The impact of contract term on customer success
A couple of weeks ago, Lihong Hicken at Nuffsaid asked me how monthly and annual payment cycles affected CS in B2B SaaS. It’s an interesting question and, from a quick search, not one we could find answers to: so we decided to put our thinking caps on. Thanks to Lihong and Chris Hicken for their help in shaping the article. Credit goes to them for the inspiration and inputs: errors are all mine.
Understanding the underlying factors
Before getting into the debate of servicing monthly versus annual customers, it’s important to consider some of the underlying factors.
The first thing to note is the payment cycle is not the real driver — contract term is. When companies speak of monthly contracts, they are typically talking about rolling monthly contracts with automatic renewal. As such, there is no specific re-contracting: the legal relationship continues until is specifically cancelled, which a customer has the right do each month. Some companies insist on annual contracts but allow monthly or quarterly payments; which in itself increases the churn risk, especially when the monthly fee is low. Although entitled to, few companies are willing to take the time and reputational risk of pursuing customers through the court for non-payment. Others quote monthly prices but require annual payments in advance.
Data show a relationship between contract length, average contract value and churn. Monthly, low value customers churn at a higher rate. I believe this is, in part, because too many suppliers rely on traditional concepts of customer success.
Product complexity is another important consideration. Some SaaS products require extensive implementation and configuration taking months to complete. Delivering measurable business impact before this phase is complete is impossible and therefore a significant risk factor in monthly contracts. This is likely to shape contract strategy and will definitely influence how customer value is delivered.
Finally, a customer’s propensity to do business with you follows this simple formula:
Propensity to buy, renew & expand = (Need for value x Value achieved) / Effort
The people who buy and use SaaS products do so because they have a need they prioritise over other competing demands for time and money. Their goals and expectations are their measures of customer success. The supplier’s job is to ensure those needs are and are seen to be fulfilled in a way that makes their job easier and more successful with the minimum of effort. This means understanding what value means to the key roles served as they engage over time.
The differences
How do these three factors; contract term, complexity and customer value shape value enablement for monthly and annual contracts? Here’s a personal view of how CS tends to be implemented in both cases.
Value elements, not outcomes
Monthly renewals create 12 times the opportunity to churn and thereby require monthly cycles of delivery and reporting that evidence the value delivered. The level of value that can be delivered in one month is very different from what can be achieved over a longer period. This requires a view of value that is incremental and role and task specific, rather than broad business impact. I call these value elements: they are unique, measurable and of value in their own right but, when aggregated, deliver broader business value. They are the building blocks of measurable customer value.
Annual contracts provide more time to achieve the business goal that underpins the reason to buy. That said, it is the aggregation of individual value elements, specific to each customer role that drives this broader business impact.
Time to first value
The most important value elements are those achieved early in the relationship. There is no point in having an approach to onboarding and adoption that takes six to eight weeks when the next renewal decision is four weeks away. The key question is what measurable value of importance to an individual can we deliver in the first days — one week at most? Focus on understanding the needs of key roles and use short, simple discovery to shape a first value process specific to that role. Communicate this achievement clearly and set the user off on the path to choose and achieve their next value threshold.
The same principles apply to annual contracts but with less time pressure. That said, lengthy time to first value is never a good idea.
Removing complexity
Products that are complex and require significant time and effort to implement do not lend themselves to monthly contracts. If monthly contracts are essential, the requirement for rapid first value means that complexity of implementation has to be minimised or, even better, removed. Product managers need to find ways to guide, automate and use templates to make the complex simple. Irrespective of contract length, removing complexity is always a good strategy.
Relationship focus
Whilst both remain important, relationships with users rise in priority over non-user decision makers in monthly contracts. User health is more important than account health. Decision maker relationships need to be maintained, with a focus on how your product is adding value to users and, by aggregation, to the business.
With annual contracts, the people making the decision to renew often reflects those involved in the original purchase. Higher contract values result in greater scrutiny from decision makers. Ensuring they recognise the scale and impact of the contribution your product has made has to be core to this relationship throughout the year.
Response times
A one day response time in a monthly contract equates to 5% of the contract time, assuming 5 working days over 4 weeks. One day in an annual contract is about 0.4% of a 252 day working year. If that wait for a response means the user cannot do what they want, it’s a bit like a 5% tax on your product. A couple of those will quickly eat into any goodwill you may have. I believe quick response times are always and advantage but are essential in monthly contracts.
Importance of context
A monthly renewal cycle often means more interactions to ensure users achieve value each month and are aware of it. There is a fine line between keeping people informed and junk messaging: the latter being of no value to the recipient at that point in time. This calls for a comprehensive data set that richly defines a user’s context that drives interventions and communications to help achieve measurable value. Content without context is junk. To sustain the context, data refresh rates need to reflect the shorter cycle times.
Automation
Automation will play a bigger part in the delivery of customer success in monthly contracts for two reasons. First, monthly renewal cycles are likely to mean lower average contract values. Add to this the greater intensity of activity and you end up with having less to spend on cost to serve per customer. Doing more with less is essential.
Automation has to be contextually rich and, wherever possible, in-app; helping people complete the flows that lead to measurable value. Diverting them from this process raises the risk of non-completion, thereby reducing the likelihood of the user achieving value, which raises the risk of churn. Customer success therefore needs excellent product management capabilities.
Metrics
Performance with monthly contracts will be tracked by monthly related metrics. MRR will be primary revenue metric and key CS revenue metrics like GRR, NRR and logo churn will also be tracked using monthly, not annual values. Annual equivalents (ARR and annually based GRR and NRR) will be used to track annual contracts.
Reporting performance is only one aspect of metrics. More important is the relationship with learning cycles and improvement activities. Actions to minimise churn risk and improve growth opportunities with monthly contracts
Payment experience
Many might question payment as an element of customer success but it forms an important part of the customer experience in monthly contracts and shapes the buying decision. “Effort” is an important element of the propensity formula above? Making a payment is a trigger for the buyer to make a decision: “Do I want to continue to pay for this service?”. Problems with the payment process exacerbate the risk and can tip a borderline decision negative. This problem does not exist to the same degree with annual contracts.
In summary
This chart attempts to summarise the differences.
What this means for your capabilities
The shorter cycle times, lower contract values and typically larger customer numbers associated with monthly renewals increase the pace and intensity of activities needed to deliver value to customers. Monthly renewals therefore need to exploit data driven, contextually rich, automated interventions more than with annual contracts, where the available time and funds allow for greater personal relationships and more time to manipulate and understand data. Repetition uncovers weaknesses quicker and exacerbates the effort to deal with even minor faults and points of friction.
Whilst it is and will continue to grow, I do not think we will get to the point in the next five years where fully automated value enablement is widespread. Human intervention will continue to play a part. I do however think this will shift from a dedicated to a pooled resource, which includes specialists in different fields. This approach is already used by some, where a rich automated approach is supplemented by short, focused bursts of personal interactions to solve specific challenges or bring customers back on track. This requires an underpinning of comprehensive customer data to maintain and share the company’s knowledge of the customer (corporate memory) such that any individual can pick up a customer with comprehensive knowledge of their history and challenges and get straight into the task.
Companies are increasing budgets for CS operations capabilities to deliver greater automation and one-to-many interventions. Whilst advantageous, I personally believe this is a stop-gap solution and winners are, and will increasingly be, those that use product management to build their applications around a customer value enablement process. As an interim, core functionality will be overlaid with the value enablement process.
Monthly renewals also intensifies the need to take a company-wide approach. Value proposition design, ideal customer profiles, packaging and pricing are all important elements whatever the contract term but monthly renewals intensifies both the detail needed and the degree of alignment between the components. Monthly renewals intensify any inconsistencies between the different elements as they are all visible in a shorter period of time.
Packaging is critical in two particular respects. The first is identifying the thresholds at which customers will pay for functionality that enables additional value and implementing them in a way that improves recurring revenue. Second, and most significantly, is the adoption of a factor that drives price paid. Consumption is currently the most common but I believe a factor or metric related to customer value achieved will become more commonplace.
In conclusion
As the French say “Plus ça change. Plus c’est la même chose”: The more things change, the more they stay the same.
I have come to the conclusion that the only differences between value enablement with monthly or annual contracts are cycle time and intensity. I think many of the differences are not significant. If I were building a B2B SaaS company, I would seek annual contracts, with some form of value-driven pricing. Done right, that will give me cash flow and NRR benefits. I would couple that with an approach to value-enablement that has the intensity, cycle time and the associated capabilities that are essential with monthly renewals. I would want a culture where the whole organisation is so worried about losing each and every customer every month that at the end of each day, we ask ourselves “What have I done today to make customers successful?” Interestingly, that was one of the values at Clicktools, my first SaaS company!
