Does Revenue Churn really matter?

https://www.livechatinc.com/blog/churn-rate/

If you are a Product Manager in a SAAS business, how often do you think about Churn? Is it something the Client Success/Account Management team deals with at your company, but is a couple of steps removed from your role? Every now and then do you get an urgent email from that team saying Big Deal client is about to leave if we don’t fix this bug or add feature XYZ? Do you think to yourself, that’s just the client making noise to get a better deal during the renewal process? As long as they don’t leave, it is not something to worry about…

If that sounds all too familiar, you may be ignoring revenue churn. While most PMs are concerned about client churn, or should be, annual service fee (ASF) reductions at renewal can actually be more deadly to your product than clients leaving. This is because fee reductions can quickly lead to your product having gross margins below the company’s target, especially if some clients were given sweetheart deals. For those of you not aware, a company’s overall gross margins are closely monitored by the executive team and investors. If your product starts to impact the margin, you had better brace yourself for some tough executive conversations. They are going to either want to cut your team to bring down costs, or may even consider pruning your product from the portfolio if it is really bad.

So how do you prevent this? First and foremost, as Alec Baldwin in “Glengarry Glen Ross” would say, “Always be adding value” to your product every quarter of every year. If your product is not improving in the eyes of your clients, they will be asking for a reduction in ASF at their next contract renewal, assuming they don’t leave you for a competitor. Even if your product is improving year over year, they will still probably ask for a reduction, but at least your account teams have something to push back with.

Certainly the most obvious way is to ensure you are always adding “Value add” features to your product. But what is a “Value add” feature anyway? The simplest test is to determine whether clients would pay extra for said enhancement. If you are unsure, talk to your account team. In my experience they will give you the most unvarnished answer. So if your roadmap is full of cool nifty features your clients say they want, but are not willing to pay extra for, your Spidey sense should be tingling. Either your sales team “Sold your roadmap” to close some deals or you are not building features that take your product to the next level. Both cases will lead to revenue churn at contract renewal time unless you get in front of it.

Is the only way to add value through features? Not necessarily. Most products require a side order of services to be successful. This is where your account team or professional services team can roll out programs that improve the product in the client’s eyes. At the most basic level, just ensuring that clients are using best practices will assure they are at least getting the bare minimum value from the solution. If they are not even doing that, you are pretty much guaranteed churn in the near future. The next level up is to look at your star clients and see what they are doing with the solution. Can you wrap any of those ideas into a program that can be rolled out to the rest of the base? Sometimes these more advanced programs may require a small feature enhancement to your product to make it easier to implement. Remember just because a star client is willing to go the extra mile and do some custom work to make a program work doesn’t mean the rest of the base will. With a small investment, you can potentially reap big rewards for your client base.

Before account teams can even consider rolling out programs, they need to know how each client is using the solution. If they don’t, they are essentially flying blind and relying on the client to tell them how they are doing. Any account team worth their salt will not put up with that for long. Do they have access to the basic client metrics? Just because you have a plethora of analytics at your fingertips doesn’t mean they do. Does accessing the data require knowing SQL or it is too “Techie?” Not everyone likes to dig around in Google Analytics or Tableau. While you may consider this their problem, it is really yours. If they can’t do their job effectively, it will create churn which will ultimately come back on you. As the PM, ensuring your internal teams are well-supported with both tools and guidance will go miles towards ultimately ensuring your clients’ happiness.

What if for some reason you just can’t add value to your solution right now? Then at the bare minimum make sure you are at least bringing down the cost to maintain and support your product. This will keep your gross margins in line when the ASF starts to come down.

So remember, revenue churn can be even more deadly to your product than losing clients. The best way to prevent that is to always be adding value to your product in the eyes of your clients.