Contraction as a means to retention
Embracing lost ARR in the short-term and reactivating in the long-term
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Snowflake reported Q1 earnings last week and highlighted weakening consumption in April and May since Easter; extrapolating this recent slowdown in consumption has seen Snowflake revise its YoY growth guide down twice from 47% to 40% to 34%.
Usage patterns in consumption models provide a real-time pulse for demand trends, moving in lockstep with buyer health and sentiment. The implied inherent volatility in usage-based models is often derided as a flaw, but the flexibility conferred to customers is a strength that subscription models would be wise to emulate.
NRR has come under the microscope in recent months as companies aim to deliver more sales and capital efficient growth, as the economics of new logo acquisition continue to be challenging.
In these conditions, any lost ARR is regrettable.
However, the rise of product-led growth present a valuable window to reframe ARR lost to contraction.
When you consider that only 56% of SaaS licenses are utilised, applying product-led principles to retention yields a customer base that is both likelier to reactivate and less likely to be permanently lost. Consumption-based models naturally confer the flexibility to scale down demand when cost-cutting is the imperative - subscription businesses that similarly seek to align total cost of ownership with ROI on a more real-time basis will bear some pain in the short-run for compounding benefits in the long-run.
The principal long-term benefit of embracing contraction in the short-term is the snowballing effects of gross churn - reacquiring customers that have churned is significantly harder than reactivating customers that have downgraded.
Irrespective of where one falls on the spectrum of being product-led, the core tenet of product-led growth is instructive across acquisition, expansion and retention: leveraging the most powerful intent signal - product usage. Insights gleaned from product usage provide ample ammunition for product-led retention.
Product-led retention typically boils down to deriving insights from usage data to continuously measure churn risk and proactively equip champions with data-driven arguments for why your product creates more value than it costs, particularly as the centre of gravity for renewals shifts upwards inside organisations.
In the context of contracted ARR, taking a long-term view on ACV potential across the customer base provides the business case for optimising gross retention at the expense of near-term NRR health. In practice this means channeling the customer success and product organisations to embrace downgrades and unit reductions with proactive measures, such as flexible packaging, and reactivating customers into upper tiers as conditions improve.
Executing on this reframing requires buy-in from multiple stakeholders, including investors and the board. CEOs and CROs grappling with how to treat contraction can gain visibility into the best course of action by examining the attributes of the contracted customers, especially the cyclicality of their various industries. The higher the exposure to cyclical customers, the stronger the case for prioritising gross retention.
As former CEO of Slack, Stewart Butterfield instilled this ethos from the very beginning, de-provisioning un-used seats:
We instituted what we called the fair billing policy.. we can easily detect accounts that are inactive. You only pay for the ones who are active.
SaaS management solutions like Vendr, Tropic, Zylo and others (including Ramp) will propel a closer alignment of utilisation to units as it is, and so those vendors that pre-empt these steps and prioritise customer satisfaction will be strongly positioned to reaccelerate.
What I’m Reading
Why We Will Never Have Enough Software Developers
Nnamdi Irregbulem presents plenty of data to point out that the high churn rate of software engineers to other professions is a perennial problem owing to the inherent structure of software development: fast-turnover of skills.
Windows and the AI Platform Shift
Ben Thompson covers Microsoft’s Build developer conference and notes that Microsoft’s concession of superiority during the mobile and cloud shifts could be an omen for Apple’s recent stretch of supremacy. Also interesting to see what Azure AI studio entails for vertical copilots.
Abraham Thomas makes a compelling analogy between the travails of building a tech company with the perilous first expeditions to the South Pole. The underlying lesson is the importance of speed - speed begets shots at goal and serving customers faster.
Google I/O, Bard, and Implications for Search
Arda Capital covers one of the more pressing questions in the discourse on how LLMs affect distribution, namely the impact of chat interfaces for SEO. 80% of search queries are non-commercial and therefore display no ads; AI-driven search results will unlock opportunities here as a personal assistant. The implications for content marketing and inbound channels will be interesting to study.
Radical Reads: Ten charts explaining AI today
Charts encompassing enterprise AI adoption to the split between academia and industry-driven progress, to data shortages.