A Vice President of Marketing I once worked with had a saying that he would frequently use throughout his day: “Not that.”
His “Not that” saying was his way of staying focused on the most important tasks at hand and not getting sidetracked by extraneous events. “Not that” often comes to my mind as I juggle both professional and personal obligations. What’s most important – “that.” What can wait until later – “not that.”
As companies try to maximize revenue and profitability, they often try to determine which customers are most critical and must be retained (“that”), and which customers may not be as critical (“not that”) due to any number of reasons—misalignment between customer needs and solution capabilities, sky high support costs, or incompatibilities with future strategic direction.
Four Pillars of Customer Value
In a recent blog post highlighting Primary Intelligence’s Four Pillars of Customer Value, my colleague Jessica Bledsoe described different ways companies provide value in Customer Experience (CX) programs.
The four pillars include:
In this post, I’d like to explore the concept of Revenue Retention in greater detail.
Revenue retention addresses whether or not your firm is retaining the same amount of customer spend this year as it did last year. Consultant Lincoln Murphy explains that revenue retention doesn’t necessarily take into consideration the actual number of customers retained, just the amount of revenue retained.
If, for example, you’re able to upsell, cross sell, or charge more for your products this year compared to last year, you may still have lost customers but your firm will have improved revenue retention as a result.
Conversely, you might retain all of your existing customers with 100 percent customer renewal rates but still lose revenue due to the discounts your sales team applied, the refunds you’re forced to accept, or the simple reduction in the use of your solution by your customers.
Murphy highlights that most companies target revenue retention rates of over 100 percent to achieve year-over-year revenue growth. (Venture capitalists typically look for 110 percent revenue retention in high growth industries, such as technology.)
Customer retention is often the focus of most Customer Experience programs, and while retaining customers is important, it’s not enough. Firms must also focus on retaining—actually, growing—their year-over-year and long-term revenue.
Primary Intelligence Program Consultant Lisa Allen emphasizes the benefits of focusing on customer revenue, stating, “Customer Experience programs are a golden opportunity for vendors to lay the groundwork for ongoing success and future revenue expansion with their customers. Formal programs also detect any shift in the strength of the partnership by giving companies enough time to repair any blemishes before their customers even think of other vendors.”
It’s helpful to examine revenue retention in different ways:
- Evaluate and compare different time periods, such as different quarters or fiscal periods
- Understand revenue contributions from your key customers or strategic accounts
- Analyze revenue retention by different regions of the world
- Examine revenue retention by customer segments (Enterprise, SMB, etc.)
- Scrutinize partner channels with an eye toward revenue retention rates
Understanding your revenue retention track record in different areas of your business and doing comparison analysis will allow you to better understand which customers should fall into the “that” category, as well as which customers should be placed into the “not that” bucket.
What are your experiences with revenue retention? Please share them in the Comments section below.