Why do the metrics you track matter? Entrepreneurs thrive on data. Their focus on key metrics such as churn rates, customer lifetime value, sales efficiency, how those numbers are trending, and how they look relative to competitors, drives the strategy and decisions they make. So how can those metrics provide deeper insights? Understanding ‘the why’ behind the numbers you track provides the context you need to make better-informed decisions.
With private equity playing an increasing role in SaaS M&A activity, we hosted a panel of four private equity investors to glean their insights on how they view potential investment opportunities, the metrics that matter to them, how they assess valuation, and their expectations post-transaction. One key takeaway from the webinar centered around how entrepreneurs should not only track certain metrics but also understand why these trends are occurring.
Tracking the “Why”:
One specific example pertains to tracking customer churn. Panelist Jeremy Holland, the Managing Partner at The Riverside Company, comments: “It would be hugely valuable if companies track why customers churned. It is different if the customer went out of business than if they chose to go to a cheaper competitor. Or say they went to a cheaper competitor, but then they came back two years later. It is validation that they tried the competitor, and it didn’t work out. If companies took the time to track ‘the why,’ there would be a tremendous amount of insight into the existing metrics” (See Response in Webinar).
In the answer above, Jeremy discusses how knowing why customers churn is as important as the calculation itself. Customer churn measures revenues lost due to customers failing to renew. If you are not digging into the data to understand why customers choose not to renew, you are losing the opportunity to generate key insights that can help you better position your company, refine your strategy, and hone sales tactics.
A more in-depth analysis of customer churn rates can help you understand why customers chose not to renew, those customers’ characteristics, such as a specific customer industry or size, and the alternatives they chose, such as a competitor or in-house option. This gives you three different pathways to pursue.
Assume your churn has been increasing for a few months. Your team digs into the data and finds that smaller customers are choosing not to renew at much higher levels than other customers. Why? Because they can’t make use of much of the functionality that your software has. How can you use this information to make better-informed decisions?
Use insights from that data to refine your strategy and decide what you need to keep, cut, or create to serve that target segment better.
- Keep – Charge your sales or customer success team to come up with use cases that demonstrate the value of your software for that specific customer segment. Educating your customers on how your product can add value to their processes or decision-making can improve adoption and retention.
- Cut – Debate whether this target segment is valuable enough to pursue. Perhaps this industry or size segment is too small relative to other potential targets where you are experiencing greater success. Given your resources and growth targets, further cost-benefit analysis can help you decide whether this segment is worth dedicating resources to.
- Create – You could strategically decide to offer a lower-cost, pared-down version of the software. Perhaps this segment is better served by a differentiated product that you currently don’t have. Evaluate the opportunity to pursue a scaled-down or specialized version for that segment, taking into account the total market or other customer segments that the same product would appeal to.
In this example, knowing the why behind your customer churn provides three strategic pathways to pursue so you can tighten your strategy and better deploy your resources. This same philosophy of understanding the why should apply to any metric you track to help your company position itself for success.
For additional insights on private equity perspectives on SaaS M&A, watch the full webinar.