more likely to spend more with you through up-sells and cross-sells, generating expansion revenue and increasing their Customer Lifetime Value (CLV) in the process.

As a SaaS provider, you can (and should) actively look for behaviors that might indicate a customer is unhappy, confused or simply not using your service any more — what I call “churn threats.”

These aren’t just indicators of a customer about to churn — but a threat to your company’s growth. You should proactively work to fix whatever situation you discover so the customer will continue to realize value and stay a customer longer.

Sure, a last-ditch phone call to try to save an account (usually by providing steep concessions) can work, but by recognizing behavior early and stepping in to help move your customer to a position of value recognition, you save the customer before they become a serious churn threat.

The best part is you saved the customer not by desperately offering discounts and perhaps prolonging the inevitable but by helping them get value from your service, which is all they’re really looking for.

Simply put, when realization of value stops, that customer is already gone; and as a SaaS provider you are in a unique position to actively monitor for threats and stop your customers from getting to that point.

This means that developing a customer-retention strategy — and building in the tools necessary to monitor and proactively eliminate churn threats — is just as important to the scaling of your company as are customer acquisition and the core functionality of your service.

So don’t wait until you have a churn problem; get proactive on customer retention and get your company on a massive growth trajectory!

Lincoln Murphy is managing director of Sixteen Ventures and is an expert in SaaS customer retention and churn reduction. Contact him at lincoln@sixteenventures.com. 

Comments

By Sreekumar

“customer retention actually starts before the sales process begins…” You are absolutely right.
How do we block customer poachers ( customers can be lured away in a less matured market, where lot of experiments are going on and there could be a limit to anticipate, right?

By Lincoln Murphy

@Sreekumar – That’s a great question… in both highly-competitive markets or those immature markets where the customers are constantly trying new things you are at risk for active customer poaching or churn due to the fickleness of the consumer.

Without more context I can’t give a specific answer, but generally I’d say there are two things you could do to avoid this problem.

1. Know your customer – It’s so cliché but there’s a reason for that… it’s super important to fully understand your customer, their needs, wants, etc. By knowing your customer and providing them a real solution to their problem they will be less likely to go to a competitor or go around trying new things. I’d say in immature markets this phenomenon is due to products being built and then searching for customers rather than because companies are building products and services with a known customer in mind.

2. Get your customers using your product – If you get customers Invested in your product – time, resources, energy, social capital, etc. – and they continue to realize value from your offering, they will not be tempted by competitive offerings (even cheaper ones) and will certainly not be tempted by shiny objects out there.

Again, I realize those are very generic ideas, but hopefully they get you thinking and moving in the right direction.

- Lincoln

By Shiva

Hi Lincoln,
Thanks for this post. Say, if following are the acquisition business numbers for last year (month wise): 90K, 100K, 110K, 120K, 120K and 125K, what would be the targets for my retention teams based on these, if I’m on a SaaS based subscription model elearning business.

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