Every company faces some degree of churn. To combat this, companies turn to existing customers for upsell / cross-sell opportunities to offset lost revenue from downgrades or cancellations. Venture capital and private equity firms are particularly interested in expansion revenue as a means of growth and are paying close attention to a company’s Net Negative Churn rate as an important indicator of happy customers which lend to increase revenue predictability.
But does Net Negative Churn paint an accurate picture of growth?
I asked Steve Bernstein, CEO and Founder of Waypoint, and Evan Klein, Founder and President of Satrix Solutions, to share why they believe venture capital and private equity firms turn to Net Negative Churn and whether this is the best metric to measure revenue expansion opportunities from existing customers.
Watch the video or read the complete transcript below for their responses.
Heather Timney, Vice President, Marketing & Partnerships, Satrix Solutions
Steve, a growing number of B2B companies are focusing on Net Negative Churn. Do you think that’s partially due to the emphasis venture capital and private equity firms have placed on this means of growth? Why do you think it’s so important to investors?
Steve Bernstein, CEO and Founder, Waypoint
There a big mantra around land and expand. I think the whole notion here is to make sure that we are creating an income stream, a revenue stream that can smooth out the curves, that can drive lifetime value, that can do all the all those things that we need to do to accelerate profitable growth for a company. At the end of the day, that should be what the growth mantra is. However, Net Negative Churn hides a lot of sins. If you’re netting out your expansion from your churn rate or your retention metrics, then you’re basically covering up your churn with expansion deals, and it’s super important to look at both.
I know as an industry in Customer Success, we all talk about retention and churn quite a lot. CEOs care about growth. So, churn is important to manage because you don’t want to erode that growth and you want to look at gross churn. But expansion sales are important enough to look at to see are we adding value and are we increasing, essentially, profitability over time.
When you’re looking at profitability, you want to look at, for example, customer acquisition cost. As a company gets bigger, it should be less and less expensive to acquire new customers because you’re getting advocates, you’re getting referrals. We all know that your best deals tend to come from references and referrals, right? Getting people to come to you organically. So, creating a way and a measurement through CAC (customer acquisition cost) or looking at growth, expansion sales separately from churn rates, you get a clearer sense of what’s going on. The more you aggregate stuff into that kitchen sink, the less visibility there is on the things that matter most.
Evan, I know you do a lot of work with VCs as well as us where we take the software approach. Do you find the VCs doing the same thing?
Evan Klein, Founder and President, Satrix Solutions
Steve, it’s been interesting, the last five, seven years, how much more emphasis venture capital and private equity firms have placed on essentially the work that we do, right, this focus on customer satisfaction, retention or churn reduction, and customer lifetime value. It’s been a tremendous focus, and frankly, a welcome one across VC and private equity firms in recent years.
Actually, we’re thankful in part, because it’s rare that a month goes by that we don’t get a phone call from either a portfolio company or maybe the venture capital firm themselves saying, “Hey, we want our portfolio companies doing this,” or the portfolio companies saying, “We were advised that we really need to do this.” So, there’s been a tremendous focus on this, which has been great.
I think the reason is pretty obvious, like you said, Steve, companies grow faster when they’re better with retention or churn reduction, land and expand – customer lifetime value ingredients. And venture capital and private equity firms want higher rates of visibility and predictability in revenue and earnings streams. How do you get that? You get that when you have very low churn and high opportunity for upsell & cross sell. You said as well, referrals and reference accounts, and testimonials, all those things. It’s definitely more of a focus I think in lot of companies that are in that B-round and C-round venture capital, or a lot of the private equity firms that are doing roll ups in different industries and are saying this is going to be a focus. So that’s been great. And I think us helping our clients on the reporting elements of this and serving as an objective third party so the Board can trust the data that’s being delivered and they have the perspective that they need to help their companies make decisions is what it means to us and to our clients at the end of the day.
For sure, we are in wholehearted agreement, violent agreement, that getting the right data in front of the right people is important. NPS could be important as long as you show it with how representative it is. Are we moving in the right direction? Are we engaging and activating those Promoters to lower our customer acquisition costs? Are we converting Detractors, which are generally much more expensive to service? Are we converting or neutralizing them in various ways? All of these metrics need to be looked at together.
But the most important thing, I think, is to look at the change over time. From time period, quarter over quarter, are we increasing our retention rate and are we increasing our rates of profitable growth? At the end of the day, VCs want to see things moving in the right direction.