The leaky bucket syndrome
Definition of Leaky Bucket:
Most companies concentrate on recruiting new customers to replace customers who move on, rather than seeking to retain customers. Andrew Ehrenberg coined the phrase ‘leaky bucket’ to describe this syndrome: in effect, firms are putting customers into a leaky bucket, and instead of preventing them from leaking away through the bottom of the bucket, the firm keeps topping up the bucket with new customers (Ehrenberg, 1988).
The race between Acquisition and Churn is a race that seems to get more and more complex for companies.
And the pressure for growth continues to build month over month, year over year.
While most companies have Sales and Retention as separate organizations, the reality is that they are tied together and responsible for growth, just in different ways.
If we think of each organization within a company as a muscle group, both Sales and Retention are muscles that need to be stretched and worked out to build strength, speed, and power.
Have you ever seen a person with a very muscular upper body but their legs are super skinny? Obviously, that person was not focused on their entire body.
Whereas a trained athlete and body builder, they train holistically so that every muscle group is growing and getting stronger.
Trying to out-run churn is a losing race
There are some companies that are losing the same amount of customers that they are acquiring!
They are essentially having to spend and invest more and more into sales just to be at the same place year over year.
That’s the same as a patient having an IV of blood transfusion while still having an open wound! If the wound isn’t closed, then the patient will never get better or even live. The same holds true for companies.
Let’s take a look at simple example where a company has the same amount of sales but with differing churn rates.
As you can see, the ending customer count for the Subscription Focus at Year 3 is 45% greater than Year 3 of the Traditional Focus. As well, the lost customer count is almost 50% less.
Now let’s look at an extreme example that isolates Retention.
While this is an extreme example, it highlights that having strong Retention will sustain your business.
Lastly, let’s look at how your company can still grow by increasing Retention and shrinking Sales.
While we never want to shrink Sales, this highlights that a company can reduce its sales efforts and still end up at a higher growth point.
Acquiring new customers is a key element for growth; however, for measuring true growth, it is about the Annual Recurring Revenue (ARR) that matters most, not how many new customers were brought in…as these simple examples demonstrate.
Fast facts
What’s the fix?
Below is a Retention Framework that helps strengthen your current retention efforts and ultimately reduce churn.
These are just a few fundamental items that will nurture the customer relationship and take it to the next level and further elaboration and deep dive into this will be in another article as there is no silver bullet that solves for this, but rather actions and adjusting as you go along.
This will ultimately pivot your customer relationship into a deep long lasting relationship.
Getting started
Trying to tackle this all at once is a daunting task as each foundational item listed above can be robust initiatives in themselves.
However, with that said, there are some basic actions that you can take to get you started on the path to increased ARR:
- Ask the question “Is this for the benefit of the customer?”
- Segment your current customers and put together a Retention Strategy for each one that answers:
- New revenue generation (new products/services)
- Increases lifetime value
- Build a Communication & Engagement strategy that supports the Retention Strategy
Take action, it does not matter how big or small of a step you take, just take a step forward in the path towards fixing that leaky bucket!