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Written by Ed Fry Head of Growth
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27 Apr 2020  |  SaaS

Acquisition vs. Retention: Which should be your Q2 focus?

SaaS businesses obsess over customer acquisition. But when deal creation is down 30% and over half of SaaS revenue leaders have revised their forecasts down, we recommend you obsess over customer retention instead. Here are the trends, data, and numbers we’re seeing to help you decide where to focus.

“Just do better than the last 30 days”.

Ordinarily, we prescribe software companies should grow by moving into new markets. There are five most common strategies we see (and the fastest-growing software companies deploy them all at once).

  1. Price with value metrics and subscriptions to sell at every level of customer value and “willingness to pay”

  2. Localize pricing, currencies & payment methods to sell to every customer globally

  3. Build a upsell and contract-based sales-motion to sell into teams and enterprise

  4. Build a self-serve trial or freemium funnel to signup and acquire new customers at scale

  5. Build a product bundle or suite across the full customer problem to cross-sell and upsell your customer accounts

The problem is this bold, expansive thinking doesn’t strike the same tone as everyone’s board meetings right now. Trending topics are new revenue drying up, churn spiking, and conserving cash.

It’s within this context Jason Lemkin shared his sage advice to a world of re-forecasting SaaS executives.

“Maybe you are only growing 20% now. Maybe bookings are down 50%. Maybe churn has doubled in your SMBs. Whatever it is, you now have a new baseline — at least for right now.”

Pick a metric. Define your new baseline (however great or grizzly it now is) and improve it.

“You are ready for a basic plan for May, June, and July.”

But just as with ordinary times, you should focus your attention - which one metric that can really drive your business? 

Let’s suggest two angles to hone in on the right metric.

Finding your Q2 growth lever

Firstly, focus on the right revenue driver. We think of revenue drivers across acquisition, retention & expansion.

  • Acquisition - can you significantly increase the rate at which you sign up customers in the next 30 days?

  • Retention - can you significantly decrease the rate at which customers cancel or their subscriptions fail in the next 30 days?

  • Expansion - can you significantly increase the value of most customer accounts in the next 30 days?

Secondly, focus on lagging indicators. In uncertain times, it becomes hard to predict the future. But your past performance (your “new baseline”) is a strong indicator of your future performance.

At SaaStr Summit last week, Harrison shared his thoughts on what SaaS executives should be focusing on right now.

"This is the time to make damn sure, you’re not making your life even harder by losing customers out the back door, churning unnecessarily."

In this post, we’re going to share the trends and strategies in the market that we’re seeing (that should be shaping yours). Your metrics may different, but here’s what we’re seeing in the market across some aggregate data.

A quick recap of definitions...

What is customer retention?

Customer retention is about keeping your existing customer subscriptions active. This means you can build revenue over time with recurring revenue without depending only on new customers.

What is revenue retention?

Revenue retention is about keeping the dollar value of your customer subscriptions active and making sure every dollar of a subscription that could renew does renew.

Customer retention drives revenue retention but will differ since subscriptions can be for different amounts for each customer.

How to calculate retention rate?

You can calculate retention rates (both customer retention and revenue retention) by dividing your current subscriptions by your past subscriptions.

For example, if you have 100 customers last month and only 90 this month, your retention rate is 90/100 = 90%

Trend #1: “Deal volume and sales response rates drop to new lows”

Leading indicators of new customer acquisition are down significantly. HubSpot benchmark data shows the “new benchmarks”:

  • 📈 Website traffic up

  • 📈 Lead generation up

  • 📈 Email open rates up

  • 📉 Sales email response rates down

  • 📉 Deal/opportunity creation rates down

  • 📉 Deal/opportunity closed rates down

Short of any self-serve revenue, this drop-off of over a third of sales deals is significant. Whilst marketing might be seeing more engagement, this doesn’t appear to be driving sales right now.

HubSpot Covid Benchmarks - Deals Created & Closed

Trend #2: 96% of revenue leaders say they’ve been impacted by Covid-19

Survey data from the Revenue Collective indicates almost every revenue leader in SaaS has been impacted by Covid-19.

  • 72% have adjusted (or will be adjusting) their revenue targets and forecasts

  • 57% have already revised down. The biggest share by 25-50% reduction. 

  • Only 1% are increasing their forecasts (there’s a Zoom in every crisis, right?)

Look at all this red!

Revenue Collective - Covid Impact

Trend #3: People are buying 50% more software since lockdown started (but will it last?)

At Paddle, we’re seeing substantial growth in buyers across the world for software businesses on our SaaS Commerce Platform. Following our Software Buying Index, you can see the lift in transactions around mid-March as Western countries went into lockdown.

Software Buying Index - Q1 2020

We're not sure if it lasts.

And perhaps your business is (or isn’t) riding this trend?

G2 shared data with booming categories (like video conferencing), but also tweeted these spikes in demand are softening too .

We're also seeing B2B transactions move slowly, with transactions around Christmas & New Year levels. Still flowing, but down 25-30%.

Looking across individual sellers, there are three common shapes to their MRR curves:

  • “The Humpbacks” - High churn is driving down MRR to their year beginning baseline (like Buffer. Look at their MRR trend from January 2020 here )

  • “Straight ‘n’ Steady” - No discernable change. Keep tracking up-and-to-the-right (like Ghost. Scroll down their About page here )

  • “The Rocketships” - MRR growth rates have tilted up and become almost vertical (like Zoom. We can’t wait for their quarterly earnings call… 😮)

Is this the new normal?

For every software business?

The headwinds for “The Humpbacks” won’t continue forever. There’s only so much that budgets can shrink (let’s hope that’s before they have to close shop).

“Straight ‘n’ Steady” sellers will eventually encounter budget questions and renewals, even if they are shielded by usage-based billing or annual contracts.

And then “The Rocketships” will max out their total addressable market. There are only so many possible buyers of Zoom, and not all of them will use (and therefore pay) as much when lockdowns cease. Maybe they become like “Mega Humpbacks” as this crisis eases.

So is this the new normal?

We’re not sure yet.

As China begins to ease some restrictions (and seems to be further on in the crisis medically and economically), we’re still seeing a high from lockdown-levels of transactions.

Perhaps some signs this is beginning to settle, but transaction volumes are still exceeding Black Friday & Cyber Monday transaction volumes (See the spike in November? That’s why we highly recommend each Paddle seller embraces a Black Friday strategy ).

China Software Buying Index

With countries like Denmark lifting their lockdowns (having started much earlier and much stricter), we might learn more about how buyer behaviors are changing so we can plan for our own target markets.

Without strong leading indicators, it’s hard to forecast your businesses future:

  1. What are you forecasting? How do you plan for a business that’s riding an unpredictable wave? What’s your “post-wave” strategy? What’s the financial impact? How do you expect this to play out over the next 12-18 months?

  2. What are you focusing on right now? You should still be looking at lagging indicators (even if they’re just for the new customer cohorts or over short periods of time).

That’s why we’re advising Paddle sellers (and you!) to double down on their retention strategies this quarter - often quick wins like pausing subscriptions or turning on dunning campaigns . Focus on what you can control (and improve!).

1% increase in retention = 14% increase in acquisition

The power of SaaS is in compound returns. Any improvement in month-to-month performance continues to pay every month into the future.

But with churn, compound returns will work against you. You can less and less to renew each month within a customer cohort.

To understand this, look at your dollar retention from a customer cohort. For every dollar in revenue you signup this month from new customers, how many cents-on-the-dollar would you have in 12 months’ time?

Dollar Retention Rate graph

You can see even a small monthly churn quickly builds up over 12 months.

Now, if you were to make that up by acquiring more customers, how many more customers would you need?

Lots!

Follow three scenarios here:

  1. $100/month subscription with 5% monthly churn

  2. $100/month subscription with 4% monthly churn (improved by 1%)

  3. $114/month subscription with 5% monthly churn (increased by 14%)

You need 14% more customers each month (or them to pay you 14% more) on average to match the equivalent 1% decrease in churn each month.

Acquisition vs Retention

Maybe you’re already thinking, “but acquisition can compound too?”

Yes, brand. Content. Partnerships. Building an active email list. This all takes time and all delivers value down the line.

But run through the maths.

Put dollar values to what you want to focus on and drive results this quarter .

That’s what we’ve researched and published in our latest deep-dive guide here on the Paddle blog: Wartime Churn Reduction Strategies: Quantified in $’s and %’s .

And that’s what you can calculate yourself with the Dollar Retention Calculator . In five short questions, we’ll calculate the value of different churn reduction strategies for your business that you can implement in less than 2 weeks, and quantify the uplift for you.

How much is your churn costing you?

How many cents on each dollar do you retain after 12 months?

Calculate your dollar retention rate based on your monthly churn.

TL;DR: If you’re going to “just do better than the last 30 days”, then make that focus retention not acquisition. It has 14X the impact on your revenue this year.

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