In B2B marketing and sales, how can you best win your market and delight your customers? Is it going deep one customer at a time? Or focusing all of your energy on a land grab; getting more new customers from whom you later extract value? This is the Power of One or Many challenge. Whatever approach you choose, you can meet this challenge and ensure Customer Success by thinking through the 4A framework, which consists of understanding:
Addiction: getting your customer hooked on your product in the early stages to drive further adoption
Adoption: which typically takes place in some kind of unit like a specific department or geographic location
Absorption: which happens after successful adoption, where your product is absorbed throughout a company
Adaptation: an important, separate phase that requires you to adapt to your customer’s changing needs and come up with some distinct new products to upsell them
Thinking Beyond Land and Expand
For sales and marketing, this 4A approach starts with understanding how we might effectively develop a single customer’s potential. The goal here is to help you think through the importance of paying close attention to individual accounts throughout the 4A cycle. From it, you will learn not only how to win a customer, but also how to partner with them to achieve joint wins, while simultaneously building barriers to entry for your competition at the customer, product, market and financial levels.
So let’s postulate how we might carefully sequence product delivery, sales and marketing to get the customer addicted to your product or service so they adopt it fully, working with you through absorption of it into their business and adaptation of your product to their changing needs, enabling them to stay with you for a long time and leading to a high customer lifetime value.
Overview of the 4As: The Power of Focused, Pre-planned Execution
Allow us to start by creating some basic terminology associated with winning an initial deal, renewing that deal and then, over time, selling incremental units to that customer until they have absorbed all the value they need. Then, let’s assume we want to track how we might introduce new products to upsell. Simplified graphically it will look like this:
Yellow Bars:Show both Initial and Incremental sales (I). Incremental sales are the sales of incremental units such as per-user licenses or “seats” to the same account.
Green Bars: Renewals (R) are available on the cumulative sales to-date at any point in time.
Orange Bars:Upsells (U). Distinctly tracking upsells will help sales and product teams understand key metrics like the adoption and profitability of existing versus new products.
The Importance of a Truly Holistic Account Penetration Strategy
The key elements of the previous diagram highlight the need for a startup to build not only an effective account penetration strategy for initial and incremental (I) sales, but also a predictable renewal (R) business—and then actively upsell (U) to customers. Of course, it will not likely be as linear or as neatly defined as this, but most situations will follow a similar path.
Ultimately, we want to see a startup scale and grow by fully exploiting the potential business under the curve as fast as possible. Then as renewals come in and growing adaptation allows you to upsell more products and services, you will have the basis of a very profitable business model. However the reverse is also true. If you try to do a land grab in your market and fail to get repeatable renewals and upsells, you will neither satisfy customers nor create a defensible position in the market or any kind of predictable business model.
So let’s take a closer look at each step in the 4A cycle to figure out how you can get this balance right.
The first step in getting addiction is often to start with something like a self-service freemium offering, trial, well-defined Proof of Value1 or paid project. Certainly your goal should be proving value before trying to expand too fast—otherwise the sales model will become a push that will feel awkward for the customer and will be expensive for you as the vendor. Until you understand what your customer needs and ideally can’t live without—in other words, what your customer gets addicted to—you will simply be wasting your sales effort.
Focus on creating the kind of addiction that will drive viral internal adoption and therefore your sales velocity and absorption rate. Ask yourself if there are specific people (champions, connectors, mavens?) or processes/functionality that could create viral adoption?
ADDICTION: The Role that Trials Play
Many businesses offer customers freemium or trial uses of their products to help foster addiction and ensure that the product will be a good fit. But it’s important that you follow a few guidelines when offering a trial run.
Define the scope: Scope a trial with your customer, mutually agreeing on the measures for success— including timeframes—so you don’t risk draining your precious resources.
Pick winners: Only start a trial if you know you can be successful at it. Customer rejection and reapproaching the problem are way more costly than a carefully scoped trial.
Build in differentiation: Clearly demonstrate what makes your product unique from your competition.
Don’t assume anything: If you don’t really know your customer’s needs, consider offering your customer something upfront, like an audit. This will show true interest and will create a “partnership” agenda from the outset.
Agree on outcomes early: Before starting the trial, ensure you agree on what you earn when the trial is successful. Specifically this should be the right to land the first deal!
Build a frictionless product: Make sure your product is truly SLIPPERY (see related article for explicit ways to do that here) so that the experience your customer has is really conducive to becoming addicted. If you’re not ready to do that, manage the experience for them with a “white glove” service.
Carefully position your offering: Ensure your freemium or trial offering doesn’t cannibalize on the ultimate value of your premium offering or misplace you in the customer’s mind as a “cheap” or “point” product.
ADDICTION: The Trial Takeaway Test
Even with the best of intentions, sometimes it’s tough to figure out if your trial really has worked well enough to be forging ahead to land your first real deal. To help remedy this, I recommend you explicitly time limit or put clear boundaries on your trials and try the takeaway test.
Time bounding a trial is critical to ensuring both the vendor and customer are working towards a defined objective. And ultimately you’ve got to be prepared to turn the trial off, or it’s not a trial—it’s just the customer using your product for free! So before you offer to extend the time, test whether your customer will care if you take the product away. If they can live without it, you haven’t successfully created addiction, obviously! But then pay attention as to why. Value test what they say it’s worth to them to keep it. Listen very carefully and either address the issues or move on as this is likely an opportunity costfor you. My best advice here is the opposite of what you’d think. Prioritize all the reasons they DON’T like your product or AREN’T getting addicted. These are the most valuable things to understand.
In situations like this, finding a real product customer fit2is a better bet than pushing on. And if this is a vital target customer in your Minimum Viable Segment (MVS), your best bet is to remove your sales ego and just listen—and bring in your product team to listen too. Heck, while you’re at it, bring in your engineering, professional services and support teams to listen again to what needs to be re-scoped and what needs can realistically be met, paying particular attention to what expectations or deliverables have to change. All the customer objections are opportunities to learn. Put pricing last—make it about value.
Don’t ever fool yourself or the customer and just sell past this point. To do so is shortsighted, even if you need the order. Closing a deal like this may initially seem like a win, but ultimately if you don’t listen, it will land you in support and reputation hell with no repeatability, let alone renewals or upsell. And creating outlier unsupportable customers can kill a startup. Yes it’s that important to understand.
ADDICTION IN ACTION: HEALTHCARE COMPANY SEEKS A WEB EXPERIENCE MANAGEMENT PLATFORM
An international healthcare company with hundreds of household-name brands was facing a struggle. Although some of the company’s web sites were taking advantage of the open source content management platform Drupal, the fact that the brand sites were hosted with more than 150 different providers was creating headaches and leading to a “snowflake” situation—where each site was completely unique and, by virtue, inconsistent. Brand managers had to effectively recreate the wheel for every element of their online experience, as assets were siloed between brands and repeatability was non-existent. There was no addiction. There was stalled adoption.
Understandably concerned about making a scalable decision, the company initially approached Acquia about providing a solution for a single large site. After experiencing initial success and getting addicted to the kind of overall high-quality experience Acquia provides in a small site, the company moved quickly to transition more sites to Drupal using the Acquia multi-site platform, and began deploying and adopting more Acquia technology for a growing number of sites.
Since the original request for hosting for a single site, the company’s addiction to and adoption of Acquia technology has been carefully nurtured and has grown significantly. The company now has absorbed the Drupal platform broadly, using it for most of its entire brand catalog, all the while taking advantage of more and more of the Acquia family of products as upgrades, for everything from cloud services and continuous delivery to digital marketing products. Meanwhile there have been continuous renewals, as they came to trust and rely on Acquia’s professional services team to provide ongoing support.
There’s no denying that trials can be time-consuming and expensive. So have you already run enough equivalent trials, or captured enough relevant customer evidence or market credibility to show proof that customers will get addicted without a trial? If your answer is yes, skip the trial and go straight in to Land—addressing a particular issue you can successfully solve, setting yourself up to be able to Expand your offerings by solving additional problems for the customer while simultaneously garnering renewals and upsells—but beware the risks as outlined above.
ADOPTION: What Makes a Good Landing?
A good landing is a safe, bump-free landing. Look for the right conditions and then think about where you can land on smooth, solid ground within the customer’s organization. Find a real need and a firm champion who will personally benefit from mutual success. To ensure you’re making a smart move, ask yourself things like: what is the right department/group/initial need/ application? And what size of initial deal is right? Larger isn’t necessarily better, especially if you have concerns about biting off more than you can chew support-wise, or you’re pushing more on the customer than they can successfully absorb and support internally.
Sticking the Landing: Two Tips
1. Think of how can you target within the customer to get the best results. For example, think about which part of your customer’s organization is the most progressive early adopter (and here’s a bonus hint: front office, revenue-generating, line-of-business people are usually better champions than back office, cost cutting gatekeepers!) Where possible, identify a priority project or well-funded part of the customer to target. Also identify areas with vertical or segment momentum that you can reference and/or leverage to shorten the sales cycle and increase win rates. If your company has momentum in specific industries or segments, showcase it through the work you’ve done with similar companies. Take a close look early on for the visionary champions who want to make their career progression based on the competitive advantage you’re bringing them. These people are often the key to startups getting early attention when they otherwise may go unnoticed.
2. Think ahead on how to balance sales priorities. You want reliable renewals. Organize and compensate your sales force accordingly. Start by distinguishing between what are often loosely called “Hunters and Farmers”. “Hunters” should be focused on and compensated for new customer acquisition and “Farmers” likewise for managing accounts to ensure you get reliable renewals. In the early stages of a company these might be the same people, but they are very different skill sets and the roles are best made more delineated over time.
Likewise compensation will need to be much more granular and change over time, based on both where the customer is in the 4A cycle and whether you want to incentivize your sales reps to go broad to get new accounts, or to go deep to get adoption and absorption in existing accounts.
“Russian Doll pricing and packaging” is a term I’ve coined referring to how your business can use freemium products to encourage viral adoption that you can convert to paid users. Check out this article on Startup Secrets to learn more about the concept.
ADOPTION: Time to Expand
How do you determine when you’re ready to expand in an account? You’re looking for repeated patterns of productivity that can infect other areas of the organization, pulling or drawing your product into other areas of the business. To bring this to life, here’s an example of a customer that had toadopt technology to solving a burning need and a lack of resources to meet it…
ADOPTION IN ACTION: CITY OF LOS ANGELES
With an aging 12-year-old web content management system, the City of Los Angeles, California needed to transform its digital presence to keep pace with the rapidly shifting expectations of its customers: citizens, businesses, visitors and employees.
The must-have attributes for LA that created initial addiction were the delivery of web experiences that were mobile responsive, driven by smart data and capable of delivering highly-personalized experiences driven by that data.
Adoption started in force because the Information Technology Agency (ITA) department staffing had seen its headcount fall 40 percent over the last six years, and the remaining IT employees were decentralized across more than 40 IT departments. To address this situation, LA tapped a key component of the Acquia Platform: Acquia Cloud Site Factory, a product that allows sharing, management and compliance of standard site templates from a central repository. Features developed for the “core” could quickly be leveraged by all departments.
By adopting the Acquia Platform as a solution, a small group of staffers could power and support a large number of websites from the back end, while affording complete freedom and agility for practitioners on the front end. In addition to the flagship LACity.org site, over a hundred other city sites, currently hosted on a variety of platforms, are poised to take advantage of Acquia Cloud Site Factory’s ability to spin off and control websites. This not only saves the city money and improves efficiency, but also maintains flexibility across city departments.
The Acquia Platform’s ability to meet the needs created by the reduced workforce and the increase in demand drove adoption throughout the organization.
Like a liquid being absorbed into a sponge, absorption is the way in which an account takes on a product or service—not just on a seat-by-seat basis, but into its business processes, its databases and its human and organizational learning. In short, a product or service’s absorption into the very fabric of the company. When you see a product get really absorbed into a company, new things can be built on it and it can transform a business.
Again this is best learned using an example. So as you saw in Scenario 2 above, if you have large accounts with big potential absorption in each account, beyond their initial adoption, it’s very important to monitor absorption by account, and to “farm” it with your customer success teams. In other words, to build on our example even further, to figure out how to go from the initial 10 users in your customer to the full potential absorption of 100 users.
From the 4A’s diagram, it’s this part:
On the graph above, you’ll also notice a metric called “Potential Absorption” which captures the maximum number of units or value of your existing product that you can sell to a customer. Potential Absorption is an extremely valuable metric for startups for many reasons:
Understanding the potential of each account can help you decide how to both prioritize it for initial sales, as well as to determine how much to invest in profitable ongoing sales, account management and support.3
Potential Absorption also cumulatively measures the potential value in your installed base, something startups need to know to think about things like their market penetration, growth potential, etc.
Strong absorption drives both new usage and renewals. With this in mind, think about how you can best enable absorption. It may be with a cross-functional team that includes at least a post-sales professional services and account management, or it might be a dedicated organization. It turns out the key to truly enabling absorption is to figure out how the customer’s business is positively impacted by your product.
Beyond Customer Service, to Your Customer’s Business Success and Best Practices
As an example, at Demandware we took absorption one step further, creating a customer best practices organization led by a former customer and senior executive who understood what it took to be successful with our product in the retail environment. We called this the Retail Practice Group. This group took an “outside-in” view of what it takes to not only ensure our product’s success, but our customer’s success as they applied our products to their eCommerce challenges. Our measure for success was theirs; that is to say that our success measurement was how well we were able to help our customers become better merchandisers and marketers and to sell more of their products—which, of course, drove usage and absorption of our platform.
If you can understand how to create and share best practices for your customers, it can be game changing and dramatically improve your 4As.
ABSORPTION: The Financial Impact
Absorption in a single customer directly contributes to the stickiness of your solution and to retention and high renewal rates. And when repeated in your overall customer base, it drives higher valuations. And although valuations continue to fluctuate, as you’ll see in the graph below, renewal (retention) rates of companies correlate strongly with their valuations.
As you approach the absorption process in the 4As cycle, pinpoint the things that you can do to be proactive and ensure, reliable renewals. Additionally, think beyond simply being sticky—how can you get your product woven into the fabric of your customers’ business? As you achieve absorption, determine ways that you can integrate with other products in their business processes, building value into your product so that you naturally increase the switching costs for customers and keep potential competitors at bay. And make sure that you fully understand how your business model is aligned with your customers’ success, making tweaks as necessary.
ABSORPTION: Creating Friction-Free Products
Anytime possible make your products friction-free—and by this I mean creating early addiction by doing something like simplifying your pricing and packaging. For example, sometimes products and services can be packaged in bite-sized chunks for consumption at different stages of the 4A model. Limited freemium versions like those typically seen with mobile apps and in-app purchases/app upgrades are often popular, with functionality added or disclosed in a way that pulls the customer to engage and pay for more value.
But think through this carefully, as free sometimes implies no value—or worse still, delivers no value. Instead, give customers real value that wows them early and compels them to do more with you to expand usage and pull down more functionality. Ensure your pricing model scales with the value your customers are experiencing.
ABSORPTION: The Role of Standardization
Once you’re getting adoption and renewals, there’s one more hack I’ve experienced that can be a subtle but useful way to create a tipping point within the customer: standardization. For example, in one of my companies a government department standardized on its workflow automation platform and mandated usage of our product as a standard. It drove millions of dollars of incremental business with virtually no sales effort.
The goal with achieving standardization is to have the customer recognize, at a purchasing and operational level, that it’s easier for them to now declare you as the standard, making you the default choice for new users rather than continuing to look elsewhere. This can be a win/win situation and greatly reduces your cost of internal selling, but don’t let it lull you into a false sense of security. Businesses change, and your greatest threat will be one you don’t see coming—an innovative new upstart that, just like you once did, wants to disrupt the status quo and has nothing to lose by trying to unseat you!
ABSORPTION IN ACTION: STATE OF GEORGIA
Tracking adoption and absorption rates can be really valuable to a product team in understanding how well they are meeting customer needs, enabling easy deployment and providing internal supportability. Additionally, for sales and finance, knowing these numbers can be a great tool to help forecast future sales and growth rates.
One example is the State of Georgia, which had deployed a legacy web content management platform in 2002 that became too difficult to use and too expensive to maintain. Rather than host locally as it had in the past, Georgia wanted to leverage the agility and resiliency of the cloud for Georgia.gov and other state sites. The state also needed to be able to onboard additional websites without the difficulty of having to manually provision new servers.
Georgia achieved this by embracing a cloud platform provisioned by Acquia and standardized on open source Drupal. Very quickly, state agencies were working from a shared cloud service, and more than 55 state agency websites were being delivered from the platform. Absorbing Drupal as a standard and Acquia as a SaaS platform had dramatic impact on how the state served citizens; the state also projects five-year savings of $4.7m resulting from the efficiencies gained.
Maybe you think you’re close to your customers. At this stage, though, that’s not enough. Get inside your customers’ heads to listen to their changing needs and even predict them. Ensure you’re gathering a combination of different use cases in different parts of your customer expansion, as well as capturing the changing needs of their business or overall market. These changing needs create the opportunity for you to develop new products and services for your customers to buy, ultimately providing upsell opportunities for you.
Done well, this will feel like a partnership to your customer; they will ASK you to help them, willingly paying for what you deliver to help them build the success of their business. And if you deliver successfully you will then see a magical thing happen—this whole cycle will repeat. That is to say you will not only get renewals on your original product, but you will also get incremental renewals on your new upsold product each year.
ADAPTATION: Understand the Line Between Upsell and Incremental Value
Where is your upsell value line? It’s important that you listen carefully to your customers to learn what’s expected versus what is incrementally valued. For example, nearly every software business I’ve worked with over the last few years has evolved to put mobile and analytics capabilities on their agenda. But for many vendors, mobile has been an expected part of the base platform or solution to ensure renewal, whereas analytics has been presented as an upsell opportunity.
Your experience will depend on your customer’s depth of needs and expectations—but whatever the case, be clear where the value line is crossed from expectation of inclusion to willingness to pay for upsell. And once you get your upselling right, you’ll start reaping the rewards, as upselling has a huge incremental effect on your valuation, as seen below.
Upselling is valued by bankers and analysts as huge leverage because there is zero CAC (Customer Acquisition Cost) and marginally low selling cost—and if you have a large number of users in your customer base, the leverage of rolling a new product out of them is enormous and drops to your bottom line. It also proves an expanding TAM (Total Addressable Market) and creates defensibility as you become further entrenched in your customers. All this drives valuation up, hence the graph above.
But don’t let this make you greedy. Never gouge your customers during this adaptation phase. It’s a relationship like any other that should become mutually rewarding—and if it is, you will both benefit. Do this well as a vendor and you can become truly entrenched in your customer’s business, meaning that yours is the standardized solution for your customer’s organization, achieving >50% absorption and experiencing reliable renewals. This level of absorption creates further barriers to entry for potential competition.
ADAPTATION: Human Change is the Hardest
Use training and certification to get as many people as possible fully experienced and even certified in your product, both inside the organization as customers and outside the business as consultants and partners. Ultimately you’re looking for market standardization.
ADAPTATION IN ACTION: MUSIC COMPANY
Wanting to create unique brand experiences for each of its artists, but needing a templated solution that could quickly roll out new sites and updates, a major music company approached Acquia to explore the possibilities. Acquia recommended its Site Factory platform, and within weeks of signing on, the music company successfully launched dozens of artist websites.
Finding Site Factory to be the ideal solution for its needs, the music company eventually transitioned all of their artists’ websites to the platform. Site Factory fundamentally changed the company’s website workflow, effectively becoming the standard for all site development. Because Site Factory took care of so much of the sites’ front end needs, brand managers were able to shift their focus, concentrating on developing uniques features that would add value to their target audience.
After standardizing on Site Factory, the company worked with Acquia and a partner agency to explore ways to better integrate commerce with content, creating a more immersive online experience. Using real-time data, the company was able to promote a specific album across several different web properties, pushing it to the top of the charts, garnering attention at the most senior levels of the organization and driving tangible business results. These capabilities became an adaptation that satisfied the customer’s expanding needs and provide a great upsell for Acquia
The company is currently working with Acquia to connect earned and owned media in a way that drives even greater revenues.
CONCLUSION: Connecting the dots
Over the course of the 4A lifecycle, the economics should become more and more highly leveraged to your advantage with declining marginal sales costs. See below.
When it comes to upselling new capabilities, there are certainly costs associated with providing support and account management, as well as increasing sales activity. Therefore, it’s important to think through the team you’ll have managing a major account, as the emphasis will change depending on where you are in the cycle. Think about it broadly as follows:
If you can stay as the single vendor your customers rely on throughout this cycle, then you will not only get initial traction, but will also achieve productive expansion and full absorption. This allows you to become a standard that reliably and profitably renews, and gives you the chance to upsell new products as your customers’ needs evolve.
The importance of understanding the cycle all the way through adaptation increases over time. The longer your product is in the market, the more things like your customer adoption and your own adaptation will become necessary for both renewal and upsell. Adaptation is also important to hold back competition and build barriers to entry to prevent individual customers from being picked off by smaller, nimbler new entrants.
And, if you can manage your key metrics (such as are discussed below) to do this repeatedly, scaling in a predictable and ultimately profitable manner, you can become a very valuable company. Don’t forget: you were once an upstart willing to read this article to figure out how to balance the power of one versus many customers.
I wish you the best as you put this into practice. I hope you get 4As in your execution! And as always please share your comments and thoughts from your experiences, as an ongoing learning experience for us all.
Metrics: Customer and Dollar Renewal Rates
Understanding addiction and adoption is like everything else in sales and marketing—a case of listening well and measuring thoughtfully. And while there are many metrics, there are two key ones that can really help you understand your progress.
As with everything in this article, we’ll start from the bottom up, looking at one customer at a time before we look at the metrics for many customers. In the case of one customer, the most critical first thing is that they renew each year. Reliable renewals are the foundation of your subscription business. Across many customers, the Customer Renewal Rate (CRR) is therefore the key metric, and it should be measured as a percentage: CRR, %.
But to measure adoption, we also need to know:
The dollars at renewal for each account so that when they expand usage, adopting your products across the organization, you measure that via the change in dollars spent with you, and
As a percentage, so you can understand growth
Hence the Dollar Renewal Rate (DRR) is important, both for each customer and for your many customers: DRR, $ and %.
This is best shown by example. Look at these scenarios:
Assumptions—for simplicity in all scenarios
Your business model is a subscription model, paying $1 per user per year.
All customers are assumed to be accounts with 100 potential users This distinction between a customer and the users within the customer is important.
*You land each customer with 10 users, therefore paying for $10 per year. Accordingly, if more or fewer than 10 users start to adopt or abandon the product, the expanded/contracted usage drives the dollars per customer up or down.
In this scenario, your 10 customers all renew in year 2, leading to 100% CRR. However, adoption is stagnant as no customers are expanding usage, meaning your DRR is 100% and $100.
Customer Renewal rate (CRR)
Reliable renewals are the foundation for everything
Dollars from cohort*
No one is expanding users, adopting more—not so great…
Dollar Renewal Rate (DRR)
You aren’t seeing growth in your existing business
Lessons Learned, Scenario 1: Even as you’re achieving expansion from your customers, never underestimate the importance of reliable renewals. They are going to provide the foundation, the predictable value in your business going forward. Therefore never ignore customer churn.
By way of example, think of yourself as a cell phone user/wireless customer. If your carrier keeps dropping calls you may still want to use a cell phone but no matter what they offer as additional services, you won’t renew if they don’t provide basic call quality and cell coverage. You’ll switch to another carrier if they provide that coverage, especially if it’s at a better price, and you can keep your existing phone number.
In this scenario, all of your customers renew, but some of them adopt more as they expand usage. As a result, your DRR goes up to $120 and 120%.
Customer Renewal rate (CRR)
Dollars from cohort*
Some of your customers are expanding usage. More users= more $ per account.
Check: Is it true for all customers or just in aggregate?
Dollar Renewal Rate (DRR)
Lessons Learned, Scenario 2: This is a great scenario, because you’re both keeping customers and growing them overall. But be careful to ensure you know this data by account, because an aggregate number may mask what’s going on in individual accounts. Again, it’s the power of one versus many.
In this scenario, we churn or lose a couple of customers, but it is masked by expansion in other accounts. This should make it clearer why you need both CRR and DRR metrics separately to understand what is going on.
Losing a couple of accounts
Customer Renewal rate (CRR)
Dollars from cohort*
Masked as other customers are adopting, expanding and spending more
Dollar Renewal Rate (DRR)
In this scenario, CRR and DRR become even more important because you’ve got serious customer churn issues here—yet some other accounts are clearly expanding very well, so you’re still showing good growth.
Customer Renewal rate (CRR)
High churn! What’s the underlying issue?
Dollars from cohort*
Enough customers are adopting, expanding and spending more to more than compensate for retention issues
Dollar Renewal Rate (DRR)
Net growth is good
Lessons Learned, Scenario 4: It’s worth taking note that the bigger the delta between CRR and DRR, the more you need to look closely into individual accounts.
It might be that you’ve got some serious segmentation work to do to understand what kind of customers really value/need your products and why they expand versus others in the wrong segment whose ongoing needs you can’t meet. These are the kinds of discussions that Marketing, Sales and Customer Success teams need to have as part of really understanding the power of one versus many accounts, and the 4As cycle in the market.
In this scenario our initial assumption is broken—meaning that our assumption that our initial 10 user, $10/year subscription accounts would renew for at least 10 users each year was incorrect. If you don’t have addiction, but instead get frustrated, disgruntled users who stop using your product, you may have to renew for fewer users or even at a discount.
Customer Renewal rate (CRR)
Dollars from cohort
But the number of users within some customer accounts are not convinced and are dropping 🙁
Dollar Renewal Rate (DRR)
Scenario 5, Lessons Learned: While this situation doesn’t necessarily mean you’ve lost the entire account, it does mean that users within the account are not continuing to use the product and are not renewing their individual licenses. But be aware that this scenario is a leading indicator for potential account churn.
At this point your strategy should be to go back and think about how you foster true addiction first. Otherwise, you risk churn, expensive customer support and product headaches or ultimately having unprofitable customers that are really just a draining opportunity cost. Don’t sell or gloss over this.
Wrapping Up CRR and DRR
CRR is vital to understand the health of your overall renewals. DRR is vital to understand your growth. The delta between the two can highlight important issues with your land and expand strategy and the underlying addiction, adoption and absorption.
Maximizing CRR and DRR requires careful planning across all areas of the business, from products and pricing to account management and customer support. “Land and expand” doesn’t just happen; early on, it needs to be thoughtfully engineered into the organization.
1 With thanks to Bryan House for this term. It is too often referred to as a proof of concept which is a lot less compelling than value.
2 Product Customer Fit is something that comes before Product Market Fit. It’s explicitly a more granular customer-by-customer fit discovery process and I highly recommend you read my related article on how to target these initial customers and find a Minimum Viable Segment (MVS). This is the critical adjunct to defining a Minimum Viable Product (MVP).
And yes, we have way too many TLAs (Three Letter Acronyms) in the startup world!
3 In the early stages of a startup these are unlikely to be distinct functions but as you scale it becomes critical to develop different skills, teams and approaches to all of them. See the 4A Cycle: Team Focus section for more information.