Synopsis: Why are churn rates in B2B SaaS companies so high, and why is expansion in major accounts so haphazard? For whatever reason, management teams wildly over-invest in their Land strategies while dramatically under-investing in their Expand opportunities, as well as in the support and education efforts required to ensure that customers Renew. Perhaps part of the problem is the lack of suitable models and best practices for managing each of the three corresponding sales motions. I hope this article provides some pointers to help teams redress this chronic imbalance.
I chose the image for this article, highlighting the different dynamics surrounding customer acquisition vs. customer expansion, because it points to a persistent, chronic misalignment in the vast majority of B2B tech companies today between management rhetoric and action. As I’ll demonstrate, renewal is another area where resources are mis-aligned and a different approach is required. CEOs, CMOs, CROs, and CCOs may talk a good game about investing in “customer success” but what their actions actually tell us is that they prioritize only what they believe to serve their own success in racking up new logos and new ARR.
The provocation in the “not equal” illustration above on the contrast in the dynamics of Landing versus Expanding accounts points to the quite different motivations in customer’s minds for choosing to sign up for the first time, vs choosing to continue, or to expand their adoption. What I believe the authors of this diagram(*) are getting at is that most management teams treat the Renew and Expand decisions as quasi-automatic extensions of the original decision to sign up for their product or service.
Consequently, SaaS sales activities focus disproportionately on landing new logos, as if success is purely a numbers game. Too often the work of onboarding new customers successfully, ensuring that contracts are renewed, and fulfilling cross-sell and upsell targets is left to thinly-staffed PS and support functions that have been hastily rebranded under the magic moniker of “Customer Success”, as if this sleight of hand will fool newly signed-up customers for very long.
Almost invariably the result of this shortfall is alarmingly high churn and low expansion rates among existing customers, particularly large enterprise organizations.
Recent Shift in Investor Expectations
A compelling new reason for companies to review their current priorities and resource allocation is that during the past couple of years the investment market has shifted gradually to rewarding a different B2B scale-up model – from the prevailing “grow at all costs” model (ACV/ARR) of the past decade and a half, to a “scale efficiently” model (CLV/NDR) model.
This new emphasis places more urgency on CEOs and management teams to re-balance their attention to renewals and expansion as compared to their investment in acquiring new logos. This shift can be seen in how different SaaS IPOs have been received in recent times. Companies such as Snowflake, Twilio, and Elastic all performed well largely because of their relatively high Net Dollar Retention (NDR) performance in excess of 140% a year.
To anyone who is unsure of the alphabet soup of acronyms for metrics these days, NDR is calculated by adding upsell and cross-sell to existing revenue and subtracting churn. NER (Net Expansion Rate) and NRR (Net Retention Rate) are two other terms with identical meaning to NDR.
In order to help management and sales teams achieve the balance that investors are now demanding, this article presents a thought experiment describing B2B SaaS as one business model that houses three distinct sales motions and their respective delivery processes – each characterized by their respective goals and metrics, skills and resources, and the need for appropriate management attention respectively.
Start by Understanding Customer Objectives
In a Land scenario, our customer conducts their evaluation, selects the vendor they believe to be best suited to serve their needs, and commits to their first experience of implementing and using the new product or service. In essence they are saying: “Let’s take the plunge with this vendor and their solution!”
This decision is usually accompanied by a certain degree of anticipation and even apprehension, because they have not yet been able to confirm whether the vendor’s pre-sale promises will be kept or not. As such, we can see this as one kind of change initiative that may well test the vendor’s and the customer’s staff equally over the ensuing weeks and months until user adoption settles into a productive rhythm.
In an Expand scenario, part of the customer organization is now familiar with this vendor’s products and services, so they can provide a reference to different parts of the organization, for new uses cases, and they themselves may want to commit to a deeper level of engagement.
To a certain extent, the new groups of users, new divisions, or new regions, feel confidence in proceeding while at the same time they might be anxious to duplicate the positive experience of their corporate colleagues in their own environment, possibly while being served by different sales and delivery teams. In essence the customer is saying: “We liked what you did for us the first time, so let’s see how much more value you can bring to different areas of our business!” I submit to you, dear reader, that this dynamic entails a quite different type of change dynamic.
In a Renew scenario, we have a quite different from the first two decisions. Whereas Land and Expand are decisions to do something new or additional, the decision to Renew is all about continuity. Thus, the debate inside the customer organization is, “Did we get sufficient value from this investment to justify continuing, rather than running a new process to evaluate competing offers with a view to switching vendors?” Thus, actual ROI vs the original business justification, actual user engagement with the product, confidence in the vendor’s responsiveness when required, their effectiveness in resolving the inevitable teething and other problems along the way, and so on, become key criteria to determine whether to continue or not.
Far from an automatic or trivial decision, but nonetheless more about continuity than change. Whatever drama is associated with the Renew decision has preceded it by weeks or months – during the various implementation, training, utilization, problem reporting and resolution activities since first signing up. The decision to stick with the vendor should by now be somewhat anti-climactic, assuming that all the activities of the past year have led our customer to feel confidence in the solution and thus want to renew their commitment.
What’s the Potential Reward for Balancing the Three Operations?
The prize for getting this equation right over time can be as much as a 20x or even 50x gain in customer lifetime value (CLV) versus the initial contract to land the customer – besides the advantage of achieving it far quicker than might occur if the customer is left to act on their own initiative without sufficient stimulus being applied by the vendor. Not to mention the considerable bonus of creating more reference accounts that lead in turn to winning more new customers. The resulting virtuous cycle can be extremely powerful in increasing NDR and even leading to market leadership.
The converse of this is the risk of losing expansion opportunities to competitors by not paying sufficient attention, and even losing a customer who decides to defect to the competition. Far too many SaaS companies are incurring unacceptable rates of churn (as high as 15%, even 30%) and even worse, foregoing expansion opportunities in one or more of the six possible dimensions – exploiting new or under-utilized functionality in the contracted product (and new products in a vendor’s expanding portfolio), greater engagement and usage, new users, new use cases, new divisions and/or geographies.
The 20X to 50X Expansion Opportunity vs the Risk of Missing Out
If you’re wondering what I mean by “20X” or “50X”, consider the quite common example of a SaaS company that closes deals with a department or group of users for $50k-$100k in ARR, but that could, with a more comprehensive strategy, develop each account into a strategic relationship worth $1m-$5m ARR or greater. Companies and sales teams quite often get this right episodically, or heroically, but it’s rarely as systematic as it needs to be and could so easily be.
I’ve lost count of the number of SaaS companies that are needlessly stuck in the profitless predicament of trying to make $50k deals work at a 25% or so annual growth rate while suffering 15% attrition. The numbers just don’t add up. This is why so many SaaS companies are taking a decade or even fifteen years to reach, say, $30m or $50m in revenues, without any sign of becoming sustainably profitable.
It’s no wonder that over time investors lose patience after seeing their original (unjustified?) expectations get stretched out indefinitely, let alone how burned out their founder-CEOs and successive executive teams become. A frequent response to this misery is to capitulate with a fire-sale that rewards no one for all their hard work and investment.
The Thigh Bone’s Connected to the Hip Bone, The Hip Bone’s Connected to the Backbone…
Let’s agree that if you can’t renew an account that was landed in the past year or less, you are unlikely to be able to expand it. So, logically, Land and Expand are linked by a need to ensure basic continuity of the relationship via an annual renewal.
Land is thus validated by Renew, and then multiplied by Expand. Landing gets you in the door but doesn’t guarantee your permanence beyond the first year (or longer depending on the term of the contract).
While I grant you that separating these three motions into distinct sales motions feels a tad artificial, I must stress that some kind of forcing function is required to encourage management teams to break the logjam that continues to compromise both Renewals and Expansions.
The Three Sales Motions for Land, Renew, and Expand
Consider the key dynamics of each sales motion as shown in the table below:
Keep in mind that the principal business metric to measure the collective performance of the three sales motions combined is the Net Expansion Rate (or Net Dollar Retention – or Net Retention Rate, to use the more defensive term borrowed from the B2C SaaS marketplace).
Critical Roles and Responsibilities for Each Sales Motion
Resources that companies should deploy, particularly in service to their major and/or strategic customers, include these:
AE / New biz sales: Key skills are to qualify opportunities and orchestrate deployment of sales team resources as well as executives and other functions to manage the sales process to successful close. An eminently commercial skillset. Carries a sales quota. Makes sense to pay commissions on a 50% Sell, 50% install basis to ensure that AEs follow through on their pre-sale commitments to each new customer.
Domain expert / business analyst: Delves into customer’s business problem and its painful consequences to build a business case that justifies the buying decision. Note that this resource is MIA in the majority of B2B SaaS sales teams today, or it is so thinly stretched as to be only marginally effective.
Solution architect: Crafts the solution that the AE and business analyst (domain expert) has built a business case around. Solution architects are often expected to double-up as business analysts, with varying degrees of success.
AE to AM in gradual hand-off after six months or immediately after first renewal. In strategic cases, AE may handle first-year renewal and/or first expansion(s) then hand off to AM. Carries the Renewal quota, activities are punctuated by periodic implementation/usage audits.
CSM – Key skill is to take care of onboarding and user adoption so that they realize the value from their investment and thus feel good about renewing the contract. This role requires a hybrid technical/administrative skillset because of the need to coordinate implementation and support response as well as deal with the renewal contract, supported by Finance and/or Legal.
AM / Expansion Sales – Key skill is to look for upsell and cross-sell opportunities on a multi-dimensional basis. Carries an Expansion quota based on detailed Account Planning, tracked and refined as appropriate in QBRs. Webinars and workshops used to develop expansion plans with customer management and staff.
CSA – Key skill is to scout for and frame up new expansion opportunities. This is an eminently consultative skillset, requiring business nous alongside decent technical knowhow. For whatever reason, SaaS management teams are reluctant to field these resources, sometimes alleging that they are “costly”, ignoring the reality that good CSAs are worth their weight in gold. Over time, service partners can and should step up to provide this expertise, but often the crucial gap is early on when the young SaaS startup or scale-up has yet to be able to recruit or attract suitable service partners.
It’s worth keeping in mind a couple of dynamics associated with Land vs Renew vs Expand.
- First, the linearity of Land > Renew > Expand is limited: You can at times Expand the account before the all-important first Renewal. But if your customer churns you almost certainly lose all further chance of expanding, unless for example a decision to not renew is taken for entirely different reasons (including intra-company politics) while elsewhere in the organization a decision(s) to Expand the contract is taken for unrelated reasons – perhaps in overseas subsidiaries, newly acquired businesses, etc.
- Second, Expansion creates not only (much) more revenue upside in the current account, but it often influences new revenues from entirely new customers. This is why the cumulative effect can be to multiply adoption and revenue by a factor of 50x and even more, within as little as 6-8 quarters after the first contract.
Summarizing, the key strategic and organizational challenge today is that in most B2B SaaS companies, sales and marketing activities targeting new logos get 80% or more of all the S&M resources and a lion’s share of management attention too, while Renew and Expand are the stepchildren left to fend for themselves until there are either above-normal defections or disappointing levels of expansion.
I believe that this is largely because the prevailing mental models that management teams use are completely out of whack.
While SaaS companies don’t need to operate each of the three models as literally separate activities, they must do a better job of resourcing and focusing them appropriately.
That’s my take: What’s yours?
(*) The image at the top of this article is reproduced with permission from Corporate Visions (www.corporatevisions.com).
NOTE: Research for this article included conversations with Bob Wright, managing partner of Firebrick Consulting.