Low churn not only maintains sales and profits but boosts important measures such as retention rates, which prospects and investors look at (when available) to decide if a company is more flash than substance. When companies focus more on acquiring logos than delivering real value, they tend to have higher churn rates. Companies with low churn rates and higher retention rates, on the other hand, provide more opportunities for cross-selling and up-selling. After all, satisfied customers tend to buy more.
To avoid churn, many companies extend promotions and special offers to the customers they believe they’re most likely to lose in an effort to keep their business. But this can be shortsighted if the customers most likely to churn are unprofitable. Dina Gerdeman authored a good article in Forbes called “A Smarter Way to Reduce Customer Churn” called “A Smarter Way to Reduce Customer Churn” based on the paper “Managing Churn to Maximize Profits”, written by Sunil Gupta, Professor of Business Administration at Harvard Business School and Aurélie Lemmens, associate professor at the Tilburg School of Economics and Management. The basic assertion of Gerdeman’s article is that firms need to take the profitability of a customer into account and target the profitable customers who are likely to churn in their retention campaigns. This is especially true in the world of recurring revenue, as customers take longer to pay off their acquisition costs.
Tip #1. Current and future profitability should be assessed against the cost of the campaign.
Tip #2. Look at net churn. Net churn takes into account lost customers minus the up-sells and cross-sells. Mining what the various segments, regions and markets have purchased can help you discover what else your customers want. That way you can go after them with new or repackaged offerings that make sense for them, and will ultimately get them to buy more.
Tip #3. Quickly test offers with prospects and existing customers, and then modify those offerings based on adoption and feedback. This requires that your existing systems support a rapid iteration of offers without complex Excel spreadsheets, manual workarounds, and days, weeks or months of approval and process meetings.
I know of one Silicon Valley company, widely considered to be innovative, that takes 4-6 months of meetings to get a new promotion off the ground and out the door. That’s because everything is manual – from recording the SaaS purchase transaction to activating the product to accounting for the promotion to the actual billing. Crazy.
Tip #4. Minimize the extra work on IT and finance from your pricing and packaging changes.
It’s really straight forward. If you want to reduce churn without risk to “in-flight” or existing customers, or big impacts to financial ops or IT, then your recurring revenue management solution has to become a critical component of your business.
Another innovative Silicon Valley company I know of was planning a new product offering a while back. Nine months in someone asked, “Can we actually bill our customers using this new pricing model?” Uh oh.
How long does it take you (and cost you) to design, launch, and collect payment on a new offering?
Recurring revenue businesses need management solutions that can handle what is required to support long-term, ongoing customer relationships. This e-paper covers the specific components that are necessary to effectively manage customer experiences, which is critical for growth and profitability.