The content of this article comes from a Pragmatic Live podcast episode: Too Much Too Soon? – Subscription Models and Revenue Retention. >> Listen to the full conversation
First-year customers are at the highest risk for not renewing. That’s a problem because If you can keep a customer for about three years, there’s a good chance you’ll keep them for the next 10 years or longer.
That is where you get that lifetime value.
A retained customer is about five times more profitable than bringing in a newly-acquired
customer and retained revenue are worth even more.
So Why Are First-Year Customers the Hardest to Keep?
There are a few reasons why first-year customers leave. Under many circumstances, customers may have unusually high expectations in terms of how much value they’re going to get in a single year. For some products, it takes some time for value to build.
And at the end of the day, it always comes down to value.
Value is like beauty. It truly is in the eye of the beholder.
If there’s one thing that will drive you absolutely crazy, it’s when you know, and you can empirically prove to a customer, that they’re getting tremendous value from their investment and they still cancel.
On the other side of that coin, you may actually have a customer who, you know, is not getting great value and they consistently renew.
You can certainly improve your value proposition by ensuring that the whole onboarding process is nice for the customer. You only get one opportunity to make a good first impression. It’s worth it, they’ll contribute more to the bottom line than if they were only around for one year because they were oversold and over-promised something that didn’t deliver them value.
Customer retention should be determined by both qualitative and quantitative data. Curiosity should drive you to try and understand at what point you might lose a customer, and your answer should come from data—or all you’re doing is guessing.
Roles Involved in Retaining Customers (It’s Not Just the Sales Team)
Many times sales representatives talk to their customers 30 to 60 days before the renewal date, and the customer indicates they have no plans to renew. Then when you ask why, they will say, “because I’m just not getting the usage that I expected, I’m not getting the value that I expected.”
By this point, it’s likely too late to retain the customer. The salesperson might explain that the customer leaving was from lack of value. In reality, however, it was the lack of engagement.
Companies expect so much from sales teams and they manage many accounts. There are two other roles that can support customers long before the sales team calls them to renew.
- Customer Engagement Managers answer questions and reach out to customers to make sure things are going okay. It’s all about monitoring the customer’s usage throughout the year. When training is necessary, absolutely provide that type of training.
- Marketing Team/Partners can develop any number of different campaigns that provide support and answer common questions.
How to Talk the Talk and Walk the Walk
You want to talk to customers. You want to understand why they renew and why they don’t. And, sometimes you learn more from the customers who don’t.
The goal of these conversations is to attempt to prove and improve the value proposition.
At the end of the day, you have to ask yourself, does the customer feel like they are getting a good return on their investment? And the onus is on you to prove that to them.
Don’t expect them to invest the time to prove it to themselves. Sometimes they know it, sometimes they don’t. Equally important, is when there is a situation where a customer is not getting commensurate value for their investment, then you must utilize intervention methods.
A Case Study in Revenue Retention
By Joe Douress
When I was in the legal field, this particular business was growing quickly. Our company helped law firms find clients. It was all happening at a time when we were making the transformation from print to web.
Early on we were at a 25% growth rate and we maintained that over a four to five-year time horizon.
But here’s what’s interesting: we were bringing in up to 6,000 new customers a year.
Those 6,000 customers on an average contract value were in the $2,500 to $3,000 range, but on an annual basis, we were bringing in anywhere from $17 million to $21 million a year in new business.
When we started looking at the second-year retention rate, the retained-revenue rate, we were all shocked to see that it was only about 52%.
Meanwhile, the business as a whole had a retained-revenue rate closer to 90%, but we had first-year customers that we were losing at a high rate.
We were trying to sell too much, perhaps too soon. So when we looked at the data.
What we learned was that, if you sold a subscription between $2,400 – $3,000, we had a better chance of retaining that revenue because the customer felt what they were getting in return was commensurate with what they’re paying for the service.
But it was at this time where we were also developing lots of new products that law firms were intrigued by and eager to purchase. We had a sales team that was eager to go out and not only sell a basic subscription but also an enhanced subscription.
It almost was impossible for us to actually deliver enough value in that first year to justify that investment the second year.
It was difficult to renew it in the second year because the price was too high and the value we were delivering was not enough for that law firm to say, “yeah, we’re going to go for it a second year.”
A couple of things we did to solve the problem was first to communicate the situation to the sales team.
In addition, we carved off a small group of four customer support representatives whose focus went from just providing general customer support to focusing only on these first-year customers. We called it the priority services team.
Their goal was to prove that the law firm was receiving tangible value and a return on investment. As a result, We saw the retained revenue rates increase the first year by five points.
Now that may not sound like a lot when you’re going from 50% to 55%, but if you consider that the revenue is in the $16 to $20 million range, a five-point improvement in retention is real money.