[Amsterdam, NL] As the Moderator for a plenary session of the Software & Information Industry’s (SIIA) On-Demand Europe conference here in June, I put a number of questions to the panelists about the meaning and practices of customer retention. Although the conference was designed for Software as a Service technology manufacturers, the questions and the responses are equally pertinent for any software vendor. The full video of the session is available here.
The Decimation of a Customer Base
I began the session with some key facts from the CMO Council report “Business Gain for How You Retain: Addressing the Challenge of Customer Churn and Marketing Burn.” The first point was something that has been talked about for a long time. The average company loses 10% of its customer base every year — sometimes more; sometimes much more. This regular decimation of the customer base has seemingly come to be accepted by many companies as being a normal part of business, especially where the profits-realization strategy is front-loaded. The implications of the acceptance of this loss pattern, however, ought to be ominous, particularly for a SaaS vendor interested in maximizing their sustainable profitability.
The verb to decimate comes from ancient Rome, where it referred to the practice of executing one tenth of all the men in a mutinous legion as a method of teaching the remainder. The lesson for modern day companies from the regular decimation, or more, of their customer base is now for the officers of the firm. The questions raised include: What is the real cost of the loss? Why were these income streams cut off? What do the individual losses tell us about the potential for other customers to leave? What is the long-term meaning to the viability of the company?
The Profit Rush
The immediate realization of the majority of profit from a customer at the beginning of the relationship, as is true in the traditional sales model, has an unfortunately powerful effect upon management thinking. The money is already in hand, and can directly be used to build the business. If the customer leaves, all that will be lost is the maintenance income. Since incremental maintenance income or profits are generally not perceived as having strategic importance, no one is typically held accountable for retaining it. So long as the numbers are kept to an apparently tolerable level, less than 20% per year or so, the short-term profitability from the stream of new sales effectively overshadows any concern over churn.
In the SaaS model, however, while there technically isn’t any immediate bulk realization of profit from a new customer, the awareness of the difference is likewise limited. The practice of requiring a new customer to commit up-front to a year or more of subscription fees unfortunately tends to have a similarly buffering effect upon the impact of lost relationships. When an individual customer leaves, there is no reappraisal of the acquisition costs against the actual profits from the now-broken deal. Worse, there also is no calculation of the total yearly losses to the company from the decimation of the customer base. The tendency is to look only at the incoming short-term profitability from the stream of new sales.
The Core of the Problem
So long as management focus is only or predominantly on short-term bulk injections of profit, and those new-sales injections continue, the true impact of a 10-20% yearly loss rate from the customer base will largely be ignored. There are two key points to be made in this scenario. The first is that the arrival of a serious competitor could be a very significant event in the life of a company that doesn’t pay attention to its customer retention rate. What happens if the combination of a smooth exit path for existing companies is offered at the same time as sharp competition for new sales? It’s far from unknown for a complacent company to lose its market share to a new competitor within a relatively short period of time.
The second key point is that there is an opportunity for individuals within companies to make a substantial impact upon both their firms and their own careers. The role of Chief Retention Officer, if properly defined and established, could be a strong base for those interested in a higher rank. We’ll talk more about that aspect in future articles of the series.