I think for many sales-aggressive enterprise SaaS startups, a fair amount of churn actually happens at inception. For example, back in 2013, shortly after I joined Host Analytics, I discovered that there were a number of deals that sales had signed with customers that our professional services (PS) team had flat out refused to implement. (Huh?) Sales being sales, they found partners willing to do the implementations and simply rode over the objections of our quite qualified PS team.
When I asked our generally sales-supportive PS team why they refused to do these implementations, they said, “because there was a 0% chance that the customer could be successful.” And they, of course, were right. 100% of those customers failed in implementation and 100% of them churned.
I call this “inception churn,” because it’s churn that’s effectively built-in from inception — the customer is sent, along with a partner, on a doomed journey to solve a problem that the system was never designed to solve. Sales may be in optimistic denial. Pre-sales consulting knows deep down that there’s a problem, but doesn’t want to admit it — after all, they usually work in the Sales team. Professional services can see the upcoming trainwreck but doesn’t know how to stop it so they are either forced to try and catch the falling anvil or, better yet, duck out and a let partner — particularly a new one who doesn’t know any better — try to do so themselves.
In startups that are largely driven by short-term, sales-oriented metrics, there will always be the temptation to take a high-risk deal today, live to fight another day, and hope that someone can make it work before it renews. This problem is compounded when customers sign two- or three-year deals [1] because the eventual day of reckoning is pushed into the distant future, perhaps beyond the mean survival expectation of the chief revenue officer (CRO) [2].
Quality startups simply cannot allow these deals to happen:
- They burn money because you don’t earn back your CAC. If your customer acquisition cost ratio is 1.5 and your gross margins are 75%, it takes you two years simply to breakeven on the cost of sale. When a 100-unit customer fails to renew after one year, you spent 175 units [3], receive 100 units, and thus have lost 75 units on the transaction — not even looking at G&A costs.
- They burn money in professional services. Let’s say your PS can’t refuse to the implementation. You take a 100-unit customer, sell them 75 units of PS to do the implementation, probably spend 150 units of PS trying to get the doomed project to succeed, eventually fail, and lose another 75 units in PS. (And that’s only if they actually pay you for the first 75.) So on a 100-unit sale, you are now down 150 to 225 units.
- They destroy your reputation in the market. SaaS startup markets are small. Even if the eventual TAM is large, the early market is small in the sense that you are probably selling to a close-knit group of professionals, all in the same geography, all doing the same job. They read the same blogs. They talk to the same analysts and consultants. They meet each other at periodic conferences and cocktail parties. You burn one of these people and they’re going to tell their friends — either via these old-school methods over drinks or via more modern methods such as social media platforms (e.g., Twitter) or software review sites (e.g., G2).
- They burn out your professional services and customer success teams. Your PS consultants get burned out trying to make the system do something they know it wasn’t designed to do. Your customer success managers (CSMs) get tired of being handed customers who are DOA (dead on arrival) where there’s virtually zero chance of avoiding churn.
- They wreck your SaaS metrics and put future financings in danger. These deals drive up your churn rate, reduce your expansion rate, and reduce your customer lifetime value. If you mix enough of them into an otherwise-healthy SaaS business, it starts looking sick real fast.
So what can we do about all this? Clearly, some sort of check-and-balance is needed, but what?
- Pay salespeople on the renewal, so they care if the customer is successful? Maybe this could work, but most companies want to keep salespeople focused on new sales.
- Pay the CRO on renewal, so he/she keeps an honest eye on sales and sales management? This might help, but again, if a CRO is missing new sales targets, he/she is probably in a lot more trouble than missing renewals — especially if he/she can pin the renewal failures on the product, professional services, or partners.
- Separate the CRO and CCO (Chief Customer Officer) jobs as two independent direct reports to the CEO. I am a big believer in this because now you have a powerful, independent voice representing customer success and renewals outside of the sales team. This is a great structure, but it only tells you about the problems after, sometimes quarters or years after, they occur. You need a process that tells you about them before they occur.
The Prospective Customer Success Review Committee
Detecting and stopping inception churn is hard, because there is so much pressure on new sales in startups and I’m proposing to literally create the normally fictitious “sales prevention team” — which is how sales sometimes refers to corporate in general, making corporate the butt of many jokes. More precisely, however, I’m saying to create the bad sales prevention team.
To do so, I’m taking an idea from Japanese manufacturing, the Andon Cord, and attaching a committee to it [4]. The Andon Cord is a cord that runs the length of an assembly line that gives the power to anyone working along the line to stop it in order to address problems. If you see a car where the dashboard is not properly installed, rather than letting it just move down the line, you can pull the cord, stop the line, and get the problem fixed upstream, rather than hoping QA finds it later or shipping a defective product to a customer.
To prevent inception churn, we need two things:
- A group of people who can look holistically at a high-risk deal and decide if it’s worth taking. I call that group the Prospective Customer Success Review Committee (the PCSRC). It should have high-level members from sales, presales, professional services, customer success, and finance.
- And a means of flagging a deal for review by that committee — that’s the Andon Cord idea. You need to let everyone who works on deals know that there is a mechanism (e.g., an email list, a field in SFDC) by which they can flag a deal for PCSRC review. Your typical flaggers will be in either pre-sales or post-sales consulting.
I know there are lots of potential problems with this. The committee might fail to do its job and yield to pressure to always say yes. Worse, sales can start to punish those who flag deals such that suspect deals are never flagged and/or that people feel they need an anonymous way to flag them [5]. But these are manageable problems in a healthy culture.
Moreover, simply calling the group together to talk about high-risk deals has two, potentially non-obvious, benefits:
- In some cases, lower risk alternatives can be proposed and presented back to the customer, to get the deal more into the known success envelope.
- In other cases, sales will simply stop working on bad deals early, knowing that they’ll likely end up in the PCSRC. In many ways, I think this the actual success metric — the number of deals that we not only didn’t sign, but where we stopped work early, because we knew the customer had little to no chance of success.
I don’t claim to have either fully deployed or been 100% successful with this concept. I do know we made great strides in reducing inception churn at Host and I think this was part of it. But I’m also happy to hear your ideas on either approaching the problem from scratch and/or improving on the basic framework I’ve started here.
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Notes
[1] Especially if they are prepaid.
[2] If CROs last on average only 19 to 26 months, then how much does a potentially struggling CRO actually care about a high-risk deal that’s going to renew in 24 months?
[3] 150 units in S&M to acquire them and 25 units in cost of goods sold to support their operations.
[4] I can’t claim to have gotten this idea working at more than 30-40% at Host. For example, I’m pretty sure you could find people at the company who didn’t know about the PCSR committee or the Andon Cord idea; i.e., we never got it fully ingrained. However, we did have success in reducing inception churn and I’m a believer that success in such matters is subtle. We shouldn’t measure success by how many deals we reject at the meeting, but instead by how much we reduce inception churn by not signing deals that we never should have been signed.
[5] Anonymous can work if it needs to. But I hope in your company it wouldn’t be required.
Dave, love it!
I see the footnote [5] but don’t see where it is in the article.
Also, with the two roles (CRO and CCO), can I assume the idea is that the CRO is compensated for new sales + renewal (maybe total ARR?) and the CCO is compensated for renewals + upsells? And PS, if they oversee it?
I do like the idea. Like you, it was never 100% implemented but got it to 40-60%, only after several bad deals happened. Before the deal could be signed, it went something like this:
1. VP CS reviewed the contract
2. VP CS discussed with PS / PS reviewed it independently. If necessary, Product would be involved
3. VP CS discussed with Sales / VP Sales. If necessary, VP CS had discussions with CEO (especially for larger contracts)
Just by instituting this process it helped “slow” certain sales down where Sales thought it could get hung up. Later on the VP CS and VP Sales would meet on a weekly basis to work through these issues.
One of the most important virtues for whoever is on the committee is to be undaunted and be okay with the phrase “I am not liked” by certain peers. But if CS is compensated on the renewal and Sales on total ARR, that incentive structure helps balance out (potentially) warring factions.
I fixed the dangling footnote; thanks for catching it. In my default world view, the CRO is really VP of New Sales and the CCO is really the VP of Renewals. That is, the CRO’s job is to pour new ARR in to the leaky ARR bucket. The CCOs job is to keep ARR from leaking out. They need to collaborate on expanding what’s in there (i.e., upsell, expansion). Typically, I’d credit that both but in a more leveraged way to the CRO. The idea is simplicity: sales sells new stuff, customer success keeps customers renewing. While there are many other models, I always start here because while I believe that (some) salespeople can account manage and I know that (some) account managers can sell, that there are generally two different poles to which people navigate. As far as the process you tried to get running, I like it — but it seems heavy because all deals are running through it. My process relies on flagging (i.e, someone pulling the cord). I also worry that while “sign off” sounds impressive, what does it really mean? I think it’s better to force people into a room to talk (and maybe get customers to relax and/or change requirements) than it is to send a salesrep around trying to get everyone to sign-off on the deal. My 2 cents. Thanks for sharing yours. Best/Dave
Thanks for catching the dangling footnote.
In my world, I like sales and customer success to be separated, ergo sales/CRO owns new ARR (including upsell/expansion) and customer success owns renewals (with some required collaboration, in fact, on upsell). Simply put, sales pours water in the leaky bucket full of ARR and customer success tries to keep water from leaking out. I know there are many other approaches and I don’t claim mine is best in all situations.
For feedback on your process, while I like what it’s trying to do I see two problems: (1) it requires every deal to go through it, which strikes me as heavy; my proposal is exception-based and in theory lighter — and long as someone is willing to pull the cord. (2) your process is pushing for “sign off” which I find dangerous. What does sign-off really mean? It’s mostly a CYA concept for the person getting it. I’d rather force a meeting of minds where we can maybe change or relax some of the customer requirements, brainstorm creative solutions, etc., instead of just sending a rep around trying to force CXOs to “sign off” on the deal — which in real life means exactly what?
Good points. I should clarify about this company (not my current one).
This is more for enterprise deals when the contract, SOW, etc. are all reviewed anyway. The VP CS & VP Sales have their weekly meeting for a meeting of the minds. The VP Sales is also comped on total ARR, with a mix of renewals in there. There (usually) isn’t a separate process for a sign off for implementation or PS. That said, I really like the idea of allowing anyone to pull the cord!
For smaller deals (e.g., non-enterprise), there are the standard agreements that are used. If they need something more, then sales management would get involved. Eventually, I (or someone else in CS) would be notified during the implementation/onboarding phases. There were weaknesses because the deals would be closed and moved to CS and CS did not have a say in the contract until later. That created a lot of bad deals for the company where the rep got commission and CS had a uphill battle and churn.
You’ve got me thinking about how that process could have been improved. Thank you Dave! I’ll take your two cents every day. In a few months, I may even have a buck! ;)
Thanks for sharing. This whole area is a work in process; we’re all trying to figure it out together.
Found your post interesting to read. I cant wait to see your post soon. Good Luck for the upcoming update. This article is really very interesting and effective.
Good post Dave. A few other thoughts to build on with you post and idea of inception churn.
The first thing is clarity on ideal customer profile. This is a trap that companies big and small fall into, but they’ve got to have clarity on their target customers, markets, personas and what unique value they bring. Lack of focus here in territory building and lead management, as well as the belief that a dollar is a dollar is not a recipe to scale a SaaS business.
Second, you have to have rigor in deal qualification, which requires the entire revenue team to use a sales methodology. This is critical in complex B2B selling. Having a consistent framework to evaluate the deal that asks questions at the top level like, “Can we compete? Can we win? Is it worth winning?” provides a structure for reps and sales leaders to evaluate the account or opportunity. It gets into the details and asks for evidence that the rep knows the unique business value. Methodology enables evaluation of elements like cultural capability, ability to grow the business, renew, etc. so the team can decide if the the business is worth having. If not, qualify out. (Very hard for reps, and even harder for a CRO pressed to make her number)
There needs to be a structured process in the operational cadence around deal reviews where everyone comes to the table as the revenue team to evaluate the opportunity and determinate how they can help. We call these “Test & Improve” because the goal is to pressure test the deal and see how to accelerate progress. This is not one-off committee, it’s part of the regular process in weekly and monthly review sessions. While the goal is to eliminate barriers and help the rep move faster, it’s also mechanism to evaluate the account and hit the brakes if the customer is not set up for success.
Finally, methodology needs to be operationalized in software, not stuck in PPT or in a rep checklist pinned in his cube. This includes the test and improve outcomes of the deal review. It needs to be documented, actionable in and the environment (Salesforce) that reps and leaders live in. If not, you’re going to get more one-offs, less qualification and more inception churn.
Great thoughts Pat, thanks for sharing.
Great post, Dave. Insightful and entertaining. I found myself chuckling at a few painful memories along the way (remember the NHS National Program for IT in the UK? Nuff said.)
I whole-heartedly agree with the direction you’re taking here. Baking this kind of approach into culture, process, and software tools can make a huge difference to the health and longevity of any software or service company.
It definitely isn’t easy though, and not just because of the competing priorities of short-term deals vs. long- (or medium-)term success. A big part of the challenge is figuring out how to tell customers that what they want (or what they think they want) isn’t going to work. This is a lot harder to bake into the approach because it depends on figuring out the best way to communicate with the customer in question. That’s about communication styles and a balance of challenge and tact.
My sense is that customers ultimately respond positively to providers that help them avoid making big and potentially costly mistakes. That pays off, but typically not in the short term.
I’m optimistic though. For one, and picking up on Pat’s point about the ideal customer (a much longer discussion topic!), I see more companies making it clear that there is some business they just won’t do. For another, I think enterprise customers increasingly look to software and services companies for guidance, not just stuff. I can’t tell you the number of times I’ve heard enterprise folks say that they have realized the hard way that they really didn’t need all of the expensive customizations they made to past enterprise applications. They don’t want to make the same mistake again.
Ironically, we’re at a point in time where it’s easier than ever to adapt enterprise apps to the way you want to work as a business just as businesses are realizing en masse that they are probably better off using standard practices in most areas. In this climate, vendors who give their customers credible advice on those practices–including “don’t do it”–will gain trust and improve their reputations. That’s my take at least.
Nicole, thanks for reading! Agree it’s not easy and that communication is a big part of the problem. In my perfect world, both my head of customer success and my head of professional services are “partner-level” consultants who can have that difficult conversation. If they screw it up, the deal is dead. If they do it right, you win and you win big. (“Wow, the other guys were telling us this was a walk in the park and now we realize you’re both going to struggle; and they didn’t even tell us.”) I agree pretty much with all of your points — thanks for sharing them.
Thanks, Dave for this helpful article. I do believe that the customer churn rate represents the loss of customers. The tips explained by you are really helpful. Below links can be followed for getting a brief idea for reducing customer churn and increasing retention. https://www.navedas.com/stop-churn-and-burn-customer-service/ and https://www.smartinsights.com/traffic-building-strategy/integrated-marketing-communications/17-unbeatable-ideas-reduce-churn-rate/
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Nice article keep it up like this in your future.I hope you do best afford and make future bright.