BEHIND UNDERSTANDING AND MANAGING. SaaS BUSINESSES. Recurly counts some of the world s most successful subscription businesses as its customers

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1 BEHIND UNDERSTANDING AND MANAGING SaaS BUSINESSES Recurly counts some of the world s most successful subscription businesses as its customers

2 Subscription and Software-as-a-Service (SaaS) are commonly misused words that often confuse rather than educate. The concepts behind subscription and SaaS business models are relatively simple, but having a clear understanding of critical variables and metrics can have a significant impact. In every subscription-based business, there are several critical variables, and they fall into three buckets related to the various stages of the funnel. Customer Acquisition Metrics Account Sign-Ups Free Trials Trial Conversion Customer Acquisition Cost CAC Engagement / Loyalty Metrics Customer Retention Customer Churn Revenue Churn Yield Business Monetization Metrics Average Revenue Per User ARPU Lifetime Value LTV Margins, etc. There are many important ratios describing the interactions between some of these key metrics, but the most important measure of any subscription and SaaS business is Subscriber Retention. Subscriber Retention is the percentage measure of subscribers that remain paying subscribers through a period of time (whether monthly, quarterly or annually). Subscriber Churn is the percentage measure of subscribers that cancel or fail to renew their subscription during the same period. Importance of Measuring Subscriber Retention and Churn Businesses with low Subscriber Retention (i.e., high Subscriber Churn) rates have underlying problems which need to be understood and addressed quickly. Otherwise, every other area of the business will suffer. This is quite literally the most important single indicator of the underlying health of a SaaS / Subscription business model. Behind Understanding and Managing SaaS Businesses page 1

3 Businesses offering a well-designed product or service at the right price point are perceived to deliver real value to their customers over time. Customers gladly renew and remain loyal over longer periods of time. The time period is the T in Lifetime Value (LTV). Importance of Addressing Subscriber Churn Subscriber Churn can be an indication of any number of different problems (or more likely a combination of underlying issues). As noted above, high Subscriber Churn forces every part of the business to work less efficiently, which ultimately can be detrimental to the business as a whole. Eventually, other critical business functions (i.e., Customer Support) will begin to suffer under the pressure. Below is an example of the perils of letting high Subscriber Churn situation go unattended. 80 % of Subscriptions Active Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012 Jul 2012 Aug 2012 Sep 2012 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 (You ll note that the slope of the retention curves get progressively steeper with each month.) This example demonstrates how churn can impact many other areas of the business. One can assume in this example that Subscriber Churn was a multi-faceted problem. For example, if it were simply a pricing problem, or a product problem, the slopes would have remained concerning, but relatively constant. Behind Understanding and Managing SaaS Businesses page 2

4 What Can Be Done? Speak with your departing customers Exit Interviews are the most valuable source of information you can possibly gather. When customers are leaving you, they are most inclined to provide direct feedback on service. It is important to understand the context behind their decision to depart. + Why are they leaving? + Where are they going? What is their planned solution? + How/where did the service not meet their expectations? + Which aspects of the service worked well for them? (serves to isolate the issues) While those comments can be less than pleasant to read or hear, they provide extremely valuable intelligence for your business to act upon. These survey results will also help to provide facts to support or debunk internal debates rather as opposed to speculation. Speak with your existing customers This is one of the most often overlooked opportunities in all companies big and small. These discussions provide a great opportunity to gauge the level of satisfaction, and share plans for the roadmap ahead. This is also an opportunity to gather requirements and to understand the need and importance of planned features to ensure you re heading in the right direction. Don t forget your customer support team Customer support teams are often overlooked, but their interactions with customers can provide a wealth of knowledge and data. For example, Recurly distributes weekly This Week In Customer Support s where the support team synthesizes a valuable breakdown of feature requests, customer sentiment, emerging topical trends, and known issues to prioritize along with valuable data. These data points help to inform our internal discussions ranging from feature prioritization to technical debt. Behind Understanding and Managing SaaS Businesses page 3

5 One of the benefits of gathering internal data from your customer support team is that it helps correct for sample bias. Often, happy customers won t take the time to express their satisfaction, while unhappy customers tend to be more willing to voice their displeasure. This can create an uneven, less than representative gauge of customer satisfaction levels. Feedback from support teams minimizes this issue. Know who you should listen to Understand sources of feedback in relation to monetization. In addition to understanding all of the sources of satisfaction and discontent, it is extremely important to correlate those findings with the actual monetization of those customers. This is why Revenue Churn is such an important metric to watch by showing whether you re losing your most valued or least valued customers. Before taking any corrective action, prioritize feedback in a way that will satisfy and therefore attract more of the best kinds of customers for your business. SaaS businesses can be optimized in many ways, which begins by understanding your goals and establishing benchmarks. By doing so and watching them as they change over time, businesses will develop a better sense of what is working and areas that require improvement. Contact our Team ABOUT RECURLY Recurly provides enterprise-class recurring billing management for thousands of subscription-based businesses worldwide Recurly, Inc. All Rights Reserved. recurly.com sales@recurly.com