Why Customer Retention is the Single Best Indicator of a Great Business

0
461 views

Share on LinkedIn

Ask any all-star investor or CEO what the lifeblood of their business is and I bet they’ll say it’s not top-line sales or margin, but net dollar retention. That’s the metric that shows how much a new customer today will be worth in a year.

Are they spending more with you (expansion) or less (churn)? Getting people to use more of your product, and minimizing the probability that they’ll quit you, is the one north star that aligns product, sales, marketing, and customer support. If everyone’s pulling toward that number, you’ve created massive leverage on your business.

This dynamic is especially acute in the SaaS business, but with everything from clothing to produce to music to razors being offered as subscriptions, companies far beyond the software sector are focusing on customer retention. Even businesses that aren’t currently dependent on subscription revenue should be prioritizing retention as though they are.

A quick refresher: Net dollar retention (also known as net revenue retention or NRR) is the result of taking your total revenue at the start of the period, plus expansion, minus churn and contractions during the period, then dividing that all by total revenue at the beginning of the period. A healthy business has an NRR above 100%, and the best ones come in north of 130%.

Whose job is it to boost retention?

Optimizing for retention is everyone’s business, and it starts well before you close a sale. Retention begins when a buyer first hears about your brand, and it keeps going through a paying customer talking to your support team. All the steps along the way are opportunities to create delightful customer experiences that promote loyalty and a greater willingness to spend with you. There are plenty of ways to automate these efforts. Intercom’s Customer Success team, for example, uses our own product features to engage unresponsive customers or to alert customers to new features.

Once you start thinking about retention as a business requirement beyond and before the close of a sale, you begin to realize the problems that come with the artificial lines we draw between corporate functions. Sales, marketing, product, and support used to be very separate disciplines, but the lines between them are (or ought to be) blurring. When a customer on a free trial reaches out with a question, is that a support issue or a sales issue? Yes, to both. When a prospect likes your webinar and reaches out to your support team to ask questions, is that a marketing, sales, or support issue? Yes, to all three.

Flywheels and Funnels

It’s worth reconsidering the orthodoxy of the traditional sales funnel, in which marketing creates awareness and leads that get handed to a sales team that will prospect, discover, negotiate, and close. While funnels can work, they can also put marketing, sales, and customer success at odds with each other, fighting over the handoffs when what they should focus on is the customer. Many good companies get caught in this “funnel vision.”

A better model could be one that’s more of a flywheel than a funnel, generating business momentum by putting the customer at the center of everything. Yamini Rangan, the CEO of Hubspot, influenced my thinking on this: we recently chatted about replacing the funnel with a flywheel, which starts spinning when you attract new customers, get them to like you, buy the product, and delight them so much that they become an advocate for you. When you center the customers and turn them into advocates, the flywheel attracts and engages even more customers. Now you’re genuinely customer-focused rather than function-focused.

Why Onboarding Is Essential To Retention

One of the essentials to building a fast-spinning attract-engage-delight cycle is the onboarding process. Customers have to be blown away immediately by the value they’re getting. The problem is most companies flop at it. Why? Because onboarding almost always falls into the cracks between what marketing promises (beautiful brochure!) and what the product team built (black & white manual!). Companies that are great at onboarding obsess over ensuring that what they sell is what they’re building and what they’re building is what they sell. They make it a game so that new customers have fun getting to know all the features, rather than tossing them the keys and shouting “good luck” over their shoulder.

One tip for building delight into your onboarding experience is to tailor the onboarding based on customer intent. Too often, people dump everyone into the same flow, even though they might have different reasons for using the product. You should be creating separate messaging and onboarding flows for each of your most common customer segments. Customizable chatbots are a great way to meet customers on their own terms, and tagging the resulting conversations can produce invaluable feedback for engineers that will want to hear about the impact of their bugs and for the product team will want to know exactly where your customers are getting lost and confused. By tagging your messages and sharing your findings, you can make sure the right feedback is available to the right people in your company.

There’s a ton of value you can unlock just by interviewing four kinds of new customers. First, talk to the ones who signed up and vanished. Ask what they were looking for. Were they even prospects? Then speak to those who signed up, started a trial, and converted. Find out what tipped them over the edge. Then talk to those who signed up, started a trial, and canceled. They gave you a shot, so what went wrong? Last, talk to those currently in a trial with your product. This cohort will get you the most energy. Ask what open questions they have, and what else they are doing. Find out what they were doing before they came to your product.

Watch what your customers do, not what they say

Asking questions of customers is essential, but taking their answers at face value can lead you astray. You have to watch what they do. Customers won’t always tell you what problem they’re trying to solve. In the Toyota production system, they have this phrase genchi genbutsu, which basically means to go and see. Get to the factory line, and watch what’s actually happening, so that you can take the right actions.

I’m not saying there are easy conclusions to make along the way. Figuring out what’s going to turn customers on or off as they start to use your product is something you build up over time in the business. But watching what customers do when no one’s looking is a crucial piece of intel, and it’s your job to put the work in. You can get in trouble if you fall in love with the solutions you think you need to retain customers. Instead, fall in love with the problems you see your customers trying to solve. That’s how you build lasting relationships and market-beating net revenue retention stats.

LEAVE A REPLY

Please enter your comment!
Please enter your name here