Why Customer Revenue is Critical to Recurring Revenue Businesses

4 min read · 6 years ago


recurring revenueAcquiring new customers isn’t just difficult and competitive for many agencies, SaaS organizations, and professional services providers. It’s also incredibly expensive, and probably not the smartest place to invest your energy. Getting into a pattern of relying on new revenue, especially in a recurring revenue business model, isn’t just inefficient. It could actually lead your organization to failure.

Venture capitalist David Skok has stated that the second most common reason startups go under is a failure to “monetize” their existing customers. This requires organizations to master customer relationship management, customer referrals, and build loyalty-based relationships. Even more commonly, too many organizations don’t succeed at the most basic calculation of all: the cost of customer acquisition (CoCA).

If your cost of customer acquisition is greater than your lifetime value of clients, your business will be in the red. In recurring revenue businesses, customer lifetime value is relatively easy to calculate with data from your company’s CRM software. If it costs you $1200 to acquire a customer and your customers typically only spend $900 before churning, it won’t be long before you’re unable to afford to stay in business.

Make Retention a Priority

We’ve all read the statistics that it’s typically around 5 times more expensive to acquire a new customer than it is to retain an existing one. Your existing customers don’t want to take their business elsewhere. Making purchase decisions is expensive and difficult. Keeping your customers satisfied is the path of least resistance, and here’s why it’s absolutely critical to agencies:

1. It’s Really Expensive to Land New Business

We all know that the cost of customer acquisition is pricy, but few entrepreneurs and business development professionals have a sense of just how costly it really is. Skok research has found that in the SaaS industry, it is typically 2-10 times more than average monthly spend of clients. Skok reports that subscription businesses are most likely to exceed if a customer’s lifetime value is at least three times greater than cost of acquisition.

In agency and professional service settings, it’s even more expensive. If your business is developing custom proposals or building unique service package concepts for prospective clients, it could be 20 or even 30 times more expensive to land new clients.

Fortunately, performing this calculation is relatively simple. Estimate the total cost of all marketing and sales materials required to land a single client, and divide this number by the average customer monthly revenue. If your average customer acquisition cost is $10,000 and your average monthly retainer is $1,000, you need to have a average customer retention period of at least 30 months to not just survive, but thrive.

2. Understand Your Customers Can Offer More Revenue

Remember, your customers already need your product. They love it more than what your competitors have to offer. If your customers aren’t feeling appreciated, their satisfaction rate could drop to dangerous levels. Small flaws and inconveniences lead to customer churn less often than you might think. More often, it’s a perceived lack of relationships that can cause customers to bail.

Research has found that up to  68% of customers leave a company because they feel the organization is indifferent about them. However, only 9% will make the switch because they feel a product or service is superior. In agency settings where working relationships can determine the success of services provided, these relationships are especially critical.

I recommend that any organization who relies on recurring revenue have policies and plans around disengaged customers. This could be a dedicated account manager whose role is to reach out and offer resolution as quickly as possible. Additionally, be sure to thank your organization’s promoters who consistently score between 9 and 10 on your satisfaction surveys. These clients are often responsible for driving cost-effective referrals and recommendations.

3. Be Realistic About Why People Churn

Churn isn’t a problem, it’s a symptom. You won’t be able to reverse any issues with recurring revenue unless you identify the leading indicator that’s causing customers to leave the organization. Your customers have become disengaged or dissatisfied for a reason, and it’s a symptom that can quickly become deadly if it isn’t fixed quickly enough.

Some of today’s smartest organizations have managed to scale churn analysis through behavioral segmentation and implicit data analysis. Perhaps the customers who have the greatest risk of becoming disengaged fall tend to hold certain job titles, or share a pain point of feeling your software is difficult to use. These customers don’t need to be ignored, they need personalized outreach and strong messaging that they matter.

Most organizations lack sufficient data, resources, or clients to rely on implicit data analysis. If your business fits into this category, your role is to engage your entire team in identifying, reporting, and escalating churn risks.

4. Use Churn as a Learning Opportunity

Some customer churn is almost inevitable. While excellent retention strategies can keep this minimal, it’s almost a certainty that you will lose at least one customer eventually. Your organization may be able to salvage relationships with appropriately personalized and quick outreach. However, even if you’re certain you’ll never win back the business, analyzing the customer’s exodus is still critical.

Understand why customers left the company, and collect any data they’re willing to share on the reasons behind their departure. If they’re unable or unwilling to communicate, map the patterns of their engagement with your product or staff in the weeks leading up to their departure.

Your brand’s most loyal and satisfied customers are a trove of invaluable insights into the types of people and firms you should be actively working to acquire as customers. However, lost revenue is an equally important data source. Use these relationships to understand where your business can improve in order to survive in a business environment where recurring revenue is your lifeline.

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This article was syndicated from Business 2 Community: Why Customer Revenue is Critical to Recurring Revenue Businesses

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