We know retention is critical to every business strategy. Somehow, the SaaS crowd thinks they’ve invented the concept, but the reality is that it’s been a business fundamental since the foundation of business. Dig into any earnings report of any organization in the world. Look at the portion of revenue from net new logos versus current customers buying again. Early stage companies will be biased to net new logos, but as they mature, the balance of revenue shifts to current customers. It becomes critical to get customers retain customers, for them to continue to buy or to buy again.
Along with much of the thinking is the idea that subscription models are the best for retention and recurring revenue. Basically, the strategy underlying this model is “Please don’t cancel!”
The “Please don’t cancel” strategy is, implicitly, a defensive strategy. We have to keep the customer happy–at least happy enough they don’t cancel. Making sure customers continue to get the value expected, that they are continuing to use the products is critical. Offering periodic enhancements to give something new may attract greater interest, keeping people using the product, helps to keep people from cancelling.
These things are important, I don’t want to understate the importance of doing these on an ongoing basis.
But in many ways, this limits our thinking about our overall GTM strategies. Perhaps it’s interesting to look at other business models, seeing what might be adapted.
Let’s look at the outright purchase strategy. When we sell physical products, they are usually offered in some form of outright purchase. Many types of professional services are outright purchases. To retain their current customers, they have to find ways to get the customer to “buy again.”
To help understand this, let’s take an extreme and simplified example. Let imagine a company has sold a product to everyone that could potentially buy their product. There is no possibility for net new logos, because the company has captured 100% of them. Great work, fantastic results! But how do they generate revenue next year, or the following year, or the following year? If they aren’t continuing to generate revenue, they go out of business.
How do we get those customer to “Buy again?” To continue to generate revenue, these organizations have to get customers to buy again. What are the strategies to get customers to buy again?
First, a customer will never consider buying again, if they aren’t happy with what they have bought. Just like the recurring revenue models, if they haven’t realized the value expected, if they are having problems with the product, they will never consider buying again. Customer service, customer satisfaction are critical for every business model.
One aspect of “Buying again,” is expansion or “Buying more.” Let’s imagine we sell manufacturing equipment. We’ve sold to a customer with a single manufacturing line, but now they are expanding the number of manufacturing lines so they need to buy more. If the customer is unsatisfied, they will buy from someone else. When they want to buy more, we have to engage them in their buying process, but assuming the customer is very happy, has gotten great value with what they have already bought, there is a very high likelihood they will select the same product for their additional manufacturing lines. There are lots of advantages to this, implementation, training, support, and position vendors very favorably to in the buying more scenario.
And the same model exists in the subscription, recurring revenue model. As customers grow, we hope they expand seats or the number of instances/subscriptions they need. We hope they buy more.
We can create new and different offerings, and sell them to our customers. This is a fundamental part of the growing our customers. If we create manufacturing machinery, we may have started with machines that do one thing on an assembly line. We can look at other machines that are needed in the assembly line, design and sell those to our current customers, driving more revenue.
This is familiar to the classic subscription businesses. For example, as SFDC gained huge share with their CRM offerings, adding marketing, service, analytics, and other offerings enabled them to sell new and different offerings to their current customers.
Finally, we get to the next, and possibly most intriguing part of the “Buy again” strategy–at least for the classic SaaS companies to consider. This is the “Buy to replace” strategy.
This strategy is interesting. It focuses on getting the customer to replace the current product we sold them with a newer product.
Sometimes, a product just wears out. It can’t be repaired, and has to be replaced. But we design products to last for very long times–that’s part of the value proposition, so a replace because it’s worn out won’t fill the revenue gap we might have. The “Buy to replace” strategy requires us to constantly innovate our products. We can’t rest on our laurels, rather find new capabilities, better performance, or other things that would justify the customer replacing the current product. Apple is a great example of this. On average Apple can expect at least $1000 a year, solely due to “buy to replace.” Whether it’s a new IPhone, IPad, Apple Watch, or Airpods. Every year Apple offers extended capabilities that make me want to replace my current perfectly good device. I don’t buy a new one of each every year, but I tend to buy at least one replacement device every year.
“Buy to replace” requires a strategy of constant innovation. “What can we do better, what can we change, what can we add, what can we improve?” And these innovations have to be sufficient to make a business case to replace.
The way organizations with outright purchase strategies continue to retain and grow their current customers can be diverse, but a fundamental element of their strategies to “Buy again,” is the “Buy to replace” strategy.
And too many of our subscription revenue strategies miss this. They focus on retention or don’t cancel. They miss the opportunity to obsolete their own products, getting customers to replace.
Ironically, their competitors are calling on their customers with a “Buy to replace” strategy, just with their products.
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