Recurring revenue is the holy grail for fast-growing companies. But there is a downside to growth: customers that leave. Jos Burgers’s book, ‘Eén fan per dag’, was voted the best management book of 2018 for a reason.
You need to be nice to customers, because it’s vital that you retain them. But there are other ways of achieving this. Take stickiness. The stickier your business model, the more difficult it will be for customers to cancel your product or service.
45% EBITDA with a sticky business model
AFAS is one of the most successful software companies in the Netherlands. Its CEO Bas van der Veldt has built a company, together with his team, that is entirely geared towards recurring revenue.
The figures are self-explanatory. In 2018, AFAS generated a revenue of 141.9 million euros and an operating result of 64.9 million. This amounts to €327,200 in revenue per employee and a profit of €149,896 per employee.
To put this into perspective: Coolblue, one of the most successful online stores in the Netherlands, generated ten times the revenue of AFAS in 2018, or 1.35 billion. Nonetheless, Coolblue’s profit is less than half of AFAS’s, i.e., 26.9 million euros.
This amounts to a profit of €7,415 euros per employee, or 20 times less than at AFAS. So what’s their secret?
Upsell/deepsell with existing customers, attracting a lot of new customers every year, and keeping that back door tightly closed. These three aspects have proven vital for AFAS’s success.
To keep that back door closed, the software company has successfully developed a sticky business model, resulting in minimal customer turnover. The AFAS software is rooted in the primary processes of several companies. So switching is no longer an option after a while.
Because the switch is simply too painful. It may be worth your while to think about ways of how you can play a role in your customers’ primary process? Which pain do you solve?
No pain, no stickiness
A statement that I wholly endorse is ‘No pain, no sale’. And the same applies to stickiness. Cancelling a membership or subscription is easy if it doesn’t have too much of an impact on your life. If I cancel my Spotify subscription today, it won’t hurt me. I can still listen to music on YouTube or in the Freemium version. Admittedly, I’ll have to deal with a few ads here and there, but that’s all.
Cancelling my mobile subscription is a whole different story however. If I do this, my business and private life will turn into a shambles. Or that’s what it might feel like, because I can’t live without my phone even for just one day.
But imagine the problems for an organization that is dependent on software or a specific technical system. What would happen if the hospital can no longer access your Electronic Patient Dossier or if Zalando can no longer send invoices or the Intel chip factory shuts down?
It can be quite painful when a program or system doesn’t function as it should. Switching to another system is also very complicated.
Historical data, hours or days of downtime and uncertainty about the new system are all obstacles when considering a switch. If you have a business model that tackles the pain, then you’re already one step ahead.
Is your business model not that sticky? No problem. Focus on customer retention instead. Because you can still build a successful business with just 50% retention.
A success with just 50 to 60% customer retention? How?
Yes, that’s right. The retention figures in the fitness industry are between 50 and 60%. In practice, this means that they lose half of their membership after a year.
Can you think of a better example of a business model with extremely low stickiness? And yet a company like Basic-Fit still posts a hefty profit year after year. In fact, the company’s profit posted 58% profit growth in 2018.
You may find yourself thinking: “That’s nice, but how does this relate to the tech industry?”. The answer is interesting. Basic-Fit has invested in reducing complexity with digitization and automation. They are also extremely focused on retaining members.
For starters, Basic-Fit knows exactly what is the acquisition cost of older versus younger target audiences. Do you have an insight in these costs? If not, then sit down and take a closer look. Who is your DMU and how much does it cost you to acquire one new customer? These are the basic questions you should ask yourself.
The fitness chain also thinks the time has come to permanently influence the behaviour and habits of new members. In an interview with Emerce.nl (February 2019), Pierre Coolen (International Customer Care Manager at Basic-Fit), explained that they are paying a lot of attention to this. “We want to achieve a change, from no sports to sports.
We offer digital support to assist our new members as much as possible. The first weeks especially are crucial when changing a habit. We want to help our customers embark on their fitness journey in the best possible way.”
Train and inform your customers
Successful tech companies think about ways of training their customers or providing the right information to them. A good example of this is the community platform of a Brabant-based software company that I assisted with its growth strategy.
The number of questions from and contacts with customers was gradually increasing, given that they had just under 300,000 daily users. Originally 7.5 FTEs replied to customers’ questions, but this figure had since inflated to 15 FTEs. In the long term, their growth ambition of doubling the number of users would require them to staff their Service & Support Department with dozens of employees.
Obviously this scenario did not mesh with the idea of a scalable organization. That is why they decided to implement a community platform in 2018. The concept is simple: users can ask and answer questions on this platform. This helps you build a knowledge database and encourages your users to help each other.
Obviously this takes time. That is why one Community Manager was tasked with the full-time development of this platform. In addition to this, every company department was required to provide input to create valuable content.
Within six months, the positive effects were noticeable below the line. User involvement was high and customer satisfaction increased. The company thus laid the foundation for future growth, in addition to developing a user-friendly solution to retain its most important capital: happy users.
3 tips for stickiness and/or customer retention
- Devise a way of becoming part of your customers’ primary process. If this is impossible, then find a way to solve your customers’ pain.
- Help your users change their behaviour or use your product/service in the best way possible. Negative experiences or people who don’t understand your product may lead to cancellations.
- Look at how digital solutions, such as a community platform, may contribute to improving the customer experience.