Why a call from an existing customer is more important than a prospective one – Customer retention
You’d be thinking about this no matter what sort of business you’re in, be it a product or a service. Somewhere on top of the food chain, someone always has to make a call on the time, energy, resources put into a) Acquiring New Customers b) Customer retention aka Keeping the existing customers happy. Obviously, the ramifications of this move might differ depending on the kind of service/product you’re offering. Try to explain the concept of “make new friends but keep your old ones” to a five-year-old, you’ll have a pretty good perspective on how many high-growth businesses approach customer acquisition and customer retention. Typically, as a growing businesses, you would tend to spend most of your time and money acquiring new customers to expand the customer. Seems to a logical presumption, more customers = more money. Sometimes the focus on new customer acquisition is so much more, that you’d often overlook your best source of growth: retaining and growing their existing customer base.
The Exotel business is modelled around SaaS, where we receive payments in recurring subscriptions. In SaaS, the new/old customer juxtaposition is a classic. It’s easy to get drifted to one side(typically New Customer Sales) with the ideology that increasing the number of customers => more money.
The funda being :- customers come in and they stay…until they don’t. An analysis of the typical SaaS metrics show that the average customer stays for an average of T years. Because their customer acquisition cost is lower than their expected customer lifetime revenue, they reach a break-even point in less than T years. So it’s a great business, as long as they keep generating new customers, right?
Wrong. The problem is that as the management team’s growth expectations increase, it gets increasingly harder to acquire more customers. As a result, customer acquisition costs go up and the quality of customers, in terms of how long they stick around, goes down.
To solve this dilemma, the client needs to ask three key questions:
• What revenue growth will we achieve if we keep our existing customers for just one additional month, on average?
• What will it cost us to do this by, say, improving customer service or adding customer benefits?
• How does this growth compare, both in magnitude and cost, to acquiring new customers?
The answer will be the same as in most businesses. It’s cheaper, easier, and more effective to retain current customers than it is to acquire new ones. In fact, if this business can retain all of its customers by just one additional month on average, they can achieve an additional 3 percent of annual growth. If they can retain their customer base for four additional months, they can create double-digit growth–without adding a single customer.
Data has continually proven how upselling/client retention is a much more solid growth strategy than selling to new customers itself.
As a SaaS business, let’s assume your CAC = 100$, LTV = 400$, ARPU = 20$
Let’s say your Sales Team made a sale today, you’ve already spent 100$ on acquiring him. He’s in the system and using your services, sees value and all is well.
Suddenly after 5 months, he decides to unsubscribe to your services, now you’ve probably recovered the 100$ that you’d invested on getting him in but that’s all. It ended becoming a nil-nil transaction. On the contrary, the 100$ that you might have spent on acquiring him are a lot more valuable today.
Getting the sale is only a part of the job done in SaaS, the business benefits/margins are only going to start kicking in from the 11th month(You spent 100$, you might want to make 100$ atleast). Once he hits the LTV, anything higher than that is a pure margin.
That’s how SaaS businesses scale. All successful SaaS companies will always have a different Account Management Team and Sales Team. The mindset is different, the gameplan is different. The math is simple, so is the logic.
So the next time you are stuck between a choice to entertain a new customer over an existing one, keep calm and pick up the call of your customer.
As conventional wisdom says; A bird in hand is better than two in the bush.