Expired: Your SaaS Company Doesn’t Need Sales Reps Focused on Renewals
Jason Lemkin, author of the popular SaaS blog, saastr.com, explains why the idea of having separate renewal sales reps is an outdated concept, and how SaaS companies can reduce their churn rate by linking compensation plans to renewal goals the right way.
In the early days of SaaS, most companies’ sales and renewal structures looked something like this: Salesperson closes a customer; account manager onboards the customer; renewal sales rep attempts to retain (and, in a perfect world, upsell) the customer before the customer’s contract expires.
Today, that model is old and inefficient, says SaaS expert Jason Lemkin.
“Our client success teams put the work in up front so that we didn’t have to re-sell customers on the value of our service at the 11th hour.”
Jason Lemkin, SaaS expert, co-founder of EchoSign
“People will disagree with me, but the idea of having separate renewal sales reps is an outdated, pre-SaaS 2.0 idea,” says Lemkin, who co-founded electronic signature company EchoSign and served as its CEO until the company was acquired by Adobe in 2011. “In most leading SaaS companies today, client success owns not just deployment and on-boarding, but the entire customer lifecycle. And that group relies on real-time metrics to decide when a customer’s problem is big enough to intervene.”
As long as the customer success team is doing its job, Lemkin says, SaaS companies shouldn’t have to worry about renewals — at least at a high level.
“If SaaS companies are doing what they’re supposed to be doing — building, selling, and servicing a product that customers can’t live without — renewals should take care of themselves,” Lemkin explains. “If customers love your product, they won’t let their contracts expire.”
The real goal of your client success team, Lemkin explains, should be to create true attitudinal loyalty by building deep, long-term relationships. In other words, they must find ways to make customers love you, your brand, and your product.
Those customers are the ones that upgrade and buy more, and Lemkin says they’re often worth 50 to 100 percent more than other customers who are merely “behaviorally loyal” (i.e., renewing out of habit because they’re already committed to using the product in their enterprise). That customer group only buys more when they absolutely have to.
Who Should Be Responsible for SaaS Renewals?
When he was the CEO of EchoSign, Lemkin tested his theory by performing an experiment — the company didn’t let its sales team play any role in driving customer renewal. And he didn’t generally have client success managers (CSMs) play a role in it, either.
Instead, Lemkin gave that responsibility to EchoSign’s accounting department.
If a customer didn’t re-up by a certain date, the company’s accounting team would send the customer a notice saying that it was going to cancel its account when its contract expired. Incredibly, Lemkin says more than 90 percent of customers renewed on their own without any further prompt.
“Our client success teams put the work in up front so that we didn’t have to re-sell customers on the value of our service at the 11th hour,” Lemkin says. “Instead, when renewal time came around, those customers simply needed a little nudge.”
How to Reduce Churn Rate: Two Renewal Goals that Should Influence Compensation Plans
Of course, Lemkin knows that EchoSign’s strategy of having accounting handle the bulk of renewals won’t work for every SaaS business.
And he also acknowledges that while customer success reps shouldn’t need to pepper expiring customers with renewal pitches, their comp packages should be tied in some way to a couple of key renewal and upsell goals:
1) Renewal Targets
Are you focusing too much on revenue growth, churn, or lifetime customer value?
Lemkin recommends basing this on revenue, not customer number, and advises it should be 80-95 percent of the prior year’s base customer revenue.
“It can’t be 100 percent, because that’s just not realistic,” Lemkin says. “But if you set it lower than 80-85 percent, you’ll fail to really challenge your CSMs.”
2) Gross Churn and Upsell Targets
Medium and large SaaS customers should have net negative churn rates, Lemkin says. CSMs should be asked to grow their base somewhere between 110 and 120 percent every year.
“If, for instance, one rep manages $2 million in customer revenue per year, his or her job should be to preserve $1.8 million of that. From there, the CSM should then go further and grow his or her original $2 million to $2.2 or 2.4 million, including churn.
Companies can incentivize those goals in various ways. But regardless of how they choose to design their comp plans, it is critical that client success reps at least understand that they will be held accountable to those metrics.
“The idea is that incentivizing renewal and upsell will force those CSMs to be obsessive about their metrics,” Lemkin says. “And if they consistently hit them, it will create this virtuous cycle that organically improves renewal and upsell without the need for a separate team of renewal sales reps.”
Do you agree with Jason? How are you incentivizing renewal and upsell goals and driving renewals?