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November 10, 2020

Revisiting Customer Retention in Times of Uncertainty

Modern Architecture

For SaaS businesses, customer retention is priority one, two, and three even in normal times. During a global pandemic and a historic economic downturn, it is a challenge that takes on all new proportions. 2020 has taken the things we thought we knew about customer retention and scrambled them. The basic business goal is still the same, however. The pressures are intensified, while the potential losses and gains that stem from your actions are magnified.

According to McKinsey’s 2020 report, “Adapting Customer Experience in the Time of Coronavirus”, “In times of crisis, a customer’s interaction with a company can trigger an immediate and lingering effect on his or her sense of trust and loyalty… Now is also the time for customer experience (CX) leaders to position themselves at the forefront of the longer-term shifts in behavior that result from this crisis. Keeping a real-time pulse on changing customer preferences and rapidly innovating to redesign journeys that matter to a very different context will be key.”

How can business leaders implement strategies that will keep customer retention high, despite the turbulent times? We chatted with executives from our portfolio, and canvassed our internal expertise, to arrive at three guiding principles:

1 – Be proactive through customer segmentation

2 – Build and leverage customer success teams

3 – Implement tailored and empathetic pricing

Be Proactive through Customer Segmentation

Faced with a turbulent year, writes the Harvard Business School, “firms need to adapt to shifting customer wants by engaging a more customer-centric philosophy. Rather than expecting their customers to come to them, they need to go to their customers.”

Segmentation is a powerful way to become more customer-centric. At Norwest, our SaaS portfolio companies are doing reasonably well riding out these tumultuous times. Many are refining their approach to customer segmentation – based on vertical, size, usage and other metrics – to spotlight and predict problems and opportunities within the customer base. This granular segmentation allows business to have a better understanding of what the key value-add is for different types of customers.

Let’s say you have an enterprise customer using the product in a different way than a mid-market customer, or valuing different features and functionalities. Clear understanding of these differences can help you take the right steps. You can market to these customers differently or potentially even alter the go-to-market strategy around your products. You can start to bundle the product, services, or features differently to better cater to specific types of customers.

Remember also that in the COVID-19 era, companies need to investigate and respond to how the nature of segmentation has changed.  Once you have your segmentation clear in your mind, it is important to pinpoint your core customers, which are typically the top 20% of customers with the highest profit potential. Once identified, companies can then concentrate their retention and upsell efforts on customers that bring the most value.

Currently, 62% of global companies surveyed by Bain & Company have adopted customer segmentation strategies. That figure is projected to rise to 85% by 2023. It’s important for companies to stay ahead of the curve and be on the front edge of this innovative growth. 

Build and Leverage Customer Success Teams

At the height of the pandemic, when other departments were suffering cuts, most enterprises were planning to keep or grow their customer success teams. Why? Because in a time of crisis, retaining customers requires going above and beyond. As McKinsey recognizes, during a crisis, customers “need extra information, guidance, and support.” 

A lot of emerging SaaS companies focus on revenue growth which means they invest in sales, marketing and product. Oftentimes, account management and customer success aren’t a priority early on, and as a result, they lag a bit when companies start entering the later stages of growth.

When coupled with customer segmentation work, account management and customer success become a huge asset to a company. Customer success (CS) teams commit to understanding the customer at a level that feels personable and warm. Talented CS teams possess a strong grasp of their product and their customer’s history with their product. This helps customers feel like they have a connection to the product and the company.

CS teams boost net retention through upselling as well. According to Forrester, for data companies, 77% of revenue comes from their install base (renewals, upsells and cross-sells). Numbers from Forbes bear this out. Increasing acquisition growth by 1% can grow your bottom-line revenue by 3.32%. However, boost retention or monetization of existing customers by the same amount, and you’ll see 6.71% and 12.7% bottom-line revenue increases respectively. 

Even if your customers are generally happy, CS teams can reach out and educate users on new products, functionalities, or integrations. Guided by data taken from the customer segmentation, these teams can make suggestions on more helpful applications and uses. These suggestions should be sensitive to the pressures of a situation such as the current pandemic. 

Implement Tailored and Empathetic Pricing

Pricing is one area that we see a lot of SaaS businesses initially brush over. Understanding price elasticity and the customers’ perception of the value you bring them allows SaaS companies to become more strategic with pricing and tailor it to the unique attributes of a particular customer. We use specific benchmarking tools and analytic frameworks to measure customer ROI and competitive pricing strategies to help portfolio companies through this. 

Gaining this level of understanding requires an in-depth analysis of demand variables, market and industry trends, financial health, competitor behavior, and more.   Conviction in your pricing strategy will allow you to be more flexible with customers when they need it.  Doing so can dramatically help with retention in the long run.  A little empathy in times of need goes a long way.  

SaaS businesses that keep a long-term perspective, monitor key customers’ evolving needs, constantly communicate with their users, and seek long-term value over short-term advantage will emerge stronger from a crisis such as COVID-19. People remember kind and compassionate gestures, particularly in challenging times.  

Improving customer retention, especially during turbulent times, is a challenge. If you’re looking to mitigate churn and maximize upsell, Norwest’s operating partner team can be a great resource. We offer diagnostic tools to pinpoint risks and opportunities and then work collaboratively to help you.  If you’re thinking seriously about improving your customer retention strategy, please reach out to us and we’d be happy to offer guidance on your approach.