An unpredictable economy has moved many SaaS businesses’ focus away from growth at all costs and elevated the importance of retention metrics. Speaking at a 20-Minute Tales from the Frontlines of Finance session, Sidharth Kakkar, Co-founder and CEO at Subscript, explained the impetus for the shift.
As a Customer Success Manager at Airbase, I focus on helping customers obtain the quality experience and value that makes renewal an easy decision. Data around retention and product usage help me determine how to make that happen.
Think about retention metrics early on.
Subscript offers subscription intelligence tools that provide real-time subscription revenue metrics. Sidharth’s previous company was in education technology, an industry that taught him some valuable lessons about knowing your customer when evaluating retention and churn.
Sidharth said that, in the past, he’s made some typical founder mistakes with regard to the metrics he paid attention to. “Like a lot of CEOs, my focus was just ‘Let’s acquire as many customers as we can, get the numbers going up and to the right.’” Plus, in the early stages, there simply isn’t enough data to put much weight on retention, particularly if contracts often span multiple years. But I’ve learned that that approach isn’t sustainable.
Creating a data management strategy that incorporates retention metrics early on creates actionable data that can guide product strategy and roadmap decisions — but timing is important. Realizing a customer is a churn risk right before renewal doesn’t give much time to address any issues.
One of the first things to do in order to create valuable retention metrics is to examine the value you want customers to gain from your product and determine how that value is measured. Product analytics software like Mixpanel and Amplitude can help determine customer interaction. Sidharth summed it up well:
I agree with his emphasis on not ignoring the value of qualitative data and asking about customers’ experiences with your product. To really grasp the dynamics of whether a customer does renew requires both qualitative and quantitative data.
Setting up processes for retention metrics.
It’s vital to start with a clean data set. That includes knowing exactly who your customers are, how the contract term is defined, and how revenue is measured. Measuring ARR for one-time revenue, consulting-based revenue, or usage-based revenue will each require a different approach. Sidharth cautioned that these definitions may seem simple on the surface, “but once you get in the weeds of it, the complexity explodes,” and that has been my experience as well.
Retention metrics as drivers of strategy.
Lifetime value (LTV) can be a complex calculation, but it’s ultimately one of the most important numbers to track because it helps determine how much to invest in go-to-market functions. But don’t overlook the impact of retention and churn on LTV. Sidharth made an important point:
Smart teams can dig deep into determining this number by breaking down the retention costs into activities like onboarding, renewal times, training, and customer support. Sidharth explained that this investment may lower your gross margins, but it will ultimately make your LTV higher.
Cohorted and non-cohorted metrics.
Cohorted retention metrics looks at customers that share similar characteristics or experience a common event (starting a contract on a certain day, for example). Looking at customers in cohorts provides insights that are often missed with a non-cohorted approach that simply gives a single number for retention rates.
As Sidharth explained, “Non-cohorted retention is taking a two-dimensional thing and flattening it into one dimension, so you lose the richness of the two-dimensional data points.” He gave an example from his previous company: How do education technology customers who purchase in March differ from those who purchase in September?
Similarly, businesses should look at how retention varies from the first, second, or third year of contract renewals and what it means in terms of customer satisfaction. The resulting insights can drive product development: If numbers drop in the second and third years, is the product only providing value in the first? What do those customers who renew have in common? This in turn can impact sales strategy, so sales can focus their efforts on customers more likely to stay.
How to increase retention rates.
What happens if, after sorting through the data, retention metrics fall short? Sidharth recommends digging deep to understand what happened, which is an approach I also take. “I don’t go to the obvious place. I go to the deeper level and ask ourselves about the value we deliver. You managed to sell to the customer, so clearly they believe that the value can be delivered, but something went wrong in the delivery of that value,” he says.
Somewhere in the gap between what a customer thought they were getting and what they actually got lies the answer to improving retention. Addressing those gaps is a cross-functional effort. When it comes to sales input, Sidharth says the decision to lower prices is complex, and a number of factors have to be considered, including CAC (customer acquisition cost), LTV, and gross margins. There’s also the matter of perceived value: lowering the price can give the impression of reduced value. Ultimately, these decisions may have to be considered on a case-by-case basis. If a client is experiencing difficulties themselves, for example, offering a price reduction can strengthen your role as a collaborative partner.
Jag Brar, CPA
Customer Success Manager at Airbase