Ep. #429: In this episode, ProfitWell Founder & CEO Patrick Campbell shares benchmarks from over 23,000 companies and offers a helpful framework to re-evaluate your retention strategy and increase your CLV (Customer Lifetime Value) between 10 and 60%.
This episode is an excerpt of Patrick’s session from SaaStr University: Spring Semester conference. Watch the full video here.
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Jason Lemkin
SaaStr
Patrick Campbell
Transcript:
Announcer:
This is SaaStr’s Founder’s Favorite Series, where you can hear some of the best of the best from SaaStr speakers. This is where the cloud meets. Up today, the current state of SaaS companies, subscriptions, and retention in 2021 with Patrick Campbell, founder and CEO at ProfitWell.
Patrick Campbell:
All right, how do we actually boost retention? Well, the first piece is how the heck do we measure it? Well, there’s a lot of different ways and a lot of different nuance here, but it really comes down to that net revenue retention, meaning when I look at that money that’s in my business, how much of it is staying and ultimately, I want more of money being created by that existing customer base, and then depending on the problem, you’re actually going to go into your user revenue churn, which is the actual cancellations. You got three big growth levers. You got active cancellations, this is where everyone likes to spend their time and their money, their effort. These are people who are actively clicking a button and saying, “I don’t want your product anymore.” You got your expansion revenue where we don’t spend nearly enough time, and then we also have delinquencies, which are essentially payment failures.
Patrick Campbell:
These are people who may be using this as an excuse to leave you, or maybe they are basically someone who doesn’t even know their payment failed, which is oftentimes really, really common. So we’re going to go through each of these three buckets and break out some strategic and tactical bits here. So first up, active cancellations. So as already alluded to, this is where your product team spends a lot of their time, if not all of their time. And they’re focused on getting the time to value, creating the right features for value, and then ultimately finding that right segment, and we’ll touch on both of those in a bit. But then there’s some really tactical things that most people don’t implement that are actually probably low lift within your business, but are actually super, super high impact on reducing your active cancellations, and these are things like term optimizations as well as win-back and triaging those folks who are trying to cancel. So we’ll touch on each of these, just in a couple of seconds here.
Patrick Campbell:
So first up, term optimization. I thought I’d start off with something super, super tactical, because we’ve been very theoretical up until this point. The basic concept here, and we have the data to support this, longer term contracts equate to lower cancellations. What you’re looking at here is about 3000 SaaS companies, we’re looking at, on the X axis here on the bottom, essentially the percentage of their contracts that are annuals, and then you’re looking at their overall monthly revenue churn rate. And what you’ll notice, the more annuals typically a business has, and of course this is purely correlative data, they tend to have lower churn. And there’s a lot of factors and lurking variables here, but even when we look at this on a very, very pure basis, your annual contracts will typically have 30% better retention overall compared to monthlies, and then quarterlies basically have typically a 20% better retention rate than those monthlies. And this really comes down to one purchasing decision over a three or 12 month period versus going after multiple, even indirect purchasing decisions on a month by month basis.
Patrick Campbell:
Now, what’s kind of interesting about this is that a lot of you intuitively get this but you’re only asking for that annual or that quarterly payment when someone signs up before they’ve even had an experience with your product. And so what we recommend doing, and you should really build your own model but if you don’t have the time or you kind of just want to do this a little bit more bluntly, you want to go at those folks who have been with you at least a month, so about two months, all the way up to about nine months, and again, this’ll differ company by company, that’s kind of a good heuristic, and make sure you’re going out to them and actually asking them to upgrade. So here’s just some sample copy you can steal.
Patrick Campbell:
And then the other piece here is making sure that when they click through, it’s really, really easy for them to confirm and then get on that longer term plan. Now, a couple of little tidbits here that I’m not going to have slides for. One, whole numbers, two months off, one month off, $100 off, versus percentages, 15% off, the whole numbers work substantially better. It’s not even close in terms of the actual performance between those two buckets. So make sure that even on your current pricing page, if you are a product led growth or a touchless product or a low sales product, you’re actually using those whole numbers.
Patrick Campbell:
And then for the enterprise folks out there, you might want to consider going to an 18 month or two year contract versus just an annual contract once that customer gets into the funnel. Now, you have to be careful with this because theoretically, you want as [inaudible] acceleration where you can actually raise their price every single year, and if you’re in a two year contract, that’s hard to do, but there’s some things we’ll talk about in a second that actually account for that. Now, the second big tactical piece, and this is something that as soon as COVID hit and we were all affected, this is my biggest recommendation to everyone because everyone was worried about a run on their product, is making sure that you set up win-back and triage those cancellations. So what I mean by that is when someone wants to leave, you want to add some friction to essentially them leaving.
Patrick Campbell:
Now, you don’t want to hijack them, force them to have a phone call or something like that, unless you’re in really dire straits, but I still wouldn’t recommend it. But a one question survey, a couple of questions survey they have to answer essentially helps you learn why they’re leaving. And if it’s super obvious, you’re going to see that data, but sometimes it’s not so obvious, especially when we’ve normalized, at least a little bit over the past 12 months. Now, when I have that information, now I can go into action and try to actually save these cancellations and give you a little bit of a takeaway here is when someone cancels, there’s typically a period between then and when they actually officially churn. And most of us just give up once they hit that cancel button and in reality, there’s a lot of things that we can do.
Patrick Campbell:
Now on a very basic level, we can offer up salvage offers. This saved a lot of companies in March and April of last year, and just basically making sure that when someone hits cancel, depending on the reason why they hit cancel, offering up, “Hey, one last thing before you go, let’s get you a free month,” or depending on what they said, let’s get you $100 off next month. Something that is better than that customer canceling, but isn’t that customer necessarily paying the full price. Now, you can offer this. You got to be careful to make sure that you don’t have people gaming the system here. You want to be a little bit more sophisticated on not just offering this to everyone, but again, if I set up a survey where someone didn’t have enough time to use the product, they’re not getting the value quite yet, those are really good customers to go after and make sure that they can actually stick around.
Patrick Campbell:
Now, some other options here, these are thrown around a lot, maintenance plans. “Hey, here’s this $10 plan. We’re going to save all your data, but you can’t use the product.” Better language, but that’s the basic idea. Even pause plans, they saved a lot of companies as well. And then a couple of other options here, if you have a freemium tier, putting them back on the freemium or even playing chicken. I think a lot of us got really scared as operators because we were nervous about losing our customers, but it’s okay to play chicken when it comes to churn because if someone hasn’t quite fit the profile or has fit the profile of someone who’s a good customer, but they want to leave, it’s okay to say, “Hey, we’ll be here whenever you want to get started again.” But the basic idea is this off-boarding is super, super important to attack.
Patrick Campbell:
And then some of the other things is, don’t be afraid to try and win back customers. I think this is a really big lesson here. Reactivation campaigns, doing these either episodically or doing these actually in that window from between someone’s canceled and someone’s churn is really, really powerful. Now, interestingly enough, discount numbers work in this case from a percentage basis. So this is interesting because it doesn’t work necessarily in the upgrade, but it does work in the salvage, particularly because you end up actually offering a much, much higher discount to get that person back for a couple of months so that they can then get onto a higher end plan.
Patrick Campbell:
Now, to back up and go a little bit strategic, this is the final couple of points here with active cancellations, you have to understand your customer and I’m not going to be able to go super, super deep into understanding customers and customer development. There’s been so much written on it, but I just want to be a reinforcer of that concept and also give you a little bit of a framework to think through feature packaging, because I think it’s really, really powerful for making sure that you’re not only getting expansion revenue, but you’re also making sure that you’re defending that core value experience. Now, there’s a lot of pushback on customer development. This Henry Ford quote goes around, he probably actually didn’t actually say this, but the whole concept is, well, if I listen to my customers, I wouldn’t actually build the innovative product. And this is the problem piece with this quote.
Patrick Campbell:
When you’re doing customer research, you are not making decisions based on what your customer says. That’s not your job. Your job is to get the information, understand where they are, almost being a prosecuting attorney, and then filtering that information and then making a decision by earning your paycheck here. And so the big thing that I want to get across is that you got to understand those customers, and I know only 20% of you are actually going to do customer development, but it is one of those things, that 20%, we have the data, actually tend to do much, much better in terms of retention as well as growth, and it’s a correlative because they’re probably doing a bunch of other things right than those who don’t do the customer development out there. But to give you this little bit of framework, this has been something we’ve been talking about in the context of pricing for a while, but whenever you have a product and it doesn’t really matter what the product is, you typically have about two axes of value.
Patrick Campbell:
There’s the relative value of the actual features of the product, and then there’s willingness to pay. And so if we’re talking about a product, like let’s say a cup of coffee, which we’re all fairly familiar with I’m sure, even if we don’t imbibe in coffee, but if we talk about a cup of coffee, the first thing I want to understand if I’m going to my customer base is, what is the relative value of the different features of that product? So for coffee, it’s things like taste, country of origin, temperature, these types of things. And I want to basically put, through some research methodology but even just maybe amongst our team, talking through these things, I want to put those features along an X axis here. So if I go out and do some research, I might find out that the most important feature relative to the other features is taste and the least important feature relative to the other features is country of origin.
Patrick Campbell:
Now, that relative nature is important because I go ask a different group about country of origin and maybe it’s the number one feature, especially the hipsters that we might talk to who really, really care about those particular things. Now, the second thing I want to do, either in a thought exercise or actually collecting data, is to overlay willingness to pay. I want to find out, those people who care about taste as their number one, what’s their willingness to pay relative to everyone else, relative to the median. And I might find out they’re willing to pay about 15%, and then country of origin, there’s not a lot of people, but the people who really care about it, they’re willing to pay about 25% more. Now, how does this help us? Well, with this two by two, we now have a framework for at least arguing about, or at least measuring value.
Patrick Campbell:
If I find a feature that is high value relative to the other features and high willingness to pay, that’s a differentiable feature. Low value relative to the other features but high willingness to pay for the people who care about it, that’s an add on. High value but low willingness to pay is a core feature, and then commodity features, which we all end up building. So you can use this, again, even if you don’t collect the actual data, to understand, are we defending the core? Are we adding differentiation? Are we adding ad-ons here? Which we’ll talk about in a second, but I think you should collect the data and here’s why. We went out to about 1300 product leaders and we asked them, for the last end features after we made sure they understood this, and we said, where do they fall in these four boxes?
Patrick Campbell:
And this is what they said for just under 5,000 features. We then went out to about 1.2 million different customers of these products in a composite study and using Profitable’s Price Intelligently product, actually measured value and where they were on the spectrum, and this is where the customers ended up being. And this divide has gotten larger and larger because there’s so many more products, there’s so much competition for attention where we’re getting more and more disconnected from being able to just know what our roadmap is for the first 18 months versus knowing, what is the thing that’s actually going to differentiate us? So it’s super important to do this actual research. So off my soap box here, something that you can use here to use this model to actually validate what you think is valuable.
Patrick Campbell:
Okay, so the one other thing that we’re going to talk about here, the two other things I should say, is next up is expansion revenue. And we’re not going to spend too much time on this because there’s other folks who talk a lot about this, especially customer success folks, but I want to give you some numbers here around cross sells, upsells, ad-ons and then be another soapbox for a value metric, which we’ll talk about in a second. So we’ve all heard the adage, keeping existing customers, it’s a lot easier than getting a new one, right? Well, it’s also easier to get more money from an existing customer than it is to get from a new one. So the biggest thing here is that we need to make sure we’re taking advantage of those advocates and that customer base that you fought so hard to get. The best subscription companies, specifically SaaS companies out there, 20% or more of their revenue each month or new revenue each month is coming from their existing customer base through ad-ons, expansion, some sort of add on.
Patrick Campbell:
Now, most companies have less than 10% of their new revenue coming from existing customers, and it’s not something that’s actually extremely difficult, it just takes some more effort and a lot of us aren’t putting in the effort for these folks. So there’s a couple of things to go into. Cross sells and upsells, these are huge. So basically, selling someone an additional product, selling them on an additional tier of a product, this is where there’s a lot of known literature out there, but I want to give you a little bit of a deep dive on this whole concept of multi-product. And the reason is that you’ve seen a lot of these companies basically go, once they hit a hundred million plus, start to actually add different products, either through acquisition or building them. HubSpot, Salesforce, Zendesk are a big three that have done this, Adobe starting to get into this.
Patrick Campbell:
Obviously, these are really, really large companies, but we’re also seeing more and more people start to do this, just past the $10 million mark. And the reason that they’re doing this is that multi-product companies between 10 and a hundred million in annual revenue, they typically grow at a 30 to 50% higher growth rate than those folks who are single product. And this stands to reason, and what you’re looking at here are different pairs based on their price point, and on the right pair, you’re basically looking at folks who are multi-product and the left of the pair, you’re looking at single product, and you’re looking at these growth rates, again, from 10 to a hundred million per about 500 SaaS companies. Now, what’s interesting about this is this should stand to reason, they’re selling multiple SKUs, hopefully to a similar type of customer or different verticals and therefore they can actually compound.
Patrick Campbell:
And once you reached that 10 million point, typically what ends up happening is you have the basic infrastructure, not only around hiring and recruiting, but also just around sales and revenue operations as well as product operations, to continue to sustain this. And so I want you to reconsider, what are those things that essentially you could add as a SKU to essentially go after your customers? Now, a good baby step here are things like add-ons, and the add-on I think is one of the most underutilized aspects of any SaaS company out there, especially since it’s a little bit more tactical and a little bit easier to implement than creating a whole ‘nother product. Just to give you some numbers here, lifetime value is typically about 20 to 50% higher for those customers with at least one add on. We looked at those who had at least one add-on versus no add-ons and this stands to reason, because they’re paying you more, but the other thing that’s really interesting is their retention is higher. And their retention tends to be higher because they’re more bought into your ecosystem.
Patrick Campbell:
Now, what should you use for an add-on? Well, you can go through this thought exercise that we just talked about and find those features or functionality that are low value relative to the whole customer base, but are high willingness to pay for those who like that feature. Another way to do this, it’s a little hacky but basically, any feature functionality that is used by 40% or less of your customer base or that particular group, so a tier if you have a feature in there, anything that’s used 40% or less, that’s a really strong candidate to pull out and basically sell across the whole customer base. Things like priority support, things like analytics for certain verticals, these types of things, they tend to be really, really good ad-ons.
Patrick Campbell:
And the final piece here of the expansion revenue side are value metrics. Now, a value metric is how you charge. So it could be per user, per hundred visits, per hundred “what’s its”. The actual value metric is super important, but just for an example here, we’re going to show two competitors here. So on the left here, you have Intercom. Intercom charges essentially based on the number of people that go through its live chat widget in a given month, so if you have a hundred prospects interact with that widget, your price is A, if you have a thousand, your price is A plus B. Now, what’s interesting is Drift, one of their competitors, basically charges on a per user basis. And I wanted to show this because these competitors essentially are pricing differently because of who they’re targeting. So Drift, they’re going after sales and a bit of marketing, whereas Intercom is going after sales support, marketing, product ops in some cases, and they need a little bit more of a generalized value metric.
Patrick Campbell:
Now, what’s powerful is what you’re doing with a value metric, sometimes called a pricing metric, is you’re essentially taking advantage of what you’ve learned in your economics class in college or high school, where your professor or teacher put a point on a particular demand curve and then he or she shaded in a box underneath that point and said, “Oh, this is your revenue for that particular price point.” Well, with a value metric, you’re essentially having infinite or seemingly infinite different price points and you’re making sure that when Disney comes in, you’re charging them a different amount of money than some Johnny or Jane startup that starts using your product. Now, the implication here is that cancellations are much, much lower. You will have more downgrades, but a downgrade’s better than a cancellation, and it’s mainly because people are actually using what they’re paying for.
Patrick Campbell:
And so what’s kind of cool here is that what you’re looking at on the far right here are those folks who have value metrics, so pure value metric companies, versus those who are using feature differentiation, and you’re seeing about that revenue churn rate actually to be about half. Now, the other side of the coin is actually really powerful too because expansion revenue is actually much higher, so these are the same categories of companies and you’re looking at about double expansion revenue. And the thing that I’d like to say is, and I’ve studied a lot of SaaS pricing over the years, if you get your value metric right, typically, your retention and your pricing, even if you get everything else wrong or mostly wrong, you’ll be okay because it bakes growth directly into how you make money. And actually, what’s super cool, and I’ve been beating on this drum for about seven years now, is that December of 2020 was the first time period where more SaaS companies were using a value metric than using feature differentiation.
Patrick Campbell:
And so this is the trend that’s been growing over time. When we first started about seven years ago, it was only 15, 20%, and we have basically billing systems to thank for this because billing systems made it easier and easier to use value metrics. All right, so we are going to talk about the sexiest topic in the world, that is payment delinquencies. Now, when I first started studying data and we started getting more and more people on ProfitWell, this was one of those pieces, credit cards, that shocked us. And it shocked us because when you look at billing, you would expect credit cards to have been revolutionized over the past 20 years to the point that, why would payments fail? Well, some fun facts. The first modern credit card was created in 1958 from Bank of America, and much of the underlying technology, apart from chips and apart from computerization, but much of the underlying technology besides those two pieces hasn’t really been updated since 1965, maybe around 1970.
Patrick Campbell:
And so you have these mechanical devices if you’re a credit card based business that are subject to failure. They’re subject to failure, and most of you don’t have the infrastructure, don’t have the pre failure piece and don’t have the post failure piece to account for these payment failures. And to shock you a little bit, if you are a credit card based business, meaning most of your payments come through credit cards, it is the largest single bucket of lost customers. And just to give you some data on this, it typically, in both B2B and in consumer subscriptions, is about 20 to 40% of your lost customers. So if you have a hundred people go delinquent, a hundred people’s payment fails, 20 to 40 of them are gone.
Patrick Campbell:
And what’s interesting is the reason that this is so problematic is that we are absolutely terrible at recovering payment failures. And I think it’s because of that misconception we have with retention, “Oh, well, if the product was good enough, they would just come back.” Well, the problem is that most people don’t even know the payment failed, and even in some cases, sometimes Amex or of the processors will actually keep that payment going. So there’s not enough nuance there. It’s kind of like saying, “Well, if we build it, they will come.” And we all know that that’s not how products are actually built.
Patrick Campbell:
To give you some perspective of impact here, right now, you’re only recovering about 30 out of a hundred folks. So if a hundred folks’ payments goes delinquent, you’re only recovering about 30 of them, and really, the best folks out there, it’s around 60 to 80. So yeah, some folks, this is their excuse to leave you. Their payment fails and they’re like, “I’m out of here.” But a lot of folks, there’s a huge delta there and it’s because you’ve never spent any time on here and you’re probably not going to spend a lot of time, but there’s some things we can do very, very tactically to get these folks back. Now, I don’t have time to go so deep into this, and if you want to go deeper into this, ask it in the Q and A because I do have a separate deck where I can go through a bit of what you should do and the payoff, but I’ll go briefly through some high level points here.
Patrick Campbell:
The biggest thing, treat these folks as a marketing channel. This is the biggest thing I see when we go into our customers, because we have a product that handles a lot of this, is we’ll notice that before, using Retain, they end up sending these very bill collector emails, typically written by the finance team, no offense to finance teams but you normally aren’t the one thinking of like the best language, right? Or what they end up doing is they’re just using what Stripe or Zoura already has built in, and that copy in stuff isn’t bad, but it could be so much better. And you’ve got to keep in mind, these are your customers, and they have something that happened that they probably didn’t even know about so it’s really, really important to treat them as those customers and remember that relationship.
Patrick Campbell:
So there’s a bunch of things you can do before the point of failure. Really, really obvious things are things like expiration tracking. You should not be sending emails for expiration tracking. It’s a little bit of a nuance point because if you’re really good and you’re going to study the data and you’re going to set up the right campaigns and the right triggers, yes, use email. But right now, most people sending emails before the point of failure, it increases active cancellations by 10 to 20%, and we’ve seen that pretty unequivocally. So what you should do, especially being a SaaS company, is you should basically be using in-app notifications. Again, if you’re going to get more advanced, you can use email, but right now, the biggest quick hit before the failure is to make sure that you’re actually turning those pre failure emails off and using an in-app.
Patrick Campbell:
Now, afterwards, smart retries, just make sure they’re turned on inside your billing system. Most of them have them turned on by default, but sometimes someone turns them off. The other thing is if you’re more advanced, larger, between 10 and 100 or over 100, you should be really decoupling your retries from the billing system and use your billing system ones but also do additional ones. We’ve just seen different fun trends. Like if you’re of a consumer, a prosumer product, best time to actually retry a credit card is 12:01 AM Pacific on the first and the 15th of the month. That’s payday. Most of the billing systems aren’t doing that for low ARPU products.
Patrick Campbell:
If you have a little bit more of a B2B focused product, Mondays is a really good time to retry a credit card. And then the other thing is email, in-app and SMS, that’s where the majority of people are going to come back from. Do not send highly branded designer email. They don’t work as well. Plain text emails that appear that they’re actually from a human, they work really, really well because there’s a little bit of reciprocation. If you send me a really nicely designed, but like, hey, your payment failed email, I’m just going to ignore it. If Martha sends me a customer success email that says, “Oh no, there was a mistake. Can you update your payment info?” I’m going to feel a little bit indebted to Martha and I’m either going to reply and say, “Actually, we’re not going to use the product anymore,” or I’m going to take care of it or I’m going to say, “Oh, I’ll update this.”
Patrick Campbell:
The other really good hack, don’t force your user to sign in to update their credit card. There’s some technology you can build or you can use a product like ours where basically, a really good mobile optimized form using Apple Pay, Google Pay, these types of things, or just straight up credit card. They can actually just use an… And this is the one thing, if you have some technological bandwidth but not enough, this is the one thing that I would do in addition to the drips, email, in-app, these types of things. And the last thing I’ll say is, lock your customers out who aren’t paying you. There’s one out of like 15 to 20 companies that we see or sees a presentation like this, they go in and they check and their engineering team treated delinquent users different than active users, and then they never closed the loop on the delinquent folks. So the delinquent folks are just using the product for free.
Patrick Campbell:
We had one company, and this is the one that’s fun to say, basically 10 million in ARR was basically using the product for free. And what ended up happening is they didn’t get all of them back, but I think they got 6 million back and it was like the greatest growth hack. It’s not really a growth hack, but it was a greatest growth hack at the time in their history because they just said, “Oh, whoops, we’re going to lock you out. Your payments failed.” And then a bunch of people updated their payment information.
Patrick Campbell:
Okay, let me recap real quickly. Retention, it’s a game of incremental optimization. That’s the biggest thing that you should take away from this. And yes, there are a lot of things that are strategic, there’s a lot of things that your product team is going to just sweat and cry over trying to figure out a bunch of things, but there’s a lot of tactical things in the middle here that you’re probably not doing just because you’re like, “Yeah, we got to fix it with features and finding the right segment,” all these other things. If you don’t have somewhat the right features or segment, of course, there’s nothing that’s going to solve it besides finding that out. But most of you on the phone here, if you’re beyond even 5 million, let alone 10, 20, 50 million, there’s a lot of tactical things you’re probably not doing to take care of things.
Patrick Campbell:
Influencing retention, you got to break things down. We’ve got these three big buckets we talked about, and I would just start by looking at what the heck is going on in your current business? You’re probably focusing so much on active cancellations and there’s no focus on expansion revenue or delinquencies, let alone the tactical pieces, but you got to just put in the work. Nothing we talked about was rocket science. There’s nothing here that was like, “Oh my gosh. Yes.” Getting in some of the math models, if you’re $150 million SaaS company, yeah, it’s going to get a little complicated, you’re going to need some data science work. But for most of you, it just takes in putting some of this effort and a little bit of prioritization, nowhere near as much prioritization of the other things in your business, but just a little bit more.
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