Supercharge your Subscription Revenue
In a SaaS (Software as a Service) world, there are 2 metrics that should be “must-track” activities. They can have an exponential impact on the profitability of the organization. Let us first assume that the company has a solid sales staff that can sell the net new business in an expected way.
So what are those magic metrics or numbers? Net Customer Retention and Net Revenue Retention. We will break down each one to show why and how it is so impactful.
For a visual representation, let’s assume every new customer is water being poured into a bucket. Our bucket has leaks, and water drips out of it. Net Customer Retention is the measurement of how much water is left in the bucket at the end of a period. Having great sales attainment is a good thing; but when you consider there is always some rate of loss out of the bucket, the goal is to patch those holes. That water dripping out of our bucket is what is called Churn. If for every 10 customers that sign up, one quits, you have to increase your sales growth by more than 10% just to end the year the same as it started. How horrible is that?
Net Customer Retention
Traditionally in a pre-subscription economy, companies have looked at their customer count as a baseline. They then increment the new customers added each period. I would encourage you to do this over a period of time but also track the active users or customers for each of the same periods. Likely both of these lines on a graph will show a growth but look at the difference in the net customer line. Imagine the impact of all that revenue in today’s dollars as well as all the future subscription revenue that is lost.
In this example, we see a starting customer count of 3000 and over a 3 years period a healthy growth rate based on new customer acquisition. In 3 years the total customer count would be expected to be at 5,034. The problem here is they were also losing customers so, at the end of the 3 year period, there are only 3,777 customers. That is a lot of holes in the bucket. By reducing the churn rate by 20%, the customer count goes up to 4,028 customers. This is significant. You can track your own churn rates this way and assign an average revenue per customer metric to understand the expected value. The benefits of such a focus are tremendous. Keeping numbers simple, if each customer represents an average of $1,000 Per Month in revenue, the impact here is tremendous. By reducing the churn by 10%, the revenue goes up to $2.3m in this 3 year period. Reducing churn by 20% brings in $4.5m in revenue improvement without selling anything more. The thing to remember in the subscription economy is these are exponential numbers as they occur year over year.
Net Reoccurring Revenue
The second metric has to do with increasing the revenue per customer. It is important to note that we are discussing net revenue and not gross revenue.
The increase in revenue per customers has to outweigh any lost or churned customers in the same period. The way to measure this is to take a snapshot of customers at a period of time. For our example, we will look at a single book of business for a Customer Success Manager. If they have 23 customers each with a $10,000 per month revenue, they are managing a $2.7m book of business. If a couple of customers leave midway through the year, that book of business goes down to 21 customers and $2.6m in revenue. Essentially a 95% net revenue retention number.
Using the same example, let’s task the Customer Success Manager with upselling/cross-sell activities. If they can increase some module or subscription usage within those same customers, the picture keeps getting better. In the chart below, you can see that there is some lost revenue with the customers that churned. The increase in revenue for the ones that remain help to raise the revenue from $2.7m to $2.84m and result in a 103% net revenue retention attainment. To visually see the difference, this chart represents revenue per month. The blue bar represents the expected revenue stream if those same customers remained constant through the year. ($230K per month). The orange line represents the revenue if there is no increase and we lose those 2 customers during the year. The gray section shows where the revenue is as a net result of upselling and cross-selling as well as the departing customers. Compelling isn’t it. We all have customers that choose to leave for a valid reason so it is impossible to think it won’t happen. A CSM’s responsibility is to help protect and maintain that book of business and revenue stream for the company.
In order for any of the concepts above to work, it has to start with a great solution that brings value to the end users. If value and return on investment can’t be demonstrated, there is likely very little chance of upselling or cross-selling. Functionality and increase cost must lead a to extra benefits that your organization can provide. A recommendation for a cross-sell or upsell has to fit a customer need and be steeped in a true business demand and outcome expected. See the “Top 5 Commandments of Customer Success” for a set of guardrails for interaction and recommendations. It can’t be a sale for a sale sake, it has to fit a business need.
Going back to our analogy of each new sale being water poured into a leaky bucket, we can see the positive results gained by putting a focus here. One metric for Customer Success patches holes in the bucket, retaining more water (revenue). The second adds an additional water (revenue) source that goes into the bucket.
Feel free to share this with others who may enjoy the information and examples. I am a visual learner so numbers and graphs that help illustrate concepts are helpful for me and I hope you find it to be for you also.