Retention is the New Growth

May 11, 2020 Written by Jake Sorofman

When economies boom, customer retention is largely taken for granted. The customer success team will handle it, many revenue leaders think. Surely we’ll oversell from time to time and, yes, we’ll lose some customers along the way, but that’s the calculus of SaaS. It just works.

Until it doesn’t.

Virtually every revenue leader I talk to right now is panicked about pipeline, speaking to a sort of giant sucking sound that occurred suddenly and enmasse as newly frozen budgets effectively evaporated what were otherwise promising deals and brought sales cycles to a grinding halt.

A hard reset on demand patterns

How long all of this will persist is anyone’s guess, but there’s enough talk about “the new normal” to fear that it’ll be a while until the economy spools up again and fear subsides.

And even then, there’s something about this particular correction that feels indelible.

Much in the way that other periods of deep economic crisis have left a lasting imprint on those who lived through them, my sense is that this crisis will bring permanent changes to the traditional SaaS growth calculus.

Companies will have to get much sharper on the acquisition side to weather this raging storm and to effectively transition to the post-COVID-19 reality. But I predict that, from now on, the best playbook for hacking your way to growth will be more about leaning into existing customers than acquiring new ones, and more about demonstrating measurable proof of value than about feeding Google Adwords and making micro-optimizations on a webpage.

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Customer success as a role… or as a goal?

If you believe the premise that the demand curve has shifted down as a lasting artifact of the next protracted business cycle, it’s worth considering whether we’ve been thinking about customer success too narrowly.

I see the customer success team as the unsung heroes of many SaaS companies, the ones left to clean up the sins of our past as customers struggle to reconcile what they’ve been told and sold with the more complicated truths of living with a vendor over time.

CSers are the empaths, the people responsible for listening and caring and finding ways to, by force of will or by dint of charm and personality, kicksave the deals that were otherwise bound to churn. In many cases, it feels like a vaguely dysfunctional relationship, where the heroics of customer success enable the poor behavior of overselling and under-serving customer needs.

I know this sounds cynical and, if you’re a salesperson, I apologize if you feel unfairly implicated because I know that this isn’t necessarily your fault.

In many cases, salespeople sell exactly what they’ve been trained to sell. It’s the handoff after the sale that begins the unraveling. Here, many companies experience a collective memory loss as the closing plan doesn’t translate into a lasting success plan. Consequently, the customer is left waiting for the promised value to accrue … while everybody else seems to have moved on.

This is why I believe that customer success needs to be thought of as a goal that we all own–not just the role of the nice people down the hall (or, more accurately, on the other end of Zoom).

NRR is the new ARR

Every SaaS leader likes to boast about ARR growth, but this economy calls for a more acute focus on ARR’s less flashy cousin: NRR.

Net revenue retention is the simple calculation of expansion revenue minus churn. Ideally, your NRR is (way) over 100%, meaning that you add more install base revenue than you lose.

Of course, NRR can also mask customer attrition, as spikes in expansion revenue from some customers make it less apparent that others are churning. Therefore, it’s also important to also closely manage gross retention. Remember that every dollar that doesn’t renew is attrition. It’s important to optimize for both sides of the install base equation: what you gain through expansion and what you lose through attrition.

While investors are mindful of what this all indicates (a healthy, vibrant customer base that loves your product, your customer experience, and wants more of it; and a revenue organization that knows how to systematically capitalize on that sentiment), many companies have proudly built an ARR Popeye muscle and a comparatively anemic NRR muscle.

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The outcome imperative

How you build that NRR muscle depends on how well you can prove the value your product delivers. This requires a holistic change to the revenue cycle, where the outcomes the sales team promises … are the ones that the implementation team delivers … are the ones that the customer success team measures, reports and holds everyone accountable to. When you build a customer lifecycle oriented around outcomes, everything gets easier: selling and renewing isn’t based on vague promises, but a systematic approach to customer value creation.

The (new) customer funnel

And it’s this tangible and measurable creation of customer value that feeds a new funnel–the customer funnel–which, much like the prospect funnel, is designed around building confidence and conviction. With the prospect funnel, this confidence and conviction comes with second-hand proof: ratings and reviews, testimonials and the like.

With the customer funnel, confidence and conviction comes from the first-hand proof that customers can see. When customers see measurable value, they’re ripe for expansion–and advocacy.

Google has built a massive business around the very same premise. They make it easy for you to see how Adwords investments convert into revenue. Marketers, therefore, are all too happy to spend more. It’s an incredibly efficient bargain for both parties in the relationship.

Wouldn’t it be great if the same bargain existed in the world of SaaS?

Doesn’t it somehow feel utterly necessary?

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