Why it's best to look to your customers (too) to drive growth.

10 min read
Apr 29, 2024 11:39:05 AM
At Webs, we work a lot with scale-ups that grow from 1 million to 10 million Euros in ARR. Most of them show a similar growth pattern: they often have a strong focus on winning new customers.

accent-line-red-xl

However, as they expand their customer portfolio, their existing customers increasingly impact their growth as well. Those customers start buying more or less from them. And that's how you win or lose sales.

For many young companies, building successful customer relationships is not easy. For example, customers expected something different from the product or they don't get enough support. At some point, those customers drop out.

To grow, these companies must ensure that the revenue they gain from new customers (new ARR) exceeds the revenue they lose from existing customers (churn). But there are two key risks to this:

  • Getting sales from new customers is 2.5x more expensive compared to existing customers
  • If you attract the wrong customers, your churn is going to grow faster.

You can ignore this at the very beginning for a while. But it's wise not to do this for too long.

Distribution of 2020 CAC Ratios

The why and when of the churn problem in SaaS organizations

A (solid) churn with young SaaS companies is not abnormal, because there is still a gap between the impact you think you make with your product (your Value Proposition) and the impact you really make with your customers. Closing that gap takes time.

If you don't yet have the impact you are making 100% in focus, you are also missing out on the insights needed to understand who your ideal customers are and what they have in common. And that's why more "bad" customers typically move in with younger companies. Over time, these customers are going to spend less and be out the door faster.

That said, it is important to have this in focus and work on a plan of action. On the way to 2-3 million Euros in ARR, you may not feel the impact of your churn as much, but as soon as you get close to 5 million Euros, it starts to weigh on your growth. That's when sales and marketing really start swimming against the current.

" Churn starts to impact growth somewhere in the $5 million range. At $10 million ARR, high churn starts to stop growth. At $20 million, it can end your startup. "
Jason M. Lemkin

Some companies can't get their churn under control and see their growth slow down severely or even stop altogether.

Small improvements, big impact

So companies whose growth strategy focuses primarily on new customers miss out on some serious revenue. They also have to invest a lot more. Let me give you an example:

  • You have 70 customers with an average ARPA of €36,000. The total turnover per year is therefore € 2.52 million
  • Scenario 1: for 3 years you do an average annual upsell of 2% and a churn of 10%. Result: € 6.38 million in sales.
  • Scenario 2: during 3 years you do on average an annual upsell of 4% and a churn of 2%. Result: €7.85 million in sales.

This example shows how small (and often achievable) changes can lead to a big impact. Increase your retention by 8% and your upsell by 2%, and you bring in €1.5 million in additional sales over a three-year period. BOOM, that's crazy 😎🔥.

And what makes this story even better is that you are not only growing in sales but also in profits, because retaining or increasing sales from existing customers is easily 2.5x cheaper than acquiring new customers.

How do you avoid a scenario where your growth starts to slow down?

You have two options.

Option 1 is: you're already so busy. Just close your eyes and hope it works out. 🙈 🤞🏻

Option 2 is: under the motto, prevention is better than cure, it's important to anticipate this even before you sense the problem. The first way to do that is to pay more attention to your existing customers.

Paying attention to our customers? Sure, we're in Sales and Marketing. Don't we all! We do. But there are different degrees of it.

Bye-bye "growth at all costs"

This leans nicely into one of the key trends in SaaS today: the mind shift away from "growth at all costs," away from the blind focus on volume, and toward a more sustainable growth model.

" We are experiencing a shift from HyperGrowth in which growth is a function of speed, to sustainable growth in which growth is a function of cost (profit)."
Jacco van der Kooij

If this trend breaks through, this is going to make everyone really happy, because you can't scale up what isn't sustainable.

Customer insights' magic number three

Throughout human history, the number three has had a unique meaning. The ancient Greek philosopher Pythagoras stated that the meaning behind numbers was very important. In the eyes of the ancient Greeks, the number 3 was considered the perfect number, the number of harmony, wisdom and understanding.

So here is a list of 3 things you should do to deepen your understanding of your clients:

  1. Visualize the problem with the right metric
  2. Keep your finger on the pulse of your customers so you can see the problem coming
  3. Create deeper understanding of your customers

Make the problem visible with the right metrics

Step 1 towards the solution is always: make the problem visible so everyone is aware of it. For this, I personally prefer to use Net Revenue Retention (NRR).

  • An NRR of < 100% is a bad thing;
  • An NRR of > 100% is a good thing; and
  • And an NRR of > 120% is an excellent business.

You can depend on this Benchmark, yet 'em is mostly about how your NRR evolves over time and how that evolution relates to your CAC ratio and your growth.

When your NRR goes down, you normally see your CAC ratio go up and your growth slow down. That's what I love about this metric. You're not only going to drive revenue growth, but also your underlying costs.

And that's important, because by the time you climb out of that "Valley of Death," and you reach the magic 10 million Euro mark, you already have to scale up. Then you have to start accelerating growth. And you can't scale up what is not sustainable.

Keep your finger on the pulse of your customers

NRR and Churn are what they call "lagging metrics." They give us an excellent indication that there's a problem, and then we can manage accordingly. In Step 2, we go one step further: how can we start predicting the problem, even if we don't see the impact right now? For this we need to look for a good leading indicator.

The best leading indicator for NRR is customer satisfaction. Because if your customers are not satisfied, you have a problem. If you don't make a recurring impact, you won't get recurring revenue. That's why it's so important to keep your finger on the pulse of your customers.

To get a good picture of that, you have to set up a process. You want to retrieve the data as correctly as possible. You can do this, for example, by collecting your NPS at regular intervals. You can use this score as a Leading Indicator for your NRR so that you can take action even before the problem makes itself felt in your turnover.

To work with a leading indicator, however, you must be able to perform cohort analysis and compare groups of customers over a period of time. Young companies sometimes have insufficient data to understand how one metric compares to another metric further down the road. Therefore, start measuring the lagging metric ahead of time. These metrics make a lot of sense on their own.

Ultimately, you have to decide whether the metric you're tracking helps you make better decisions faster. A true metric must drive something, otherwise it is just a vanity metric. Lagging and Leading Metrics can both be steering, only with a Leading Metric you can start steering beforehand.

Make work of deeper insights into your customers

With steps 1 and 2, you work primarily on quantitative data. They give you hard numbers and expose a trend, but as a Saas Company, does that give you a deep enough understanding of your customers?

Many people have been taught the reflex to look only at quantitative data. Yet for Customer Insights, we just lean very heavily on qualitative data. The reason is simple: you get context.

That information is much richer and gives you many more insights. And it's that extra level of insight that can make a world of difference.

" If quantitative data answers what and how much, qualitative data answers why. Quantitative data adhors to emotion; qualitative data marinates in it. "
Lean Analytics

Let me give you an example:

The solution to this problem lay with the customers who did make the switch. The question we asked ourselves was: what do these customers have in common? So why are we looking at the good customers in the first place? It's more important to understand what works than what doesn't. Because you can't scale failure.

In this case, it turned out that 'happy customers' had in common that they used the plugin on a weekly basis. Their feedback was:

"The workflow is quite different from the legacy software itself, and you do have to get used to it. But once you get the hang of it, it's super and you can't live without it."
Happy customers.

That insight had a huge impact. And additional qualitative research allowed us to dig deeper. Soon we discovered which use cases required frequent use of the plugin, so marketing could focus on those.

The rest of the customers were ignored because we knew it wasn't a good match and thus we had very little chance of retaining them.

So we did identify the problem here with quantitative data, but insight into the "why" we didn't get until we started talking to our Users.

Many companies find qualitative data difficult to retrieve. At Webs, we put a heavy emphasis on this ourselves, and here's how we do it:

  • Self-reported attribution on our website (where have you heard about us?)
  • Playbooks in HubSpot for Sales and CS (asking the right questions)
  • Reviewing recordings of sessions with customers
  • 1:1 customer interviews by Marketing (e.g. to collect reviews from customers)
  • Social listening (for us this is mainly LinkedIn)
  • Being active in communities such as Pavilion, SaaS Bosses and Exit Five.

Setting up this process is easy. But collecting good quality data takes preparation. You have to ask specific questions without leading (potential) customers or distorting their answers. You need to avoid radiating enthusiasm and reality distortion onto your interview subjects. Unprepared interviews produce misleading or meaningless results.

We call this internally our Customer Insights Flow. The insights flow in constantly and are analyzed and discussed on a regular basis. So they make an impact everywhere: on our messaging, the choices to invest more or less in certain channels, the targeting and qualification of customers, our content, the further development of our services, etc.

It's so simple and the impact is so great that we decided to start offering it as a service to customers. Because of course we don't want to withhold this from them. 🙃

Make Customer Insights a priority in all teams and steer proactively

Everyone can live a contribution in retrieving these insights. In addition, everyone can also start to proactively drive your NRR. And we're not just talking about your CSMs but also your sales and marketing and customer service teams.

CSM's impact on your NRR is obvious. After all, their mission is to ensure that customers are successful and experience Recurring Impact from your product and services.

In Sales and Marketing, this is less obvious, and they are not aware of it. Especially when these teams only work on attracting new customers. After all, SHIT IN is always SHIT OUT.

Other teams must also be aware of the importance and impact they have. For example, your marketing can make sure they are attracting the right customers, and sales can make sure they are closing deals with the right customers.

What is true for the Target Account List in ABM is also true here: the Customer Success team's results are limited to the quality of the customers coming in. If sales and marketing bring in the wrong customers, your churn is going to grow anyway.

Ideally, you want to deal with this in a proactive way. In that, you have 3 different levels:

Success Sales Marketing
Level 1 Reactive Not involved Not involved
Level 2 Proactive Not involved Not involved
Level 3 Proactive Proactive Proactive


Put the customer at the center of your People Process Technology (PPT)

Now that you have a clear understanding of who your ideal customer is, how they prefer to buy from you and what impact they are expected to have, you have a huge competitive advantage that you can focus on.

In doing so, you need to take a close look at all your customer-facing teams. You want to align them around your (future) customers with only one goal in mind: creating a strong Experience throughout the Journey. After all, it is that experience that will ultimately lead to both growth in sales and growth in profits.

  • Where are people still missing?
  • What content do you still need to create?
  • Where are the frictions in the process?
  • Is technology still missing?
  • Or is certain technology just creating friction?

At Webs, we use a framework for this: the Growth Framework. That framework is based on the Cyclonic Buyer Journey and on the Lifecycle Stages in HubSpot. A copy of that Framework can be requested via our contact form.

Key Take-aways

  • Many Saas companies struggle around 5 million Euros in ARR. By paying close attention to your customers early on in the journey, you can avoid this.
  • Small (and often achievable) changes in quality can lead to big impact. These are often easier to achieve than if you approach growth linearly.
  • Qualitative data gives you the context, the "why. That information is much richer and gives you many more insights. So you can make more impact.
  • Not only Customer Success, but all Client-facing teams can live a contribution in retrieving insights and help proactively drive your NRR.
  • Align your People Process Technology around your (future) customers with only one goal in mind: creating a strong Experience throughout the Journey.

Our Mission

At Webs, we are committed to building successful Saas companies here in Western Europe. Growth at all costs is not enough; it has to be sustainable. You cannot scale up what is not sustainable.

Want to learn more about Webs and how we help our customers build a more sustainable growth model? We'd love to engage with you.

quote-example

Want to stay updated on all HubSpot changes? Subscribe to our newsletters, follow us on Instagram or join our HubSpot User Days!

Explore HubSpot User Days