Prisoners, And Why It Doesn’t Really Matter Your App Is So Hard to Rip Out

Screen Shot 2013-06-06 at 12.29.12 PMThere are two things I see SaaS entrepreneurs who are post-Traction and post-Scale say again and again:

  • We’re So Sticky.  Once we’re in, it’s so hard to rip us out.
  • Our Churn is Basically Zero in the Enterprise.  We’re doing great because No One Leaves.

If you’re coming from a Freemium background, or B2C, that will sound amazing!  Compare Freemium churn rates of 2-3% a month, to Enterprise SaaS net churn (including upsell / upgrades) that is often less than zero … man it sounds like those Enterprise customers don’t go anywhere.

And in truth, they usually don’t go anywhere for 1 or 2 or even 3 years.  And if you’re not playing a Long Game, you can stop here.  If you close Starbucks, and they invest 3 months getting up to speed on your product, and you see real usage — they’re not going anywhere for now.

But here’s the thing.  That’s not enough.  For two key reasons:

First, if your customers aren’t happy — They’re Prisoners.  It’s a term well known to Net Promoter Score advocates.  These are unhappy customers that aren’t willing to switch to another vendor, it’s too much work.  But they won’t pay you another cent unless under duress.  They won’t recommend you to anyone.  And what happens is you’ll lose all your Second Order Revenue.  You’ll lose 50-70% of the total direct + indirect revenue you could have gotten out of a truly happy customer.  More on the huge revenue loss from Prisoners that doesn’t show up in the direct short-term numbers here.

secondorderrevenue

Second, switching today is hard.  But switching eventually is easier than you think.  Even if you don’t have a great competitor today, you will in 2-3 years, or sooner.  Eventually, there will be enough resources on your customer’s side to switch.  Maybe not on a dime, or even in a year.  In fact, a lot of times, due to deployment and renewal cycles, you don’t even see Enterprise churn until Year 3 — see more on that here.  But switching is not as big a deal as you think it is, 90% of the time.  You won’t see this if you’re focused on the short term.  But it’s a big deal if you’re Going Long.

If you really think your app is so sticky, ask vendors of sticky apps what happens when their champion at a customer leaves, and a new VP comes in that prefers their competitor.  You know what happens?  They switch.

Here’s my only point, because I hear it again and again.  Don’t take a false sense of confidence in the Enterprise just because your churn seems low / negative.  Or just because you’re automating a complex business process.

It’s easier to switch than you think, given enough time.

Your only choice is to make your customers truly happy.  And see it rewarded in declining churn rates and increasing upgrade rates as measured over 3+ years.  It will take you a long time to really see this.  Your board and investors probably won’t even be able to see it.  But if you’re Going Long — it’s almost all that matters.

I’d like to hear more about that, about quantitative customer happiness.  Net promoter score is one, albeit flawed, vehicle.  There are a number of exciting new start-ups working on this.

And I’d like to hear a little less about gates on the way out.  Because that captures exactly $0 of the second-order revenue.

And a lot less about how amazingly low your enterprise customer churn is.  Because of course it is.  In years 1 and 2.

Published on June 9, 2013

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