Software as a Service (or SaaS, as it is popularly known) businesses, by virtue of the nature of their business model, have several commonalities irrespective of the industry vertical that they serve. For those who are not aware of SaaS, here’s a quick intro:
Software as a service (SaaS; pronounced /sæs/) is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted. It is sometimes referred to as “on-demand software”. SaaS is typically accessed by users using a thin client via a web browser.
Reference: SaaS, Wikipedia.
Since SaaS is a subscription based business that has an upfront cost of acquisition of customer (called, CAC), it is imperative that SaaS businesses retain a customer for as long as possible; failing to do so would make the business unprofitable. Here’s a typical cash flow over months from a SaaS client:
Given that a typical SaaS client has an option to cancel its subscription at any time, the SaaS provider would be left with negative cumulative cash flow if the customer cancels before the CAC has been fully recovered. Based on the same premise, where subscription renewal is critical on one hand, it is equally important that clients buy more features so the average revenue per account increases with time. If the “up-sell” can be organically achieved, the cumulative cash flow would become positive sooner. This ensures a faster route to profitability for the SaaS provider. The following chart depicts the situation pretty well:
Having understood the peculiarities of a SaaS business, it is clear that customer retention and organic account growth is of utmost importance for SaaS profitability. Let’s take a step back and look at this from the client’s perspective.
SaaS makes a lot of sense for a client because it reduces the time to go-live (in some cases, down to a few minutes!), reduces total cost of ownership, provides on-demand scalability and integration, and provides maintenance + upgrades that are painless in comparison with a non-SaaS solution. One would wonder, with all these advantages to their disposal, why would clients ever discontinue their subscription! That is because it is as easy to get out as it is to get in. The only thing that would make a client “stick”, is the customer experience. That’s where NPS is our hero! Don’t be deceived by its simplicity and let yourself believe that NPS will not give enough information to help a SaaS business grow. In fact, it is quite the opposite. By capturing regular NPS feedback, asking the right follow-up questions, and tracking NPS as a core metric that is reported in weekly/monthly meetings, SaaS businesses can get enough data to understand the clients that are at risk and the ones that are the best targets to up-sell. Here are a few incredible ways NPS can help SaaS businesses grow sustainably:
Traditionally, organisations are programmed to market and service all their clients equally. However, imagine how much better it would be to know where to allocate your service resources and where to put your marketing dollars. Using NPS, a SaaS company can classify its clients into detractors, passives, and promoters or benchmark individual client NPS against overall NPS to get a sense of the clients that are net-negative and those that are net-positive. With this approach you’d get clarity on how to best allocate your service and marketing resources. This will improve your ROI on service and marketing spend and make your organisation super efficient in recovering a client from the brink of ‘Unsubscribe’.
In their book “The Ultimate Question 2.0”, Fred Reichheld and Rob Markey have discussed the transformational journey of Intuit – a finance management software, facilitated by NPS. By using NPS and relentlessly acting on customer feedback while closely monitoring NPS movement, Intuit took some bold decisions of reducing the number of features in its star product – Quickbooks. It also changed traditional processes such as rebates and tech-support to the liking of the customers, thus enhancing customer delight for TurboTax.
This is a great story for SaaS company to learn from. Several companies keep building more features and keep selling to their clients without understanding how it impacts the experience of the clients. By slicing and dicing the NPS feedback, a SaaS product company can unearth issues that are creating unhappy customers. It can also discover what is loved most by clients, and try to build similar features in other products or train their other clients to use that feature more efficiently. All in all, by closely observing NPS across the several product features, a SaaS business can co-develop a product roadmap with its clients from day one.
One of the most powerful aspects of NPS is that it is a leading indicator of future revenue. In one of his blogs, Jason Lemkin – a successful VC, confesses how powerful NPS is for SaaS businesses. I quote him:
“Struggling at $1m, $2m, $3m ARR? If your NPS is super high, and going up … well … it’s gonna be OK. It will. Break through to $10m ARR, and life will get better. The cavalry will come.”
This confidence comes from the fact that a high NPS with an upward trend is an indicator of how happy your existing clients are! If your existing clients are happy, they will refer you to their network and will buy more from you. You will not only make more sales but also cut down cost of acquisition and servicing. Since NPS is an indicator of customer happiness, it speaks a lot about a company’s health and its probability of creating more happy clients. Therefore, apart from going out and selling more, the one thing you should do to ensure that sales keep coming is that you should start measuring, monitoring, and tracking NPS on a weekly/monthly basis. Make it a core metric and obsess on improving it with time. Sales will follow!
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