Is Customer Churn Your Silent Killer?
Like kryptonite is to Superman, customer churn is a pervasive and insidious problem facing many tech companies today. It is the silent killer that eats away at revenue, consumes sales capacity, and leaves companies struggling to survive. Despite this, only a few select companies are calling out that Net Revenue Retention (NRR) is a problem, many are leaving this unchecked.
During the latest February reporting period we observe some worrying numbers and a significant rise in commentary from founder’s, CEO’s, CRO’s and CFO’s using terms like “Churn continues to be elevated”, “saw expansion slow”, “our net retention fell in Q4”.
These are all early warning signs or what is around the corner in 2023, but what is worrying more is that many companies are not commenting on it and many aren’t reporting it. It is absolutely crucial for all tech companies, regardless of size, to measure and track NRR with many in churn nightmare land.
What’s the hype around NRR?
NRR is all important, as it indicates a company’s ability to retain customers and grow revenue from them over time. High NRR indicates that the company has a strong customer base, one that is loyal and one that is willing to spend more money with the company. This is particularly important for companies that operate on a subscription or recurring revenue model, as customer retention is critical to the company’s success.
So why aren’t all CFO’s presenting and disclosing NRR metrics?
- Is it due to a lack of understanding or prioritization? Some might not fully understand the importance of NRR metrics, or the board doesn’t prioritize it as a key metric in their financial reporting and prefer to focus on more traditional financial metrics.
- Measuring NRR requires a deep understanding of customer behavior and the ability to track changes in customer spending patterns over time. This can be a complex and time-consuming process, given data inaccuracies, data silos in the channel and account structure and normalisation.
- Potential fear of negative perception? Lack of industry standards? Unlike traditional financial metrics, there are no established industry standards for NRR metrics.
Does tracking NRR solve all your problems, no way – Gross Renewal Rate (GRR), Renewal Rate, and Gross Churn are also critical preceding indicators that help assess the health of the customer base quantifiably and unemotionally. How they are performing and how likely they are to retain customers, which ultimately affects the NRR. Many companies are attempting to measure customer health score cards, however these are fought with danger given that close to 50% of the score is controlled by the Customer Success team, who are also often compensated on the growth of customer health scores (conflicted much).
- Gross Renewal Rate (GRR) measures the percentage of customers who renew their subscriptions or contracts without making any changes. A high GRR indicates that customers are satisfied with the product or service and are more likely to renew their subscriptions. If the GRR is low, it could indicate that customers are not finding the product or service valuable, which could lead to higher churn rates and lower NRR.
- Renewal Rate measures the percentage of customers who renew their subscriptions or contracts, regardless of whether or not they make changes. A high renewal rate indicates that customers are satisfied with the product or service and are more likely to renew. If the renewal rate is low, it can indicate that customers are not finding value from the product or service, which could in turn lead to higher churn rates and lower NRR.
- Gross Churn measures the percentage of customers who cancel or do not renew their subscriptions or contracts. A high churn rate indicates that customers are leaving the company, which could result in lower NRR. By understanding the reasons for churn and taking steps to address them, companies can reduce churn and improve NRR.
In our opinion, the realisation that many technology business’s existing customer bases are in a non-healthily decline is unacceptable and throwing more sales staff at the problem will not solve the root cause. Sales team inefficiency is a growing time bomb, and the need to measure NRR and free up sales teams, is higher than ever before.
A select few companies have started to calling out the impact of a “continued elongation of sales cycles” and the fact that this impacting their team’s ability to sell more seats and more data into their install base.
Here are some steps, processes, and techniques we have observed from successful companies bucking the trend consistently and repeatably to grow NRR and Gross Margin.
1. Automate the renewal process: Use a software solution that automates the renewal process, from generating renewal quotes to sending out reminders and notifications. This will help reduce the workload on your sales, renewals, customer success and operations team and ensure that renewals are not overlooked.
2. Implement automated price quotes: Use a software solution that automatically generates priced quotes based on the customer’s current product/service and any changes they have made since their last renewal. In addition to quoting like-for-like renewals, you should also leverage the data you have on the customer to identify upsell and cross-sell opportunities and quote and present these at the time of renewal. This will make it easier for your customers to understand their renewal options and make an informed decision without potential human intervention. Not to be confused with a CPQ that only generates “Like for Like” quote and requires human intervention for all others.
3. Send automated notifications: Set up automated notifications to notify customers about upcoming renewals opportunities and any changes to their product/service. This will help keep your customers informed, notified and engaged with your product at critical stages of the lifecycle.
4. Use automated reminders: Set up automated reminders to automatically touch, communicate and follow up with customers who have not yet renewed their product/service. This goes a long way to reducing churn and improving On Time Rates (OTR)
5. Implement self-service quoting and workflows: Create self-service, interactive quotes and workflows that allow customers to make changes to their own product/service terms without having to go through a sales/renewals/customers success representative. This will make it easier for customers to manage their subscription and reduce the workload on your own teams.
By at least assessing and reviewing these strategies against what these companies are utilising today, they can improve their renewal process, increase customer engagement, identify upsell and cross-sell opportunities earlier, and free up their costly sales, renewals & customer success teams to focus on high-touch sales activities that will ultimately materialise into NRR improvements and reduce churn.
Mat Cagney – CEO @ Renewtrak
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