Capabilities: 6 Ways To A New You

XaaS Key #4:??Capabilities

Part 3:??A Stitch In Time Saves Nine

There’s Big Money Here

What if I told you I could save you 75% of your customer acquisition costs, AND save you over half of your renewal costs for existing customers???Sounds pretty good, right?

In my previous article,?XaaS Success Key #3:??Go-To-Market/Part 1:??The XaaS Sales Funnel:??Deeper Than You Think, I mentioned that for XaaS, the money is in renewals.??Even for products requiring ongoing maintenance and occasional upgrades, about half of total contract value is realized in the first year.??However, for XaaS, only around 15% of total contract value is realized in the first year.?

Clearly, more money comes later.

Reality Check:??Most Do Renewals Wrong

A major software company I worked with did not have a renewals strategy even after 6 months of embarking on the transition to SaaS.??We studied the practices of typical subscription companies – such as cable TV and telecommunications, and came to some surprising discoveries.

First, most subscription companies are terrible at renewals.??Sometimes, renewal costs were as high as 50% of CAC, leading to payback periods of as much as 6 months.??

Second, the reason they are terrible at renewals is because they don’t use data and analytics to know their customers, and thus resorted to expensive methods to “win back” customers that did not renew.??

The economics of bad renewal capabilities are stunning – in general, I’ve found that for most XaaS companies, 90% of their renewal budget gets directed at renewing only 10% of customers.??Even worse, 25% of the budget gets wasted on the 20% of customers that won’t renew.??

And what does this money typically get spent on???Usually it’s on costly “win back” spending such as discounts, giveaways, and highly expensive telemarketing calls that erode price points and do little to create more valuable customers.

Doing Renewals Right

There are three steps to doing renewals right – and these are key capabilities any company in XaaS must develop in order to succeed, enjoying those compelling economics I mentioned earlier (Figure 2).??By far the most important of these is the third step, investing in customer success.

1.?????Know Thy Customer

First, as discussed in XaaS Key #4:??Capabilities:??A New You In Six Steps/Part 2:??Customer Data, From Acquisition To Everything, companies must capture key customer usage data, in order to determine propensity to renew.??

2.?????Pick Teams

The second key step is to categorize customers according to propensity to renew. In general, in any cohort, 70% of customers will renew without intervention, 20% will refuse to renew, and then a critical 10% are sitting on the fence, trying to decide whether to renew.??In general, this 10% of customers are your target for renewal efforts, although obviously, all of your customers should receive your attention.

3.?????Make Them Winners

Winning XaaS companies develop a strong customer success capability, dramatically lowering the percentage of customers that won’t renew or are hesitant with much greater cost-effectiveness.??

How much more effective is customer success spending than winback spending???An SaaS leader I analyzed budgeted only 3% of annual recurring revenue (ARR) for customer success, with retention rates well over 90%, while a pay TV company I analyzed spent over 11% of ARR on winback spending with renewal rates in the 70% range.??Clearly, it is much more effective. Customer success sounds magical but it is actually simple; it merely means making sure your customer can use and does use your product, and intervening wherever necessary to make sure they can and do use your product.??It is a “stitch in time saves nine” approach, involving communications and training tools and methods aligned to the size of the customer account.??A benefit for SaaS and IoT companies is that much of this support can be automated by dynamically capturing information around customer usage.

So…How Do You Feel?

Smoothed revenues, but also smoothed costs and smoothed stress on your team – XaaS produces multiple benefits for the vendor.??Master these four new capabilities, and these benefits can be yours!

What is your take???What do you feel are the major capabilities shifts and challenges in transforming to XaaS???Contact me; I’d love to hear from you!