Subscription is a highly popular and profitable business model these days with the best cases generating reliable recurring revenue, brand loyalty, and the ease of pre-negotiated and automated transactions for both buyer and seller. However, the whole construction starts crumbling if subscribers don’t stay hooked. Companies that are able to rapidly bring in new subscribers or upsell those that they hold onto might not see the importance of seriously investing in retention, but trying to balance out churn with growth will still end up costing the business significantly. To explain why and provide advice on reducing churn rates, we invited two subject matter experts to speak with MGI Research analyst Igor Stenmark at the 2021 Monetize Forum. Our guests for this conversation were Steve Booth, VP of Retention for Vindicia, and Doug Caviness, Vice President of B2B Strategy & Partnerships at cleverbridge.
Key Issues
What strategies can be employed against churn?
Which key metrics should companies follow to understand retention?
How should companies prioritize growth versus retention?
Guest Profiles
Steve is responsible for Vindicia’s US Eastern Region. Prior to joining Vindicia, he held senior sales management positions at Proclivity Systems, Aria Systems, QlikTech, Responsys, Oracle, ADP, and Portal Software.
Doug is Vice President, B2B Strategy & Partnerships for cleverbridge. He brings over 20 years’ experience in e-commerce, software, and IT with companies ranging from startups to Fortune 500, including Digital River and HP.
Igor Stenmark
Hello, this is Igor Stenmark of MGI research. We are at the 2021 Monetize Forum conference, and in our next session, “Taming the Churn Beast,” we’ll focus on one of my favorite topics: subscriber retention. Subscription remains the holy grail of modern business. Customers want it, investors value it, and companies are looking for ways to implement it while retaining their sanity, keeping their budget in check, and maintaining their reputation. So, “Great concept,” you could say. What about execution?
Every year, we see in our advisory practice numerous billion-dollar business plans, in an Excel model, that talk about subscription. Lots of companies are very excited about getting it done, and they tend to forget to ask the most important question as we’re building up this plan: How do I retain customers? It’s not enough to get them to subscribe. What are some tools, techniques, and best practices that I need to use to really make sure that I have a high retention rate? After all, the success or failure of a subscription business hinges completely on its rate of retention.
So, for this session, we brought together a couple of experts who understand a lot about managing subscriber churn—Steve Booth of Vindicia and Doug Caviness of cleverbridge. Let me give a quick introduction. Doug is the Vice President of B2B Strategy & Partnerships for cleverbridge. His work focuses on sales automation and customer self-service. His specialty is addressing high-velocity, long-tail customer segments. Doug brings over 20 years of experience in e-commerce, software, and IT, having worked with companies ranging from startups to Fortune 500, including Digital River and HP. Steve is VP of Retention at Vindicia. He’s a veteran of the software industry with a career that spans over 30 years in various sales and executive management roles with companies such as ADP, Oracle, Portal Software, and QlikTech. Steve and Doug, welcome to Monetize Forum 2021—a big thank you for participating in the event. We are delighted to have you both as our guests.
Steve Booth
Glad to be here.
Doug Caviness
Thank you.
Igor Stenmark
Terrific. Let me open it up and ask you each to give a brief introduction about your respective companies. Let’s start with Steve and then pass it on to Doug.
Steve Booth
Vindicia is a company that’s part of an organization called Amdocs. We’ve been around for about 17 years now, and since Vindicia’s inception, we’ve always been very focused on the direct-to-consumer market. We do that with a product called MarketONE, which is an all-in-one subscription platform for truly end-to-end subscription relationship management, focused on customer acquisition, retention, and growth. Our focus is enabling increases in each of these areas for our customers. We do that primarily through subscription intelligence and also best practices. Obviously today, as Igor said, we’re focused on retention, which has always been part and parcel of what we do. That’s to the point that my job, as you mentioned, is the VP of the retention services here at Vindicia. So, I wake up every single day and this is all I do; this is the focus. So, I’m very excited to be here today.
Igor Stenmark
Thank you. It’s great to have you. Doug?
Doug Caviness
Igor, thanks for having me. A little bit about cleverbridge: We’re a leading e-commerce provider for digital product companies, namely software and SaaS. We started in 2005 and were super focused on making it easy for clients to sell globally. One way we do this is by offering what we call a merchant of record model, where we take on a lot of the heavy lifting of things like handling payment contracts, taxes, localization, PCI, and global compliance. Today, it’s mostly about subscriptions for our clients. We process over one and a half million transactions per month for companies like Parallels, McAfee and Sony.
Igor Stenmark
Great. Why don’t we start with some definitions—so, how do each of you define churn and retention? Doug, if you’ll start, and then we can pass it on to Steve.
Doug Caviness
Sure. Churn is basically a measure of subscription dollars or customers not renewed. So, if in the beginning of a term you had 100 customers, and at that the end of the term only 90% renewed, that’s 10% of those churned. The inverse of churn is retention. So, if 10% of customers churn, you’ve retained 90% of your customers. One other thing I’d just highlight in terms of definitions is that a lot of the companies we interact with work with net dollar renewal rate, which would be a measure of the total contract value of all subscriptions set to renew over a given term, plus any up-sell and cross-sell. In that kind of definition, if you had a 90% renewal rate on customers, but you up-sold or cross-sold 10% additional dollars for those customers that did renew, you could actually have a 100% dollar renewal rate.
Igor Stenmark
Steve, did you want to contradict or add anything to that or?
Doug Caviness
I definitely wouldn’t contradict that; he nailed it in terms of the overall definition. The only additional point, diving in slightly further on the churn side, is a distinction that we at Vindicia refer to as active churn versus passive churn, and you’re going to work on, focus on, and handle each of those differently.
Active churn is, as Doug said, a client fundamentally raising their hand and saying, “I’m done. I don’t want to be involved with your service anymore,” for whatever reason (and we’ll talk about that). So, that’s an active engagement by the customer saying they no longer want to be part of the relationship with you.
Regarding passive churn, in the direct-to-consumer model, we usually see between 20% and 30% (based on the customer and the industry) being passive churn. That’s actually customers that are lost through failed payment card transactions. To me, that’s sometimes slightly the more painful of the two because there’s one that’s active and you feel it, and the other is just a customer not saying they don’t want to be there anymore but, from a numeric standpoint, still dropping out. So, that’s what we call passive churn. Other than that, Doug’s definition was spot on.
Igor Stenmark
Yes. I just want to come back to the point that Doug made about revenue retention versus customer retention, and I’ll share just a bit of an analyst’s perspective here. When we look at companies and try to assess the health of their business, and they tell us that they have 100% revenue retention, we often discount that because we want to see the actual customer retention. To us, revenue retention alone is only 30% of the story. We look at whether they’re retaining customers or if customers are fleeing actively from the business.
Doug Caviness
That’s a really important point.
Steve Booth
It’s a great point because a saved customer is an opportunity. If you increase numbers on one side but lose on revenue, you still have the opportunity to increase overall. You’re exactly right. It’s a terrific point.
Igor Stenmark
Yes. The customer acquisition cost is generally so high in most of these businesses. If you lose a customer, as Steve described, through a customer saying, “I don’t want to do this anymore,” you’re basically back to square one, and you have to prepare to spend money again on acquiring a new customer. So, the economics are not favorable in that case.
Looking at the subscription business in general, besides churn/retention, what are the key metrics that companies should be measuring to help themselves reduce churn in your view? Let’s start with Steve and then go to Doug.
Steve Booth
Well, I’m going to steal one that you just said, which is kind of an interesting one when you talk about retention. It’s that everybody should know their customer acquisition cost because, in this case, it becomes a customer replacement cost, and for the vast majority of companies that we deal with in a subscription model, that customer acquisition cost is definitely not a one-to-one. It’s a multiple of what you tend to get on a billing period basis. So, everybody should know that because that’s the number that matters when you ask, “What am I losing when somebody leaves?” The answer is what it’s going to cost you to replace that customer, so everybody should know.
A second thing that’s very important to track and manage (though it’s probably seen as a little fluffy) is engagement. It’s tough because I say “engagement” like it’s this very specific thing, but a lot of times it’s really going to be by service and by provider. You need to understand what an engaged customer means in your world, and you have to be real. You have to manage both positive and negative engagement so that you can understand it. Some organizations or businesses are what I like to call kind of in the insurance world; I think of home warranty services or home security services, where there normally isn’t really an engagement unless there’s an incident. In some ways, I think you have to force engagement to make sure you’re staying communicative out there. You have to be able to do that. I would create an engagement scale, which we’ll talk about a little bit more in a few minutes.
When it comes to payment failures, you want to have a good handle on the metrics. Where are you at? What’s your initial success rate? What are you doing after retries? Where are you ending up? That’s surprisingly not the easiest number to track because we get into fun, cool, statistical terms like cohort management, but you need to do it.
Then finally, closing the loop here, is retention costs. I think it’s very important to do that because a lot of people, as Igor mentioned, will just assume it’s going to happen, and you do need to invest in this. But I can promise you that if you know your acquisition costs, that is by a number of factors higher than your retention costs. So, that will give you commitment to spending the money and making the investment. Those are the high-level things that I would really focus on.
Igor Stenmark
Yes. Doug—anything to add to this?
Doug Caviness
I think you’ve hit all the major topics. I’ll just highlight or reinforce a couple. Igor, you mentioned that you focus on knowing the account retention with your client engagements and that this relates to customer acquisition costs. A lot of times, we see companies not measuring that, and they’re acquiring the wrong customers who are likely to churn. To Steve’s point, I think having measures of engagement and satisfaction is super important, and those are the predictive things you can actually manage. By the time you get to a renewal event, at least for what Steve called active or voluntary churn, it could be too late. For software and services, it’s often the first hours, days, or weeks that are going to dictate a customer’s likelihood of renewing. So, that’s the most critical there. Then, on the involuntary or passive churn, it’s about things like whether the customer’s payment details and contact information are up to date.
Igor Stenmark
I think engagement is absolutely critical—engagement and then measuring customer satisfaction, whether that’s through direct CSAT scores, NPS, or whatever it is the company chooses to measure. Without engagement, there’s no renewal, and without renewal, there isn’t a subscription business. You basically have 100% churn. That’s pretty critical.
I have a follow-up question for Steve. Steve, you focused on the acquisition costs. Do you think it’s important for companies to track the relationship between the acquisition cost and the value of a subscription on a period? Is there a golden ratio? I’ve seen some companies do that. Have you seen this in your practice?
Steve Booth
Absolutely. You need to do that, and I think Doug made a terrific point. You want to dive into that for two reasons. The panacea in what you’re shooting for in a subscription model is increasing average lifetime value. One of the things that I remember because, as you mentioned up front, I’m old (Igor didn’t really say it, but I got the 30-year thing…).
Igor Stenmark
It’s a compliment!
Steve Booth
It is a compliment, exactly. I still remember, in the early SaaS days, someone talking about migrating to a subscription model, going to their CFO and saying, “Hey, here’s this great idea. We have to go to subscription. We’re going to get paid every month, we’re going to have visibility into revenue, and it’s going to be wonderful.” The CFO says, “That’s great.” Then the person says, “Yeah, the only thing is that you have to put all our costs upfront,” and the CFO falls off their chair, right? So, average lifetime value is a continuum that you need to be focused on, and you want to relate that to your acquisition cost because, if you’re not getting the money back, you don’t have to be an economic wizard to say that’s not working.
Then, Doug had a great point, which is to also evaluate the tranches of your customers to make sure that you’re acquiring valuable customers. Is there a tranche of customers leaving that you shouldn’t try to acquire? I know that’s heretical in a lot of ways. Some people believe they can improve or fix anything, but at some point, you have to do that analysis. If there’s a channel that’s generating customers that just churn off quickly, you have look at that level and say, “Maybe I don’t go that route anymore if they’re not staying with us and if it’s not worth it.” So absolutely, you want to be keeping track of that from cradle-to-grave or soup-to-nuts and make sure you’re analyzing that.
Igor Stenmark
I want to ask you a follow-up to that. We sometimes see companies really accelerate very rapidly from the starting gate. They get fresh funding or fresh talent, and they’re going in guns blazing. And even though the growth rate is very high in the beginning, the retention begins to really look unattractive very quickly. So, we’ve seen a relationship between overly fast growth (though it’s not always the case) and a drop-off in retention. Have you guys seen that? Is that something that happens in your practice?
Steve Booth
Absolutely. Unfortunately, I think it’s more the norm than anything. Especially when starting out, I think that a lot of organizations have this thought that retention is a rich person’s problem to be worried about later. I’ve always been of the mindset that the minute you have one customer, retention needs to be a focus. I talked about that engagement scale, and it’s really important that you’re literally looking at every single lever there and understanding—is it a customer that has a risk of churn? What’s their engagement like?
If it’s a happy customer, it’s back to Doug’s point. That’s when I would like to increase the revenue. Are there additional products? Can I increase their engagement with us? But absolutely, all these things are important. That and failed payments are not just a cost of doing business. As I mentioned, the whole idea of the benefit of the subscription model from a financial perspective is continual revenue. If you’re losing them at the back end, as we’ve all mentioned, it’s a lot more expensive to replace them. “Cheaper to keep them”—we’ve all heard that phrase out in the world, and that’s absolutely true in the subscription world.
Doug Caviness
I think Steve nailed it. The point is that you have to think through that entire customer experience at the beginning and not defer it as something you’ll get to when you have time or when you get closer to the renewal.
Igor Stenmark
Yes. When you’re thinking about it at renewal, you’re way too late. It sounds like there’s really a whole science behind subscriber management and ensuring healthy business in this area. What would your advice be for companies looking to improve or maintain their subscriber retention, whether it’s in terms of tools, best practices, or organizational techniques? Doug, do you want to maybe start with that?
Doug Caviness
Sure. I have two, and this might be skewed a little bit on what I see in B2B, but I see these as key things and kind of basic. The first one is understanding the critical importance of renewals for your organization. A lot of times, I don’t think it’s fully appreciated how important renewals are. I’m remembering a study I saw from Bain about a year ago. They looked at the software industry and found that, for software companies, renewals are something like 30% to 50% of revenues but they’re around 50% to 80% of profits. They had this one statistic that really hit home for me. They said for every one-point increase in renewal or retention rate, that could equate to somewhere between nearly 2% and 6% uplift in operating income. So, I think that may be central from number one—making sure everyone in the organization gets renewals.
Number two would be making sure that you’re not approaching the customer as silos. I see this as an ongoing thing, particularly in B2B, where we really need to focus on customer experience throughout that lifecycle and on making sure that customer experience is rock solid from the very beginning and all the way through to the renewal event.
Igor Stenmark
Steve?
Steve Booth
Yes, absolutely. I live in an interesting world where I work for a B2B company that has and deals with renewals, but our merchants are direct-to-consumer. There’s a lovely term in the world we live in called “evergreen,” so it’s not really a renewal. That would be my first point: commit the resources. This does not happen by magic. To whoever is out there listening, I know you have a good product, but that’s just not enough. You have to make sure you’re continually evaluating this. To Doug’s point, in the B2B world, the bad habit tends to be that people say, “Oh, okay. Renewal’s in a month. Let’s dive in.” You have to commit the resources.
We talked about the relative nature of the cost of acquisition versus retention. Doug, I love that you mentioned that operating income increase. We have numbers that we use at Vindicia to talk about exactly that, even around passive churn—how that top-line revenue is just a multiple of what you’re doing. That’s very important, and it’s a constant process. I mentioned the engagement scale earlier. There are so many companies out there right now that have a saves team, and when does the saves team dive in? When a customer says, “I quit,” what do we do then? We rally the troops, and we normally throw money at it, offering discounts. You have to be moving, and that’s why I like to talk about an engagement scale.
We’re all consumers. Think about when you’ve left any organization or even any relationship, where you’ve said, “I’m leaving,” and the other person says, “Why?” Your first thought is, “Are you kidding me? How could I have made it clearer that I’m experiencing a struggle?” A quick little example: I had a car I bought when I was young. It was a great car, but it used to shut off while I was driving. The company was great, but every time it happened, they would call back and ask, “How was our customer service?” I said, “It’s awesome, but there’s just too darn much of it.” The customers will tell you, so you have to listen to them and move away from that being an event.
Like Doug said with renewals, in the direct-to-consumer world, it’s on terming. You really want to look at it as a continuum, evaluate everybody, and constantly try to move them up the scale—unhappy to happy, happy to ecstatic. I know it sounds like a panacea, but that’s something you have to do and commit to. We’re all pounding on this point, but I’m going to go back and say it again: Look at the numbers, and you will realize the commitment to doing this is beyond worth it, relative to the cost of recapturing or replacing that customer. So, yes, I’m a little passionate about it, but that’s what you need to do for sure.
Igor Stenmark
Very cool. We’re almost to the end of our time slot here at the conference. To conclude, I wanted to ask you both what unique strengths each one of your companies brings to the table in the context of churn and subscriber management. What should our audience take away, in terms of where they can get help from you guys specifically in this area? Let’s start with Steve and then close with Doug.
Steve Booth
From day one, this has been a huge focus of ours. These days, we have products that are focused on more than just reducing overall churn; they’re getting into active churn. We’re working with a wonderful partner called Redfast that addresses not just engagement measurement (for which there are some other things out there) but also the actions that can be taken both programmatically and notification-wise. It says, “Hey, here’s where this person is as it relates to themself”—not just a broad depiction but the ability to look at a person’s activity versus what they’ve done before.
We also have a product called Retain. We have a wonderful marketing team—how obvious, right? Retain. That’s very focused on the passive churn, where we’re able to actually increase the successes on between 20% to 30% of otherwise failed payment transactions, very importantly, without getting involved with the customer. That’s another best practice. You want to do as much as you can in that world pre-touching the customer, so you maintain that frictionless experience for the customer and keep them active. So, those are our strengths from a very specific retention focus.
Igor Stenmark
Great. Doug?
Doug Caviness
From a churn standpoint, first of all, cleverbridge is super focused on helping B2B and B2C digital product companies on a global basis. We try to think through and optimize that entire acquisition-to-renewal process from a transaction standpoint. We also bring things like retention tools to help prevent issues like card expirations. We have other offerings including digital marketing services. In B2B and B2C, as Steve would probably tell you, one of the most important things is effective communication, so we bring email marketing services, as an example. We make sure that the customer is enjoying their product and aware of things like an upcoming renewal event. Additionally, we provide transaction-based customer service, so if customers have questions or problems, they have somebody they can call or a self-service interface they can go to. We try to provide that whole experience regardless of whether the person’s in Japan, Germany, or the United States.
Igor Stenmark
That’s very cool. Steve, Doug, we could go on talking much longer. Thank you very much for joining us here at Monetize Forum 2021. I want to remind the audience to go visit the virtual exhibit booths that both cleverbridge and Vindicia are hosting, and I hope everyone has a great rest of the conference. Thank you.
Steve Booth
Thank you, Igor. We appreciate it. Thank you, Doug.
Doug Caviness
Thank you.
