Remember Andrew Mason, the giddy and self-deprecating GroupOn CEO who introduced daily deals into our lexicon? It’s been almost two years since he was fired, but the lessons of his ouster are, if anything, more relevant today to those who’ve bet their future on recurring revenue.
The broad brush strokes of Mason’s rise are well-known. In the span of three years, the music major founded and led the Internet-coupon site to an impressive IPO that valued the company at almost $13 billion. Pundits pointed to Mason’s irreverent antics as they dissected his downfall, but they widely overlooked the real reason for his ouster: the company’s customer acquisition costs were soaring after dissatisfied merchants stopped providing the coupons that fueled GroupOn’s early growth. And while acquisition costs soared, retention rates plummeted.
Mason’s rise and fall serves as a cautionary tale for business leaders, a primer of sorts as to why customer retention is so critical to a company’s overall health. In this second blog in my series on Customer Lifetime Value (CLV) (link to first blog), I’ll look at how companies can boost customer retention to increase CLV. This is critical because research by Aria Systems and Service Source suggests it is six times more costly on average to acquire a customer than retain one and the average subscription across industries takes more than three years to break even after acquisition costs are factored in.
There are two major ways to increase the value of customers who provide recurring revenue:
These factors are not mutually exclusive. A recent Pacific Crest survey of 300 Software as a Service (SaaS) providers found that their median annual churn rate was about 6% and churn rates decline among customers with more valuable contracts.
There are numerous ways companies can keep customers loyal. Most importantly, companies must distinguish themselves with distinctive services or features that set them apart from competitors. Any company that fails in this regard risks becoming a commodity provider that is unable to lock long-term customers into its products and services.
But beyond standing apart in a crowded marketplace, smart companies segment their clientele based on a variety of criteria (customer size, annual recurring revenue, product mix and market opportunity), then leverage the latest technologies to better understand them and develop tailored playbooks to reach out to the different tiers of customers.
A company’s clientele typically looks like a pyramid, with the wide base representing the vast majority of casual customers who sign up for basic services and are infrequent users. Monitoring these customers is critical because they receive less value from a company, making them more likely to walk away. Good companies recognize and respond to the warning signs by making promotional offers or improving services in order to pull customers back into the fold, boosting the value of their monthly subscription and satisfying them to build brand loyalty.
The top of the pyramid represents the small percentage of customers who typically engage with high value products and services and account for a large percentage of annual recurring revenue. These customers provide the highest Customer Lifetime Value because they are more engaged and much less likely to slip away. The break-even point for these customers is sooner and churn rate is lower. They are also leading candidates for upselling and cross-selling, which further solidifies the relationship for a longer period of time.
Smart companies are increasingly taking advantage of technology to increase retention and minimize churn. Technology helps companies better understand their segmented customers through data contained in surveys and customer reviews, as well as from the digital breadcrumbs they leave on websites and mobile apps as well as during store visits and phone calls. At it’s most fundamental, big data can now more than ever identify at-risk customers and generate new insights about the most valuable customers at the top of the pyramid.
But there’s more: Data analysis can also increase a company’s operational agility to better service – and retain – customers. New methods like location analytics and device analysis can generate the real-time insights that help companies personalize services. Other features can reduce friction and extend profitable relationships. For example, a smart corporation will let clients choose a billing cycle that best meets their needs, whether it be on a monthly or quarterly basis, or even a 20- or 40 day cycle.
There is no secret formula to driving CLV. Offer differentiated products and services, and use technology to learn about and engage customers in a highly personalized manner. Keep your customers loyal and watch their CLV soar.