The business model is simple for cloud – in order to grow, you need to add more customers than you lose. Yet many companies struggle to grow because dollars are leaking from their revenue buckets faster than they can be replaced. Most companies measure churn by the number of accounts that leave during a particular period of time. Another more subtle form is dollar churn which occurs when an account shrinks in size from one period to the next.
Best practice companies manage both ways of measuring churn to 5% or less. How does your company stack up?
There are many reasons for churn – competition, customer business failure, and inadequate or poor service to name a few. What role does the sales organization play in causing churn? And, what role can sales play to reduce it?
Churn Will Eventually Catch Up to You
In order to continue to grow, cloud companies need to constantly increase their new account dollar acquisition rate to avoid hitting a point where churn negates any growth that is being delivered through new accounts. Consider the following – a cloud company has a sales force that consistently acquires $10M in new Monthly Recurring Revenue per year. However, this same company churns its customer base at a rate of 20% per year. At this constant rate of growth, the churn will eventually catch up to the company and limit their annual recurring revenue as the absolute value of churn will soon enough equal the new dollars being acquired. The two levers you can pull to change this picture are to either increase your rate of growth (instead of growing at a steady rate of $10M MRR per year, you grow at a steady percentage rate per year) or to address the hole in your bucket and minimize the amount of dollar leakage out the bottom.
While sales organizations often are thought to drive growth, there are several ways that sales can contribute to churn.
- Sales can contribute to churn by selling to the wrong customers. Customers who have low profitability, high service needs, short lifecycles or a combination of the above can often be undesirable in a recurring revenue model. While these customers may boost your customer acquisition metrics, they are likely to be the first customers to churn.
- Sales can also increase churn by overselling, resulting in customer underutilization of the solution and possible contract downsizing or worse yet, complete customer attrition at the time of renewal. While it might be fiscally beneficial for the sales rep to sell the customer as much as they can, in the long term, customers will downsize their commitments to you or stop using your service altogether.
- By focusing too much on new booking opportunities, sales reps can often overlook the retention of their existing book of business if there is perceived to be limited growth opportunity in the set of accounts.
What Is A Sales Leader To Do?
- Segment Your Customer Base To Identify High Value Accounts: Start by segmenting your customer base to ensure that your account executives are focusing their time and efforts on the most valuable customers. Differentiate accounts based upon Customer Lifetime Value which accounts for not only the booking amount, but also the expected lifetime of that account as a customer.
- Enable Sales Reps to Effectively Target and Qualify Accounts: Sales reps must learn how to effectively target and qualify potential customers. While segmentation can provide direction on who to target, without the knowledge of how to target and qualify, sales reps will usually revert to the easier sale which can be the wrong target. Management plays a critical role in the training and enablement of sales reps, teaching them how to qualify customers–and possibly more importantly–how to disqualify customers.
- Sell Your Customers the Right Sized Solution: Make sure that your reps are not overselling your clients. This can be done through a combination of rep training, playbooks and tools that can be incorporated into the sales process. By providing guidance and coaching to your sales reps about how to appropriately size deals, you can avoid future churn and build a more loyal customer base.
- Redesign Your Account Management Function: Successful cloud companies invest resources into account management and customer success roles squarely aimed at increasing utilization, reducing churn and upselling or expanding the footprint within an account. By creating roles focused on reducing churn as part of their core job, you can expect to see reduction in churn which will become additive to the top and bottom lines.
- Compensate for Results: Account Management roles are usually compensated through some variation of a churn mitigation measure in sales compensation plans. These measures range from a pure renewal metric, to a blended Net New Monthly Recurring Revenue (NNMRR) metric to discrete metrics for growth and churn. Each one of these options can be very effective in mitigating churn.
In summary, the art of growth in a cloud business is not only about adding new accounts, but maintaining and growing the accounts you already have.
Learn more about how the Alexander Group has helped other cloud sales organizations tackle growth challenges by visiting out Cloud Sales Practice.
Originally published by: Dale Chang