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Five Levels of Rethinking Recurring Revenue and Retention

Many B2B businesses either have shifted or are shifting to some form of a recurring revenue model. When they do, one of the first things they learn is that renewals by current customers are just as important as―and often more important than―initial sales. If the customer doesn’t stick around for, typically, three to five years, then you’ve lost money on them.

But renewal rates and recurring revenue seem to be stuck. Companies I work with are ones that have been trying to make a difference. They need to significantly increase renewal rates to achieve the growth their investors demand and their teams want and have been using a variety of tactics to do so. But none of those tactics targeted to recurring revenue seem to make much of a difference.

These companies usually rely on two approaches to maximizing renewals. The first is an activity-driven approach, usually focused on adoption. The intent is to determine which activities your customer performs with your product that tend to lead to renewal and then to build a program to encourage your customers to do more of those activities. The second is a conversion-driven approach, where you ask customers for renewals, maybe making special offers for early renewals or upgrades, and expect a percentage to accept your offer. This is very much like your demand-generation process, where you expect a given conversion rate from a marketing offer.

Both of these are good approaches to building recurring revenue, and they work. But if you’ve spent time trying to improve your renewal rates, then you probably have that gnawing feeling in the back of your brain that wonders why this is so hard and why it takes what seems to be either a patchwork or a Herculean effort to make any significant uptick in renewal rates.

If this sounds familiar to you, you’re missing something: you’re not paying attention to what your customers really needed in the first place. You’re probably working with each customer on a recurring revenue plan for what you think they define as success, which is typically a list of activities you’ve developed that you think, statistically, lead to renewal.

But renewal is not the same as a successful customer. We have all become so programmed to define success as a collection of metrics that we miss out on what we really mean by being successful.

For Recurring Revenue, Know What Customers Really Want

I’ve heard any number of marketers and salespeople say to me that customers buy only two things: cost reductions and revenue increases. You might even hear the (highly coached) customer attest to this in case studies. But this is not what the customer really wants.

To build a strong relationship with your customer and ensure they renew year after year, you need to understand both their concerns at every level and the kind of relationship your customer needs to have with you.

Note that concerns in this context are not worries. Concerns mean the things with which your customer or its people are concerned with, think about, and hope for.

The model I use with my clients surfaces customer needs, concerns, and aspirations in five different ways. It looks at the questions you are asking and about your customer’s business and how you are addressing the concerns and aspirations you identify. This model is based on a model of understanding concerns written by my good friend Jennifer Kenny.

Finding Recurring RevenueWhen you use this model, it’s important not only to understand what your customers need, what they are concerned about, and what their aspirations are, but also what you can actually deliver. You will not be a trusted adviser to all your customers. Some companies will be transactional with all of their customers. Most will have customers at every level of relationship.

When you understand your customers at this deep level, and you know how you work best with them, you then have an approach to creating, building, and maintaining relationships that will lead to recurring revenue and renewal year after year after year.

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The One Mistake that Derails Company Growth

You have a pretty ambitious company growth target. You’ve put together a strong team, as well as a great sales and marketing plan based on industry best practices. Your offerings are ready to go. And you launch your campaigns. Everything looks good, and the outlook is rosy.

A few months later, you’re scrambling. Everything worked as planned, but prospects are not hitting your B2B funnel nearly as fast as you thought they should. Your pipeline looks pretty anemic. And you’re missing your growth targets up and down your pipeline.

What Happened to the Company Growth Plans?

If your company is like most these days, the entire company is looking at you―the marketing leader―to explain why things have gone awry and how to fix them. After all, marketing’s job is to drive the pipeline, right?

If you’re like most marketing leaders, you take a look at your campaign. Was the message right? Did we miss something in the design or execution? Then you look at your process. Is there something keeping an interested prospect from taking whatever action you were hoping they would take? Did you fail to follow up? Did sales drop the hand-off of the lead from marketing?

The Mistake

Your problem isn’t your sales people. It’s not your marketing people. It’s your customer.

That’s right, the problem is your customer. In my previous post, I wrote about building a better persona to get a better understanding of your customer (you all did that, right?). If you did that, then the next three steps are:

  • Decide, based on what you know you can deliver, what specific concerns and aspirations your company can fulfill for your target customer.
  • Decide what promises you will make to your prospects that they understand will fulfill those concerns and aspirations.
  • Then build your position and your message around those specific promises.

When you do that, every prospect that receives your message will understand instantly how you will help them and whether they need that specific kind of help. If they don’t, they are not your target customer, and you can comfortably let them go. If they do, they will be interested and will enter into your company growth funnel quickly and easily―and of their own accord.

If you don’t get your target customer definitions, position, and message right, you are marketing to no one. You are putting a bunch of messages out into the market in the hope that they will resonate with someone who will then call you to the benefit of your company growth plans. Your metrics for this type of effort (often called “spray-and-pray”) will be below your industry average, and you will be left wondering what went wrong.

We, as marketers, put a lot of effort into the process of marketing, including campaign design and the underlying technology. But marketing is still, fundamentally, about knowing what your target customer wants and needs and delivering that in a way that makes them feel like you’re doing magic for them.

If your marketing isn’t yielding the company growth results you expect or want, the problem is not how you’re doing marketing or sales. The problem is that you don’t know― at least not well enough―who your customer is and what you can do for them.

Go back to the drawing board. Get your target customer, position, and message right. Your pipeline and your company will thank you.

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Drop the Persona. Market to a Person

Nearly all the marketers I meet seem, in some way, obsessed with personas.  A persona is a convenient little tool that describes some set of attributes of a hypothetical―and supposedly typical―customer that are intended to allow everyone in the company to understand this customer and what they want.

If you’ve spent time talking with me about personas, you know exactly how I feel about them: I hate them.

No, I don’t hate the idea that there should be an understanding of the customer, and everyone should be able to see what it is. That’s necessary for getting teams aligned and driving market growth (see my discussion on this in my previous post).

I hate the idea because most of the marketers I meet use them as crutches―and not very useful crutches at that. I hate that most marketers try so hard to be specific and complete in their description of “Finance Francine” that their list of things “Francine” cares about are either redundant or useless in creating messaging that will convince the hypothetical “Francine” to spend non-hypothetical money.

Have you ever seen a list like this?

“CEO Chuck” cares about:

  • Increasing revenue.
  • Increasing profit margin.
  • Meeting set revenue and profit goals.
  • Not losing revenue.
  • Not losing profit margins.
  • Increasing net income.

OK, I’m going a little overboard, but you’ve seen that list. The problem you see with it is that it’s redundant. I see that and something far more dangerous to your marketing:

The list is meaningless.

If the person working on personas in your organization makes lists like this one, you probably don’t ever look at them for anything you do. If you do look at them, I’d ask you whether they help you target content, create advertising, or email campaigns or even inform sales scripts.

A good test for whether you have a useful persona is whether your average sales rep can use the language in the persona document to describe how you help your customer and the prospects on the other side of that table (or other end of that call) respond with “Yes!! That’s exactly what I need!” How often does that happen to you?

So, what do we do about this? How do we get a useful understanding of the people to whom we are selling (and yes, if you’re selling to businesses, you’re still selling to people)?

Focus on the person.

It sounds easy, doesn’t it? Well, it is, but then again, it isn’t. They say understanding other people and building relationships is hard. When you are selling any kind of offering, you are building a relationship with another person (or people), and it’s exactly as easy and hard as with anyone.

What’s the key to getting this right?

In an earlier post, I wrote about the importance of knowing how you and your offering make a difference in the lives of your customers. There are three steps to making this an integral part of your marketing:

  1. Understanding your customer’ needs and aspirations―most importantly, the ones they don’t articulate.
  2. Understanding what needs and aspirations you can enable.
  3. Understanding how you help your customer meet those needs and achieve those aspirations.

Revisiting “CEO Chuck,” here’s how this might work:

Chuck runs a small software company. Chuck is trying to solve the disconnects within his organization. He knows that if product, sales, and marketing could stop arguing and get on the same page, it would be easier and smoother to generate leads and grow the sales pipeline. His demand generation leader says the biggest obstacle to getting prospects into the pipeline is knowing how to effectively find the right kind of person to whom to deliver messages. His investors are breathing down his neck about meeting sales targets and showing some eye-popping PR stories. His engineers are bugging him about prioritizing new features and bug fixes, and claim they can’t understand what they should be doing first―it all seems important.

Now let’s say you are selling some kind of marketing product to Chuck. You could tell Chuck your offering increases revenue, and you’d think that would be important enough for him to buy it. But let’s say your offering could help get the pipeline process unified between sales and marketing, and make sure they both have at least common numbers, account information and the like. You could then offer Chuck a solution to at least part of the sales and marketing friction problem, making his pipeline move more smoothly to help grow revenue.

Some marketers will see that as a more specific and, therefore, smaller offer. It’s not. It helps solve the problem your prototypical customer thinks they have. It makes sure you can deliver something they think is valuable to them and that makes a difference in their lives. And if you do it successfully, I am pretty sure they will tell their friends and colleagues you made a whole set of challenges go away.

This illustration is an over-simplification for the purposes of keeping this post readable. But the point of doing this exercise―and doing it well―is you get to understand your customer as a person, not as a hypothetical persona or profile.

And when you stop making claims to a persona and start making promises to people, you can start delivering real value and changing their lives.

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Getting It Just Right: Measuring Customer Success

In an earlier post, I discussed how to get measuring customer success right.  It sparked quite a few questions about how to choose the measurement and how to ensure it causes you to be aligned with your customer’s business success.  Here are some thoughts about how to get it just right.

The Goldilocks Customer Success Metric

In my earlier post, I compared two public safety companies that had very Measuring Customer Successdifferent measurements of how their customers became successful because of their products.

One was RedFlex, whose most often cited metric was the number of red light tickets issued because of their cameras (though, I don’t think they want to be measured this way).  This metric misses the mark, because it does not measure an outcome that is of value to the people who have to make a decision on the purchase of the camera system.  The goal is public safety, not more tickets.

In contrast, ShotSpotter (SST) measured a variety of outcomes, including number of arrests resulting from gunshots detected and number of convictions made easier because of their data.  The goal—public safety—is the same, but the metrics are directly relevant to the outcome.

Let’s analyze these:

Neither company chose what I’ll call the “papa bear” metric, which is something such as increased public safety.  This metric is far too broad, far too hard to measure, and while both companies do something that affects public safety, neither can claim to have increased it directly.

The number of tickets metric, which I’ll call the “mama bear” metric, is too narrow.  It measures the direct result of the system, but it does not take into account any of the results the activity produces.

The number of arrests metric is the Goldilocks metric (or one of them).  It’s not the direct result of the system (you could measure number of gunshots identified), and it does not claim to be a panacea for all police issues.  It does measure an outcome most of us can link directly to which is increased public safety (criminals get arrested), and one the immediate buyer (police department) and the ultimate buyer (political leadership) can relate to and definitely care about.

One alternative to the number of tickets metric might be to look at the total number of accidents at intersections with red light cameras.  For most of us, fewer accidents mean safer streets.

So How Do You Choose Your Customer Success Metric?

Let’s assume for the moment you are selling to a business.

Papa Bear 

Increase revenue or reduce costs.  I hope whatever it is you are selling to the business does one or both of these, or I suspect your prospective customer will never buy.  That said, with very few exceptions, your product or service probably does not directly do either one, and the outcomes of your product are not “more revenue.”  They should do things that lead to one of these two.

These are the wrong metrics.

Mama Bear 

More twitter followers (sorry, social media folks, this isn’t a business outcome).  This is certainly a metric, but for most businesses, it doesn’t produce something effective, nor does it (in any meaningful way) affect costs or revenue.  It’s too narrow, and too immediate. Other examples are things such as, “keeps all your customer activity in one place” or “ensures everyone knows the correct procedures.”

Those might be things your product does, but they are not why your customer buys.

The Goldilocks Metric (encore) 

If you were selling a product to a marketing department, the outcome might be “produces more leads in the pipeline” or “shortens the time to conversion to a sale.”  Both of those are things your product might do where you can measure the effect your product has on either number of leads or time to conversion, and the metric has a credible effect on the business (in these examples, more revenue).

In another recent post, I discussed Christensen’s idea of “hiring” a product to “do a job.” Your customer has a job they need done (e.g., they need more leads).  That’s something they hire a product to do.  And it’s something you can measure before and after they buy your product, so you and they can tell how effective your product is for them.

Another way to consider this is that every team, every group, and every department in a company has business objectives they can measure.  Your product needs to help their measurement of at least one of those business objectives moving in the right direction.

The Goldilocks metric has to be specific and countable.   ShotSpotter counts the number of prosecutions and convictions that use their data.  You can count number of leads, length of sales cycle, reduction in overhead, etc.

So finding the right metric is really simple:   It is a business objective, and it is countable.

Get that right, and you’ll have no trouble getting your customers to show you just how successful you are for them.  Which is just right.

Tell us how you are measuring your customers’ success in the comments.

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