Once upon a time, in the world of perpetual licenses and revenue streams coming predominantly from new logo acquisitions, pipelines looked like this:
In today’s subscription economy, existing customers represent 70+% of total ARR, and have a significant effect on revenue – both recurring and new.
Consider the math.
In the calculations below, COMPANY has an Existing ARR (EARR) of $0 and generates $1,000,000 in New ARR (NARR) in Year 1. NARR grows at a rate of 20% each year, and EARR has a 90% retention rate (10% churn).
By year 5, EARR represents 67% of Total ARR, and by year 10 EARR represents 74% of Total ARR. Notice, too, that NARR becomes an increasingly smaller portion of Total ARR over time.
There is no getting around the value of existing customers.
However, there’s more to this.
There are two significant points to be made about this:
1. Existing customers that are loyal and referenceable advocates feed your funnel for new sales, which dramatically affects your Total ARR.
2. Budget and spend should be adjusted to reflect the value of customer retainment over new (logo) acquisition.
Let’s start with the first point – the value of existing customers as referrals. Consider the math when you reduce churn to 0 (100% retention rate on EARR) and increase NARR to 30% (reflecting the referrals your loyal, referenceable, existing customers provide). With a well-oiled Customer Success process, this is what happens.
By year 5, EARR represents 68% of Total ARR and by year 10, EARR represents 75% of Total ARR. That’s significant. But, the more powerful calculation is the difference in Total ARR when churn is reduced and existing customers serve as referrals that result in a 10% increase in NARR.
In Year 5, Total ARR is 43% higher (than the previous illustration), and by Year 10, TOTAL ARR IS 118% HIGHER!
To say that existing customers are important is an understatement. They represent a vast majority of your revenue by year 3 and they hold the key to a substantial increase in your Total ARR when they feed your funnel (by being references) for new acquisition. Taking care of your existing customers has never been more important. Customer Success must assure your customers’ experiences are consistently excellent so that they will be that key to new sales.
This brings us to the second significant point to make about the reality of EARR: Budget and spend should be adjusted to reflect the value of customer retainment over new (logo) acquisition. Customer Acquisition Costs (CAC) in the SaaS industry range from 20-50% of operational budgets. If you accept that your existing customers are actually more valuable to your overall revenue, then you should modify your budget allocations to reflect this reality. The importance of funding a Customer Success team isn’t really up for debate any longer. (And, the truth is that it will be a profit center for you if you do it right.)
The influence of existing customers on new customers cannot be undervalued. It isn’t unrealistic to expect that having a strong base of referenceable customers can yield a 10% increase in new logo acquisition. Once you fully recognize and claim the value of your existing customer base, budgets should be rethought to prioritize customer retention over new acquisition.
Now let’s revisit the original sales pipeline funnel. This old paradigm reflects an antiquated set of priorities where new customer acquisition was central to revenue growth. Recognizing that existing customers have more value in the subscription economy, the funnel for acquisition might look more like this:
Understanding the value of loyal customers isn’t a new concept. However, it is foundational to the executive decision to invest in Customer Success. The math is irrefutable. The next steps are pivotal.
Take the next steps and see how a Customer Success platform can impact your business and help create more loyal customers.