Subscription Software and the Churn Challenge

Part 1 - Overview

If you have ever worked at a B2B software company, there’s one word you have probably heard repeatedly - CHURN.  As a veteran of the software development tools space, working at various companies over the past 20 years that create applications for enterprise customers, I’ve seen the challenge of churn as a repeated theme.  Tech startups love the subscription-based license model that has become prevalent with the popularity of SaaS offerings - customers commit to an annual subscription for some number of licenses, and typically pay the tool vendor upfront in full for the entire year.   The assumption is that most customers will renew their subscription annually, providing the vendor with a steady, predictable revenue stream even without acquiring additional customers.  This is typically called annual recurring revenue, or ARR.  Customers will also typically expand their license usage as their product usage grows and matures, providing organic ARR growth to the tool vendor.  However, if a customer does not fully utilize the tool, they may decide to either cancel their subscription during their renewal period, resulting in churn, or reduce the number of licenses they renew, which is typically called contraction.  Both events mean a reduction in net ARR to the software vendor.

Simply stated, churn is a net result of the lack of successful product adoption by an enterprise customer.  Admittedly, this statement might be an oversimplification - there are other business factors that impact churn - including staff reductions and financial challenges that the enterprise customers are having, merger and acquisition activity, and similar events impacting the enterprise. But while it’s easy to blame churn on “a bad economy”, the reality is that in the overwhelming majority of churn cases, the customer was not utilizing the product to its fullest potential or that the product did not adequately support the customer’s use cases.     

Now I’m a bit of a unicorn in the world of customer-facing tech professionals in the sense that I have held a broad range of roles over my career.  I have worked in technical pre-sales, post-sales customer success, and professional services (PS) roles in the capacity of PS sales, delivery oversight, and as a delivery consultant.  I have made a career out of pre-IPO tech startups in the software development tools space and have tended to fill whatever role has had a need and challenging problems to solve, as long as customer interaction was involved.  This has given me a unique perspective on "customer success" and churn.  And it has left me contemplating this customer churn challenge and speculating about why it has continued to plague many software vendors.

Before I get into that, let me address the quotes around customer success.   Customer success has become an entire field in itself.  Most B2B software vendors now have an extensive Customer Success organization, with a variety of different CSX roles - Customer Success Advocate/Engineer/Architect/Manager.  And this field has undergone dramatic change over the past several years.  This topic likely needs an entire blog post of its own.  For now, let me be clear that when I use the term customer success in this blog, I mean it in a general sense of helping customers successfully adopt a tool and am not speaking about any specific role or organizational structure.   

The topic of churn naturally leads to several questions, including:

Whose job is it in a tech company to make customers successful and prevent churn?  

And while it may seem like a loaded question, I pose a simple response:

It’s every employee’s job to make customers successful and prevent churn. 

Okay, I know…that’s too simple a response and merits additional explanation.  But if you think about it, what is the entire purpose of a B2B tech company?  It is to provide products and services that solve complex business problems for its customers.  Without customers, you don’t have a business and can’t continue to build a product.  So focusing on making customers successful should be at the heart of the entire organization.

The next obvious question is:

What can software companies do to reduce churn? 

As the topic has stirred in my brain for many, many months, I have realized that there are concepts from multiple areas that apply:

• Organizational health

• Lean and agile principles

• Value stream management

• Product management and the emergence of ProductOps as an area of focus

• Metrics

I’ve attempted to sort out all of these different concepts and make some cohesive sense of them in the context of customer success and churn prevention. And I’ve come to the following recommendations that organizations should adopt to minimize churn:

1. Organize customer-facing personnel into cross-functional, customer-centric teams.  This means that pre-sales and post-sales roles work closely and collaborate to drive customer adoption.

2. Establish a common set of success metrics for all cross-functional customer-centric team members.

3. Build fast feedback loops from customers to product management by defining strong collaboration practices between product management, engineering, and customer-facing teams.  Product management needs to continue to have direct customer-facing conversations with some customers, but it’s almost impossible to scale this approach as the number of customers grows. In large organizations, customer-facing personnel become a proxy for product management for receiving and collating customer feedback.  Using a customer-facing idea manager or issue tracker to capture customer needs and feedback is also fine.  However, direct conversations between customers and customer-facing personnel capture details and context that get lost in translation when captured in a tool without a live conversation.

4. Define customer use cases for product initiatives and features with clear success criteria, known edge cases, and what is considered out of scope for each.

5. Enable cross-functional customer-facing teams on the details of each customer use case and the technical details of how to enable it within the product.

6. Instrument the product with analytics about customer usage of each feature and paths through the system.

7. Prioritize building in-product tools that enable the fast configuration and adoption of key features.  These can be built-in guides and demos, configuration wizards, and AI assistants that help customers make smart choices about how to get started with the product and use the most important features, accelerating product adoption. 

In the upcoming blog posts, I will dive deeper into each of these recommendations and why they are necessary for minimizing churn and maximizing successful customer adoption and growth.