This week's Newsletter:
MULTI-YEAR CONTRACTS WILL NOT FIX YOUR CHURN!
Our latest research might shock you...
Many people assume that longer-term contracts increase overall retention.
Here are 4 PROBLEMS with this line of reasoning:
❶ It assumes many customers stay only as long as their contract lasts. Most SaaS companies cannot survive and grow unless most customers stay for at least 4 years or more. In that case, multi-year contracts will have little impact because they are already shorter than the average customer lifespan.
📈 Our latest research reveals that customers with multi-year contracts stay only an average of 6% longer, or about 3 additional months overall, in companies with customer half-life over 4 years.
❷ On the other hand, if your churn is very high, then multi-year contracts could have a big impact, but the problem is they are much more difficult to sell!
📉 Our data shows that in companies with high churn (less than 3-year half-life), the lifespan of multi-year customers is 45% longer on average! But only about 10% of customers sign up for them (compared to 17% in low-churn companies).
👉 The increase in lifespan from multi-year contracts is insufficient to overcome high churn and get your company back to healthy growth.
❸ But there's another problem: You can't be sure that these customers stayed longer BECAUSE of the multi-year contract. Customers who purchase multi-year contracts tend to be those who would stay without them.
In other words, most customers buy multi-year contracts only after they've committed to your platform for the long term.
❹ There may be one group where longer contracts result in longer lifespans. I call them the "DISCOUNT HUNTERS." This group of customers is highly price-sensitive and uses multi-year contracts to get a cheaper deal.
So what's the problem? Unfortunately, these customers consistently have higher churn rates overall because they tend to fail at a high rate, and are always chasing the latest bargain.
Most of them will churn at the first opportunity. In the meantime, they tend to expend less effort to be successful and cost more to support than they are worth.
In short, these customers are NET LOSERS, and multi-year contracts only serve to extend your losses on them.
✅ 3 TIPS FOR DECIDING WHAT YOUR COMPANY SHOULD DO:
1️⃣ For high-retention companies, multi-year contracts have minimal impact on overall retention. Ensure that the discount you offer is small to match the modest impact.
2️⃣ If you have high churn (customer half-life of less than 36 months), then multi-year contracts can move the needle as long as you can figure out how to sell them effectively. I recommend bundling them with upgraded onboarding and expertise services to ensure customers get measurable results.
3️⃣ In general, avoid offering steep discounts for multi-year contracts that attract those "discount hunters" who cost more than they're worth!
Upcoming Podcast: How Sales can move the needle on churn! With Chad Rawlings
WHY I NEVER USE "YELLOW" CUSTOMER HEALTH STATUS 🚦 and what I recommend instead...
Here are the 3 reasons I don't use "Yellow" customer status:
❶ I'M HYPER-SENSITIVE TO RISK
As outsiders, we see only glimpses of what's happening inside our customers.
➜ If you sense an account might be at risk, you are almost certainly right, and it's likely worse than you think.
Over my career, I've become extremely sensitive to the slightest hint of risk because my experience is that they usually turn out to be real, and by the time the risk is obvious, it's often too late to address it.
❷ BIAS FOR ACTION
For most people, yellow means "wait." If we sense a risk that a customer might eventually fail and churn, we should always act on it.
In most cases, the risk informs precisely what we should do about it. Treating every risk as something that should be actioned immediately is vastly more effective than taking a "wait and see" approach.
👉 The cardinal sin of customer success isn't churn; it's *unexpected* churn. 👈
❸ SOONER IS ALWAYS BETTER
It takes time to resolve issues and get customers back on track.
The customer's willingness to engage with us to make key changes is a highly perishable resource. As a result, our impact diminishes rapidly as time passes.
🚦 For all these reasons, I don't include a "yellow" status when building a customer risk system.
🚨 One immediate consequence of this approach is that it increases the risk sensitivity, resulting in many more "Red" accounts. This can create a lot of anxiety for CSMs and AMs. But...
✅ It's less miserable than constantly dealing with unexpected churn!
✅ Early risk detection and quick intervention are among the most impactful customer success processes. The reality is that many of your current "Red" accounts are already unsavable.
Most customers fail long before they churn. That's why I recommend building systems that prioritize identifying account risks early and actioning them immediately.
My clients quickly find that the earlier they intervene, the easier it is to address them and move customers back to "Green"!
Recent Podcast Interview: CSM Talk ep. 11: Greg Daines
I joined Kevin Reinhart to talk about the simple initiatives that can increase customer lifetime value up to 6X!
Episode 11 on Spotify - https://lnkd.in/eTd5W8Kc
Episode 11 on YouTube - https://lnkd.in/eRDiqgtu
QUOTE OF THE WEEK:
If you sense an account might be at risk, you are almost certainly right, and it's likely worse than you think.