There are innumerable strategies and tactics for acquiring new customers. But a less talked about – albeit often more important – goal is making sure your customers remain customers.
Growing SaaS is tough as it is, and a high churn rate can be a nightmare.
Our CEO, Paris Childress, connected with Patrick Campbell from Profitwell to dive deeper into the importance of the customer lifecycle and reducing churn, and shine a light on the power of freemium for spinning the growth flywheel.
Let’s tune in.
The SaaS Customer Lifecycle
The customer lifecycle refers to the process prospects go through to learn about, engage with, and purchase a product or service.
In SaaS, getting a customer to buy once isn’t enough. You need to keep your customers engaged so that they see value and keep buying from you every month.
Patrick Campbell, CEO at Profitwell, knows that all too well.
When it comes to getting users to stick around, Patrick shares that the company focuses on three core lifecycle stages – acquisition, monetization, and retention.
Simply put: “You acquire a customer, monetize them over time, and then try to retain them as much as humanly possible,” Patrick says.
The stages of the customer lifecycle can also be visualized through the marketing flywheel.
HubSpot coins the three major components of a successful flywheel model as:
- Attract – drawing prospects with valuable content and focusing on earning their attention
- Engage – making it easy for prospects to engage with you on their own time and preferred channels
- Delight – designing your product to be as easy to get started with as possible and support and empower customers to reach their goals
The core idea behind the flywheel is that the more you invest in each stage, the faster the flywheel spins.
Done well, your prospects and customers will all be invested in fueling the flywheel to attract more users and retain happy, loyal ones.
3 Ways to Speed up the Flywheel and Reduce Churn
“We’re living in a world where growth can’t just come from being good at acquisition,” Patrick shares, “growth now is having the flywheel turn as quickly and as largely as possible.”
To speed up your flywheel, you will need to add force to the areas that have the most impact.
The good news is that you can implement a mix of different forces, such as a freemium model, inbound marketing, and paid advertising.
Where things start to get a little more challenging, though, is that – as you apply force to the flywheel – you also need to make sure there are no obstacles standing in the way. This means eliminating friction.
One way to reduce friction is by looking at how and why customers are churning.
Churn rate optimization – reducing the number of users who abandon your product – is crucial for your business’s bottom line and long-term success. Just consider this:
- Acquiring a new customer is 5 times more expensive than retaining an existing one
- 71% of people who had a great experience with a product/service recommended it to others
- The likelihood of selling to an existing customer is between 60% and 70%. The probability of selling to a new one, on the other hand, is between 5% and 20%.
The incentives to reduce churn are pretty high. However, so are the challenges. Speaking about optimizing churn rates, Patrick points out three distinct categories:
- Active churn rate – users making a conscious decision to cancel your product
- Involuntary churn rate – payment failure, typically associated with credit cards
- Expansion revenue – your existing customers; here you need a deep understanding of when and how to best upsell them
Let’s walk through three powerful ways to stop your brand from losing out.
Follow the Path to Least Resistance
One advice Profitwell’s CEO has for marketers and anyone invested in growth is to “start with things that are paths of least resistance.”
Consider this example: if your business gets the majority of payments through credit cards, that’s likely one of the easiest things to tackle right off the bat and reduce churn.
Why? “Because it’s purely mechanical. It’s not like they [users] didn’t like a feature or they had a bad support experience. It’s just the credit card field,” Patrick explains.
Even more, he attributes 20% to 40% of all lost customers to involuntary church, making it one of the biggest buckets where you’re losing revenue.
So how do you get that percentage as low as possible?
A good way to get more bang for your buck – and follow the path to least resistance – is to implement marketing tactics that you’ve already learned.
Patrick shares one particular tactic for bringing that percentage down – email drip campaigns.
On a very basic level, an email drip campaign is a strategy composed of a series of emails automatically sent to a specific audience at specific times, usually after they take a certain action.
Generally speaking, there are no limits to the type of campaign you can create, but to keep SaaS customers into the sales cycle, you should create campaigns that engage and educate the reader.
Measure and Improve LTV
Truth is that when you’re efficiently reaching your addressable market, to keep scaling, you have to look at how to improve the customer’s lifetime value (LTV).
LTV – the total amount of money that you’ll receive from a single customer – is an extremely influential metric and a core function of retention and monetization.
Profitwell’s CEO is a strong believer in the power of customer lifetime value. He explains that LTV is “one of the most important things and that’s how you should be measuring mostly everything; what is the LTV by channel, what is the LTV by sales rep, what is the LTV by cohort, etc.”
The main reason why LTV sweeps away many other metrics in SaaS is that it’s focused on long-term value.
LTV also excels at showing you the path to achieving higher profits. Because increasing LTV increases profits, Patrick shares that “sometimes it’s okay to wait for that customer to be okay with you, to actually want your product, or value your product a couple of months after they get that need [for your product].”
One way Profitwell improves LTV is through its revenue automation process. The concept enables users to plug their billing system into the tool, get all metrics for free, and automatically increase their revenue.
Being able to increase your revenue automatically is a very powerful differentiator for the company because “there’s so much need to focus on your customer and your product as the market gets more competitive. But also because retention and monetization are these areas that people don’t focus enough on.”
After all, in the subscription space, “you have to look at the whole cycle of a particular customer – not just the beginning.”
Look at Monetization as an Ongoing Process
Monetization, and how you’re pricing your product, is a huge growth lever. But “like all growth levers, you have to develop it over time, especially as your business changes.”
So, where do you start?
In the earliest of stages, most SaaS companies fixate too much on the number. But, as Patrick points out, the most important questions you need to answer at that point are:
- Who are you selling to and where is their willingness to pay?
- How are you going to charge (e.g. per user, screen, or visits)?
If you can figure out your pricing metric and who you’re selling to, over time, you will figure out all the other aspects of monetization, too.
Your pricing strategy matters, but so does the design of the page. Although there is no one size fits all approach to designing SaaS pricing pages, you should keep it simple and use a strong headline.
What Makes Freemium a Powerful Force
Patrick shares that the main thing to keep in mind with “free” models is that there are two main types:
- Free forever – freemium + adjacent add-ons
- Faux free trial – with this strategy, your target customers get value and quickly burn through the available “free” features and you keep prompting them to upgrade to continue to get more of that value
Although it may seem like freemium is simply an indefinite free trial model, the go-to-market strategies are significantly different.
So what makes a freemium model more influential? According to Patrick: “The reason freemium is so powerful is that it puts the onus of conversion on the customer’s activity or timeline.”
One of the top reasons why this can be a great strategy is because you can nurture your customers. Additionally, the more customers interact with your brand and product, the less likely they are to churn.
With all this in mind, when choosing what to give away in the freemium, you need to be extremely careful. When walking the freemium tightrope, one of the crucial aspects you want to focus on is improving time to value (TTV). The shorter the TTV, the more likely users are to stick around.
With a freemium offering, Patrick adds, the number 1 thing to look at is cohorts over six to twelve months.
Why? Profitwell’s CEO explains:
“Because, over six to twelve months, you’ll notice like “oh, they can in free and now this cohort of free users we’ve converted 40% of them”. Whereas in the first month, maybe you only converted 4% of them. That’s what’s so powerful.”
Why Profitwell Chose a Freemium Model
Having a freemium model works great in a dominant growth strategy, but it is not going to be valuable for every business.
So how did Profitwell decide it’s the best move?
Like many other SaaS companies, as Profitwell was building out their metrics product, they started to notice more and more competitors coming into the space.
The main problem was that analytics are very difficult products to monetize. Many customers may not realize the amount of work that goes into making the product work or moving data from one place to another.
“So their willingness to pay is typically very, very low and the retention is terrible because the people who get it, get it and they’re locked forever. But the people who don’t get it, they churn out and don’t see the value,” Patrick adds.
That left Profitwell with three options: build something else, go upmarket, or “get some data, study it, and use it to train our algorithms.”
By focusing on the third option and making their product better than the “paid” competitors, Profitwell was not only able to scale but it also enabled a network effect where happy customers effectively turned into some of their best salespeople.
Start Onboarding Customers for Long-Term Success
Great user onboarding is crucial for every stage of a customer’s lifecycle.
Effectively, what you do in-between customer acquisition and the user’s first success with your product can have a significant effect on your retention rate. This means that you need to continually guide people towards achieving success with your product.
At the end of the day, the happier the customer the higher the retention.
If you’re not quite sure where to start, check out how Chameleon created a seamless product-led onboarding experience.