In this final entry of our Commvergence blog series, we turn our attention to the subject of customer retention. And while this is the last step in our journey (after discussions on product mix, interoperability and integrations, and upmarket sales), this may actually be the most critical as we look at the long term success of communications and managed service providers.
Why? It simply comes down to the economics of retention in a recurring revenue model. Specifically, the much higher profit margins for recurring revenue compared to new sales.
A Dollar Saved > A Dollar Sold
Think back to our discussion about marketing and selling to upmarket segments, and how much you have to invest into winning each new account. Significant money and time investment needs to be made to find leads (through direct sales, live events, advertising, or other channels), take a prospect through a full sales funnel, close the deal, provision services, onboard the customer, and set up the new technical infrastructure to ensure the new customer has a good experience for the long term. Each new deal represents a great deal of effort, and that effort only becomes greater as you sell to larger, more complex customers.
Fortunately, once that customer has been sold and is paying for your services (on a monthly, quarterly, or annual basis), your revenue from that customer will grow much faster than the marginal costs of supporting that customer over the long run. As you bring on more and more customers, the quality of your recurring revenue will improve over time, as will the value of your business itself.
Calculating Customer Lifetime Value
A key aggregate metric to measure the overall value of your customer relative to its acquisition cost is Customer Lifetime Value (CLV). CLV is defined as the product of your Average Revenue Per User (or Customer) and your Gross Margin, divided by your Churn Rate.
Churn itself in a recurring revenue business is defined simply as the percentage of customers that you lose over time.
With three inputs into this calculation, what are the levers you can pull to positively affect each?
- Average Revenue Per User is affected by your product and service mix, pricing structure, and ability to sell.
- Gross Margin is enhanced by making the cost to create and deploy these products as efficient as possible, and ultimately driving more profitability.
- Churn is affected by several factors, only some of which are under your control. General economic slowdown or challenges specific to your targeted customer market that cause some of your customers to shrink or disappear are out of your control. Your customers being bought and consolidating their technology away from your offerings are also beyond control. What is in your path to affect? The experience that you give your customers, and how that can flow through to long-term retention.
Customer Service: The Secret Revenue Weapon
If you ask ten different people for a definition of good customer service, you may get ten different answers. But just like the old saying of “you know good art when you see it,” there are generally accepted feelings that a customer will have when he or she receives good service.
There is a feeling of satisfaction that a problem has been solved, as well as a sense that the representative working on the problem cared about the customer’s situation. And while not all satisfied customers may become vocal fans, they will be significantly more likely to stay with a company that provides great service, particularly if that customer has choices of who they can buy these services from.
To put it in perspective, Zendesk, a leading provider of service ticket software, sponsored a study of over 1,000 respondents in 2020 related to the impact of service on customer lifetime value. The study offered numerous interesting findings, but three items stand out in particular:
- 89% of respondents said that quick response to an initial inquiry is important when deciding which company to buy from
- 87% said good customer service changes buying behavior
- 97% said bad customer service changes buying behavior
These conclusions are striking, if not surprising. It’s human nature that people will often remember bad experiences more intensely than good ones, and thus a poor customer experience will stick with them longer than a good one. And when it comes time to decide whether to stay with a particular service provider, those bad experiences will more often decide the path of further engagement.
Based on the survey data along with the generally accepted idea of service quality, the equation is rather simple. Provide exceptional service, retain your customers, increase the lifetime value of those customers for your business. Seems simple enough, but how do you actually deliver on the promise of great service? Speed of response and solving problems are obvious, but in our experience the measure of service quality goes a bit deeper. Here are two ideas to keep in mind as you design your service organization for excellence.
- Your service should be both proactive and reactive. Most companies get the reactive part of things right, staffing a team of customer success representatives who support a customer when things go wrong. But fewer providers proactively work with their customers to better understand their business needs and potential challenges. Using an account manager or similar role to periodically review a customer’s business can identify potential problems that you can work to circumvent before they become major issues that can create churn risks. As an added bonus, these engagements can also uncover potential upsell opportunities that can grow revenue and increase customer lifetime value.
- As a service provider, you should embrace your role as your customers’ technology expert. The tools that businesses use for connectivity and productivity are constantly changing, and any lay person will find it hard to keep up with the details of these changes. But what any customer will tell you is that they are interested in hearing about what the latest and greatest technologies are that will keep them competitive and efficient. You should devote time to keeping up with current trends, while also looking at what new tools may be available in the future. Use your proactive meetings to talk about the latest technology available, and match opportunities to the unique needs of your business customers into the future.
Above all else, you should position your service organization as a partnership organization for your customers. By working together with your customers to proactively identify issues, you can also uncover opportunities to not just retain but also help them grow their business, which could mean higher recurring revenue and enhanced customer value in the long run.
Rev.io is Here to Help
At Rev.io, we are committed to helping service providers retain and grow their customer base through our own solutions. Our quote-to-cash offering includes a configurable product catalog, native ticketing system, and convenient customer portals for ease of bill payments. We also employ the same type of proactive and reactive service model, combining tiered support with account management to easily build partnerships with all our clients. Above all, we are here to help and support the service provider community that keeps all businesses connecting and thriving.
We appreciate your interest in the Commvergence blog series, and we hope that it has been helpful as you evaluate the implications of the CSP and MSP blending and how this can affect your business. We’d love to hear your impressions and ideas, and how you are executing all these strategies in a fast changing market.
If you missed the previous entries in our Commvergence series, you can find them here: