Can Turning Down Business Improve ARR?
January 8, 2020 | Contributed by: Mike Boland
ARR is the new black (in style and accounting terms). Denoting annual recurring revenue, it’s gaining recognition in the return-to-fundamentals backlash of the failed-unicorn era. As we examined recently, it’s also at the heart of SMB SaaS, and is a longstanding virtue of SaaS economics in general.
This has been top of mind for us as an additional lens through which to view the SMB SaaS sector in 2020. But it especially came to mind when reading recent insights from Web.com CEO Sharon Rowlands. Spoiler alert: This was during the process of planning an upcoming video interview.
In a Forbes Op-ed (referenced in Inc.) she asserted the sometimes-controversial viewpoint that you have to say no to some customers. Sort of the antithesis of the “get any and all revenue in the door,” this takes a more thoughtful and longer-term view about sustainable revenue and operations.
In other words, customers that are a bad match for your product have a greater chance of churning. Or it requires greater resources to satisfy them, given a deficiency in product fit. When measured against the cost of acquisition, this lower lifetime value can deem the relationship sub-optimal in unit economics.
There’s also opportunity cost from mismatched customers. Time is redeployed from serving good/recurring customers given fixed resources. This can happen due to cultural factors such as the prioritization of winning new between over serving existing business… always a delicate balance.
The underlying customer “mismatch” can meanwhile stem from how the product maps to their needs (or doesn’t). It could also be an overly-needy customer that’s a disproportionate resource drain. Identifying them isn’t always easy, nor is saying “no” to their business, given top-line consequences
But ultimately, what this comes down to is panning back to recognize sections of your income statement that sit below the top line. That’s where the detriments of bad customers are most often felt, given the factors above. There are also less-tangible costs such as potential PR hit from unsatisfied customers.
Based on all these factors, Rowlands advice is to set salespeople up to identify and land good customers. That can happen on a wider cultural level (not necessarily easy to do) as well as things like incentive compensation — beyond sales commission — that rewards behavior correlated to recurring revenue.
And that brings us back to ARR. The line of thinking represented above is aligned with long-term recurring revenue. We’ll reiterate that turning down business is easier said than done, especially given the pressure to grow the top line in any organization. But there can be larger payoffs in the long run.
And if it lends any additional validation to Rowland’s assertions, Web.com in October was awarded Frost & Sullivan’s 2019 North American Customer Value Leadership Award. Slightly different but related to all of the above, this is all about cultivating recurring business through award-winning service.
We’ll have the chance to go deeper with Rowlands on this and other success factors she practices. And check out the Localogy 20/20 conference in March when we’ll certainly address this topic, among others, throughout the program. It will be an ongoing narrative to define best practices in SMB SaaS.