SaaS102 #19 How to Increase SaaS Renewal Rates?
Before the arrival of the SaaS model, traditional software companies generally sold software on a one-time basis. Their profits would come largely from those one-time sales, and were supplemented by fees from occasional post-sale maintenance services.
However, there were two problems with traditional methods of selling software:
Problem one:
Customer-satisfaction levels were poor. Sales staff often were only concerned with making sales. Once the sale was made, they were no longer interested in taking care of the customer.
Problem two:
There were limited opportunities for software companies to grow over the long term. Selling software was just a one-time deal, so no matter whether the customer was happy or not, they wouldn’t pay you a second time. In this kind of scenario, companies could only grow by continually finding new customers.
The arrival of SaaS changed the way software was sold. SaaS stands for Software as a Service.
The biggest difference between SaaS products and traditional software is:
With traditional software, cooperation with the customer ends the moment the sale is completed. With SaaS, the service starts the moment the sale is made.
Another difference is that for traditional software, money is made when the software is sold. Under the SaaS model, money is made when customers continually renew their subscriptions.
The following is an example to help illustrate these differences:
With the traditional software model, you might make a piece of software and sell it to a customer for a one-time amount of 21,000 US dollars. To earn more money, your main method will be to find more new customers to sell to.
If you use the SaaS sales model, you might sign a subscription contract with a customer for 7,000 US dollars per year. Once the customer has signed, you still need to provide good service in order to ensure the customer renews their subscription the next year.
If the customer renews their subscription for three years, you will have earned 21,000 US dollars, the same as the one-time sales amount under the traditional model. If the customer renews for more than three years, you will make more than 21,000 US dollars. And if the customer continually renews their subscription, you will earn 7,000 dollars in annual revenue from that customer.
For a company, the benefits of a subscription model are quite clear. They are:
The more customers the company gains, the higher revenue will be. And even if the company reaches a stage where they find it hard to expand their customer base, they will still receive a steady stream of income from their old customers.
The subscription model also has benefits for customers:
The customer has reduced their risk because they no longer need to make a large one-time payment of 21,000 US dollars, even before they know whether the software can provide an effective solution to the challenges their business faces.
Instead, they can first make a payment of 7,000 US dollars. If, after one year of use, they are sure that the product brings them value worth more than 7,000 US dollars, they can renew their subscription and continue payment.
The fundamental requirement of the customer is not about wanting to use software which offers some advanced technology. Customers are looking for solutions to specific business challenges.
Under the SaaS model, subscription renewal rates are an essential factor that cannot be overlooked. Customers will only renew subscriptions for products that provide effective solutions to the challenges they face.
If a customer only uses your product for a month and then cancels their subscription, the revenue received might not make up for the customer acquisition cost.
So, how can we increase subscription renewal rates for SaaS products?
The answer is, we need to build a customer success team dedicated to helping our customers succeed.
What is a customer success team?
Before SaaS arrived on the scene, a CRM company called Vantive created a customer success team back in 1996.
In 2005, Salesforce founded what was, at the time, the largest customer success department in the industry. Salesforce continued to build and promote this department until it became the industry standard.
Many people might have a question when they hear the term “customer success team.” They might ask: “What’s the difference between a customer success team and a customer service team?”
The answer is: A customer service team focuses on helping customers use products. A customer success team focuses on helping customers build their business.
The attitude of customer service teams is usually that they will help customers who contact them if they are having issues using a product. But if customers do not contact a customer service team, the customer service team will not generally take the initiative to contact the customer.
Customer success team will instead take the initiative to contact the customer, even if the customer does not contact them. This is because the goal of the customer success team is to help the customer use products in the way that most benefits their business.
In order to achieve their goal of helping the customer succeed, the customer success team plays different roles internally and externally.
Internally, the customer success team plays the following roles:
Revenue guarantor
The customer success team plays a key role in guaranteeing revenue because, as explained earlier in this article, the number of customers that will want to start or renew subscriptions is closely linked with how successful customers are. Customer success is closely linked to company revenue.
Product improvement advocate
The customer success team communicates with the customer on a daily basis. As a result, they know the most about the customer's pain points. They need to tell product managers about the real needs and pain points that the customer faces. This can then help the product manager to create and build the solutions most able to resolve the customer’s needs and pain points.
Externally, the customer success team plays the following roles:
Trusted advisor
The customer success team aims to help customers diagnose problems and find solutions in ways that improve their business.
Educator
The customer success team explains the value that our products can offer to the customer. They help the customer understand how they can best use and implement the product in their specific business scenario.
For example, if the customer success team finds out that customer A has a certain way of using the AfterShip product which helps their business, then this implementation method can also be shared with customers B, C, and D, so that they too can enjoy the same benefits.
Bridge between customer and company
The customer success team collects the customer’s feedback and complaints. They use this information to help us improve our products.
When new product features come out, it’s the customer success team that explains them to our customers. This enables our customers to make the best use of these features and maximize the benefit they gain from using our products.
How can we increase our product subscription renewal rate?
Now that we understand what a customer success team is and the roles that they play, we can look at what we can do to increase subscription renewal rates for our products.
First, we need to find the correct customers.
No matter what research report you look at, the number one cause of losing customers starts from the beginning: selling products to the wrong customers. When products are sold to the wrong customers, the scenario usually falls into one of two types:
Scenario type one
The customer didn’t want to buy, but our sales staff kept trying to persuade them with bold claims about the product. In the end the customer made the purchase, but had very high expectations that the product wasn’t able to meet.
Scenario type two
The second type of scenario is that the customer did really want to buy our product, but according to the assessments we had made, the product didn’t actually meet the customer’s core needs. But in order to make the deal and earn commission, sales staff went ahead and signed the contract.
Both scenario types are problematic. No matter whether an order comes from sales staff making exaggerated promises, or whether customers actively make orders with us because they have inaccurate expectations of what our product can do, the result will often be the same. Once they have used the product, they find it can’t meet their expectations, and so they choose not to renew their subscription.
In this kind of situation, not only do we not get the money from renewed subscriptions, we also damage our word-of-mouth reputation among our potential customers. By doing this, we drive away our real target customers.
So, product sales staff should not overpromise in order to close sales deals.
Even if a customer really wants to buy our product, if we know that the product cannot meet their core needs (and we have no plans to introduce features that do support their needs in the near future), we should have no hesitation about turning that customer down.
Second, the sales team needs to communicate effectively with the customer success team.
The sales team should fully update the customer success team on customer needs and the solutions that have been promised.
The customer success team needs this information to customize solutions for the customer and help the customer reach their goals.
If the sales team make the sale but then don’t do anything further, leaving it all up to the customer success team to carry on communicating with the customer, several problems will arise:
Problem one: Low efficiency
The first issue will be low efficiency. The customer success team will need to spend time communicating with the customer on matters which the sales team has already communicated with them about.
Problem two: We will appear unprofessional
If the sales team fails to communicate effectively with the customer success team, the customer may well end up thinking something along the lines of: “Before we signed the contract we clearly discussed these problems and you agreed to help us resolve them. Now we’ve made the payment, and you’re asking us the same questions again!? Doesn’t this prove that before you were just trying to trick us into buying and didn’t care about helping us?”
Third, we need to teach our customers how to use our products well.
Suppose that two customers were both using the same one of our products. If customer A got 100% value from the product, but if customer B (despite being a very similar customer to customer A) only got 70% value from the product, whose problem would that be?
Some people might think that this would be customer B’s problem. They might think: “The product features are the same for both products. If customer A can get 100% of the potential product value, but customer B can only get 70% of the potential product value, then of course it’s customer B’s problem.”
In fact, it would be AfterShip’s problem, because we would have failed to help our customer get the most out of our product.
It might be that the design of our product isn’t simple and user-friendly enough, so the customer doesn’t know how to use it. Or it might be that some customers don’t know the best scenarios to use the product in, so they take a less than optimal route to achieve the results they want.
Whatever the case may be, we need to use industry-best practices to communicate to the customer how they can use our product to gain the maximum possible value from it.
As the customer has paid money, we need to help the customer gain the maximum possible value. And the more value the customer gains, the more willing they will be to renew their subscription.
Fourth, we need to ensure our product managers hear our customers’ voices.
We need to encourage product managers to do the things that bring the most value to our customers.
Many product managers say they are the representatives of the customer. Yet in the B2B SaaS field, it’s often the customer success team which has the most communication with the customer.
That’s why it’s so important that the customer success team helps product managers, makes sure that actual customer feedback reaches them, and encourages them to do what will create the most value for the customer.
Of course, during this process, there are several areas that need to be paid attention to.
One such area is that what the customer success team provides as feedback is the customer’s needs, rather than the customer’s requirements.
In some scenarios, what the customer asks for, and what the customer actually needs in order to resolve a problem, may not be the same thing.
In the words of Theodore Levitt, a former marketing professor at the Harvard Business School, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.”
Another important area is that the product R&D team needs to set aside a clear schedule to support all the customer needs which are raised by the customer success team.
For example the customer success team and the product R&D team might come to the following agreement:
The product R&D team will dedicate 20% of its time and labor resources each month to support needs raised by the customer success team.
In general, the first level of priority will certainly be any issues which affect customers’ online use of our products. The priority level of other needs can be determined by the customer success team.
Fifth, we need to use data to show customers the value our products have provided them.
As well as making sure we are constantly improving our products and helping customers get the most out of our products, we also want customers to understand directly how much value our products have created for them. The best way to communicate how much value has been created is through the use of data.
Sam’s Club is a shopping club which offers perks and discounts to its members. Members of Sam’s Club are told how much money they have saved each time they open the app.
The image above is an example of how Sam’s Club uses data to show users how much they’ve saved. Image credit: https://aomdesign.com/sams-club
The screenshot above shows the customer that they have saved 300 US dollars through their Sam’s Club membership. This page also tells the customer that their annual Plus membership has paid for itself. (As of September, 2022, the cost of a Sam’s Club annual Plus membership was 100 US dollars.) The customer can directly see the value this service has provided for them by looking at the data. If the service really has saved the customer more money than they spent on the initial membership, then when the time to renew their subscription comes around, they naturally won’t have any doubts.
For SaaS products, the same principles apply. We need to use data to show the customer exactly what the product has done for them and how much value it has provided for them.
It’s also very important to remember that there is a very big difference between B2B and B2C.
For B2B SaaS software, your customer and your user may not be the same person.
Your customer may be the boss of a company. The boss is your customer as he or she is responsible for approving the decision to buy, or not to buy, your software. Your users, meanwhile, may be a group of people in a certain company department that use the software every day.
Even if you create great software and customers use that software every day without problems, if you can’t use data to directly show your customers how much value the software has provided their company with, there’s no guarantee that they will continue their subscription the next year.
If you can use a very clear data report to show the customer how much using our software has saved them in costs, and how many benefits it has brought them, they will have much less reason to hesitate when they decide whether to renew their subscription for another year.
Summary: Working together to help customers succeed
As you’ve read this far, I think you will now have a good understanding of questions such as “Why are product subscription renewal rates so important?”, “What is a customer success team?” and “How can we increase product subscription renewal rates?”
To conclude this article, I’d like to share something I feel is important:
Although the customer success team is most directly involved with the product subscription renewal rates metric, our customer’s success is something that requires the hard work and participation of everyone at AfterShip.
If you are in the product team, you need to think about how to make great products and create more value for the customer.
If you are in the R&D team, you need to think about how to guarantee stable service and respond to customer needs as quickly as possible.
If you are in branding and marketing, you need to observe current market trends and the industry environment. You then need to think about what actions and methods we should follow to maximize the value we provide to our customers, and to help our customers improve their reputations and increase awareness around their own brands.
Even if you are in HR and admin, you can also think of every means possible to hire talented people that are focused on the industry and will help us create more value for our customers.
Customer success isn’t the title of somebody’s job post. It is a way of thinking. And each person at AfterShip needs to think about the following question:
“What can I do to help our customers succeed?”
Because for companies like ours that work with SaaS software and services, the success of our customers is a prerequisite to our own success.
About author:
This post was written by Sean, VP of Customer Success at AfterShip.
AfterShip is a SaaS post-purchase experience platform that empowers eCommerce retailers like Wish, eBay, and Gymshark to improve their customer experience, drive sales, and increase brand loyalty.
(Article translated by Joseph O'Neill)