KPI Closeup is a series dedicated to the key metrics CFOs heed to perform in a highly competitive landscape. You can find the entire series here.
For recurring revenue companies, few KPIs are more crucial than customer retention. It's much more expensive to bring on a new customer than it is to keep an existing one, so mastering customer retention — the inverse of churn — is job one of any CFO. But knowing how to measure it isn't enough; although it's typically the job of the customer success team or chief revenue officer to keep customers on board, it's the CFO's mastery of what goes into thed measurement that can make a difference in how well a company does.
"There's all these things to [understand] ahead of time," says Mohit Daswani, CFO of ThoughtSpot. "If all you're doing is measuring churn, and not the indicators leading into it, you're being way too reactive."
Although CFOs measure customer retention differently, at its base the KPI is about getting the highest customer lifetime value (LTV) from the lowest customer acquisition cost (CAC). This means reducing churn and upselling existing customers. No company can make a profit if LTV doesn't exceed CAC.
Retaining customers in a down market
Customer retention is important at all times, but in periods of uncertainty like today, keeping existing customers happy to compensate for a drop in new business is especially important, Jason Maynard, senior vice president of global field operations for Oracle NetSuite, said. That puts the spotlight on CFOs' ability to identify where attrition is coming from so it can be addressed.
"When you drill it down, I would look at attrition by customer segment or geography, to start with," he said. "If you have attrition, where is it coming from, and how do you segment it? If you sell to consumers, do you see it in the U.S. or the E.U.? Isolate your variables."
Once you get a handle on attrition, you can start to get good picture of LTV and determine how much to concentrate on retention and how much to go for new business.
"If you're in a period of churn, and downsell is improving, your customers are stickier, and you're seeing less of that churn and more up and cross selling, your LTV goes up," he said. "If that goes up, you may say, ‘Hey, we have a market opportunity, let's continue to try adding more customers and be more aggressive,' because we know we make it up in the long run. But in times like now, with massive churn, you want to rein it in and be more conservative towards CAC; adding bad or highly churnable revenue is not sustainable."
Another issue impacting the decision to focus in retention has to do with the industry-specific impacts of the pandemic. Every business-to-business company Maynard is working with, he says, is trying to understand whether they should they be marketing to airline, restaurant, hospitality, ands leisure companies.
"Obviously those are some of the most negatively impacted businesses," he said.
They're also trying to understand the other side, too: companies that are doing well.
"What business has benefited most?" Maynard said. "Every business is running that analysis with their customer base, trying to sort that out and use data from existing customers as a guide."
For most companies, retention starts with customer success and sales teams. Finance invoices and collects from the customer, but the department will also dig into the data, meaning retention is a whole company job, Maynard said.
"I subscribe to certain things, and it appears to be a relationship with their marketing team, not their finance team," he said. "For B2B, it might be a customer success person, or sales rep, but the most important thing is that it's not just one person's responsibility. Finance has a huge role to play in providing financial data to find out trends by segment, and being equipped to decide how to retain a certain customer base."
That financial data is at the center of a virtuous loop between the customer success team and the products people, says Daswani. "The feedback mechanism between customer success and product is key," he says, because it informs how products should be tweaked to keep customers on board.
How customer retention measures up
Customer retention tends to be a source and driver of cash flow too, Maynard said. "It goes back to ROIC [return on invested capital]: you typically make sure you have renewing customers, whether you're consumer subscription or B2B, it's foundational."
Those metrics, cash flow, ROIC, churn, become determinants for CAC and LTV.
Maynard also looks at it by product. "Not all your products theoretically have the same margin structure," he said. "Software could have 90% or 40% gross margin products, so make sure you're looking at dollar weighted figures and see where that weight is coming from. Have fairly regularly operating cadence on metrics."
Historical analysis here is really useful, he said. It has to be part of a standard reporting package that an operating team could use and something a board would want to see.
"I imagine any private company going into a subscription business without these metrics would be bad," he said. "It needs to be ingrained into the fabric of how you actually operate. Even if you're private, you still report to your shareholders. Make this part of your plan for how you operate and run the business, not just for external reporting."
Let happy customers sleep
Andrew Gilboy, general manager of North American operations for GoCardless, a fintech company focused on recurring payments, uses his prior experience as the company's chief revenue officer to guide his customer retention decision-making.
As a SaaS business, he sees customer retention as having an additional layer. His job, he says, is to help GoCardless' customers retain their customers.
"Before providing an excellent service, retaining customers, at its core, begins with not giving them an excuse to leave, especially during a tough time," Gilboy says. "If you have service interruptions, 20 to 40% of customers will eventually leave."
Gilboy defines involuntary churn as "waking up a sleeper," or a happy customer, when cash is tight, may opt out of renewal. In the subscription business, the key is not to wake them up, so to speak, with a payment failure or non-frictionless checkout process.
Here, Gilboy aligns with Daswani, who said, "onboarding has to be a quick, good initial experience to reduce friction."
"If you use wire transfer or credit cards as your main payment vehicle, there's a pretty high chance of failure rate," Gilboy added. "I don't invite the opportunity for customers to wake up and [cancel because of] unreliable payment. We have a low failure rate, so they don't wake up to it."
Like Maynard, Gilboy builds a ratio around CAC and LTV to determine the cost of losing, or eventually regaining a customer.
To retain customers, or, to keep them asleep, Gilboy focuses on the underlying mechanism of how GoCardless looks after its customers' money, and asking, per customer, how much it's prepared to pay to keep them, and what the customer's lifetime management cost is.
"Is the CAC worth the LTV?" Gilboy routinely asks.
The cost of losing
While merchants typically lose 20 to 40% of customers due to payment failures, Gilboy approximates, he has a short list of must-dos to discourage churn.
"Deliver a good service, listen to customers, and try to proactively offer services that will stop them from churning," he said. "Try and get the ways for them to use your service with more upsell value, and make it easy to access all of these things."
Gilboy's credo: don't give customers a chance to even consider switching or turning a service off through payment process friction, because that impacts customer retention more than anything else.
"If you lose a customer, it's a fight to get them back," Gilboy explained. "The ratio of how hard it is to return, in our industry, is usually a factor of 10 to 1."
Daswani summarized customer attitudes towards businesses, particularly in a down economy, plainly: "If they don't like you, they're not going to keep you."