It rarely takes long for fledgling cloud or managed service providers to discover the elegant simplicity of monthly recurring revenue’s compounding math. In this model, scale and technical repeatability combine to allow net-new business to plump up a company’s bottom line in a logarithmic cascade.
It’s beautiful – and profitable – to watch.
But while most partners focus on adding new clients to the roster, there’s a withering side to MRR that also bears watching. Churn. Losing subscription customers after the first or second renewal period throws a big, wet blanket on the cloud services fire. The well-rounded services practitioner needs to manage both net-new sales and customer attrition to succeed.
How important is managing churn in a subscription services world? According to the Harvard Business Review, customer attrition can take a big bite out of your bottom line. That’s because it costs up to 25 times more to replace a lost client than to service an existing one. Reducing churn just 5% can boost profits more than 50%, research from Bain & Company found.
Lock Them in to Win
One of the best tools to reduce client churn in a technology services business is judicious use of longer-term discounted contracts. Our State of the U.S. Cloud Channel research report, developed in collaboration with Ingram Micro Cloud and Microsoft and supported by our 2112 Cloud Altimeter diagnostic assessment tool, offers clear visibility into the impact of longer software as a service (SaaS) and cloud infrastructure contracts on both partner profitability and reduced churn.
According to our data, monthly client churn in cloud and SaaS engagements hovers around 10% in month-to-month engagements, but drops to around 2.5% in contracts of one year or more. That’s the difference between losing 72% of your customer base in a year, versus just 26 %. Face it: A client with a one-year contract has one chance to churn out per year; a customer with a month-to-month arrangement has 12 such opportunities.
The difference in acquisition costs alone makes the reduced churn desirable, but the benefits don’t end there. Our data shows that the probability of upselling to a current client under contract hovers near 65%; the chances of making the same sale to a net-new client are less than 15%.
To further reduce church and firm up financials, cloud services providers should also:
Keep Up Client Communications
In our State of the U.S. Cloud Channel research, we looked at the dynamics of recurring-revenue cloud relationships and the impact of frequent, positive interactions between service providers and their clients. It comes as little surprise that partners who reached out to clients at least monthly had greater profitability and significantly reduced churn. The findings match those of sales research firm InsightSquared, which found that 62% of B2B customers spend more after a positive customer experience. And seven of 10 are willing to spend more with vendors they feel provide great service.
Learn from the Ones You Lost
No matter how diligent you are, you won’t eliminate churn. So it’s important to examine each lost account to see what lessons you can glean to help your business perform better in the future. Major clients deserve a phone call to discuss their lost account directly. Others should receive a personalized email and exit survey to uncover their reasons for quitting.
In any case, questions should be kept simple and to the point. You want to know the main reason the client discontinued the service: Did they find another provider? Or did they simply not need the service any longer? You also want to know the key factors that went into the decision to leave. Was it the quality of the service? The customer support? The price? Did they expect more features or better functionality?
And be sure to leave space for unstructured comments, so they can elaborate on their decision. These interactions have tremendous value for adjusting services delivery and sales strategies in future engagements.