The Three Ways Software Companies Retain Customers

One of the most cherished things in the software business, particularly for externally funded companies, is maintaining a low churn rate. This is especially important to SaaS companies with monthly subscriptions because the cost of acquisition is often very high for each customer. This means that in order for the company to make a profit, every new customer needs to (at least) stick around long enough to pay back the initial acquisition cost.

Everything after that is called "profit."

In order to make back the acquisition cost, companies generally employ one of three common strategies to retain their customers:

"Let's consistently provide value"

The ideal way you want to retain customers is by offering a product that's actually worth paying for month over month. As simple as that sounds, it's not the strategy that most companies adopt. Many strive for it, but they often supplement it with one of the other two tactics as precautionary measures.

It's pretty easy to spot companies that have adopted this strategy: they're customer-driven. This means that they actively seek and act on customer feedback and emphasize the user experience of the product. Customer-driven companies make every feature and interaction focused on providing and proving return on investment. If you're paying for something that's not constantly proving it's value to you, then odds are you're being subjected to one of the other strategies:

"Let's incur a high setup cost"

This is typically present in enterprise software. These scenarios typically look like this:

  • A customer (let's call him "Joe") spends a month researching the product.
  • Joe spends another month arguing with sales to get a good deal and convincing his boss.
  • Then Joe and his company go through a 6-month integration process, which includes product training, certifications, etc.
  • As a consolation, the salesperson offers Joe a "once-in-a-lifetime" deal on the software, but the contract can't be suspended or transferred.

The guilt of walking away from all the work put in and the seemingly "great" deal is too much for Joe to handle, so he never cancels the software contract, even when he starts becoming extremely dissatisfied with it. The vendor knows Joe won't cancel because they've proven this strategy with all of their other customers. In response, they offer the bare-minimum it takes to keep him (begrudgingly) using the product.

But there's a caveat here: in this scenario, the vendor's worst nightmare is that Joe takes a job at a different company. When that happens, the vendor is left with a new contact who doesn't share the same integration pain or guilt that Joe experienced. This basically puts the company back at square one.

Some of the more cunning vendors will try to establish multiple points of contact at a customer's company to quell hasty cancelations. If you're being manipulated by this strategy, you probably already know it.

"Let's make our value non-transferrable"

The third and final type of retention strategy is to make the things the customer is creating inseparable from your software. There are a number of ways companies do this:

  • No "export" buttons anywhere in the product
  • Proprietary subsystems (e.g. a templating language)
  • Saving/storing data in non-standard ways

Support software is infamous for having very non-portable information. Despite the fact that they all follow the format of "question" and "answer(s)," most support programs don't offer an easy way to extract the data and move it to a new system.

This is a common strategy among companies whose value is in historic data. Support ticket systems, analytics, and CRMs are pretty likely candidates for this strategy because historic data is (theoretically) rich with insights.

It's very difficult to know whether you're in this situation. You can have fun with this by calling up your vendor and asking them for a dump of your data in CSV format.

Undeniably, the best way to retain customers is to deliver "awesome" on a regular basis. While sneaky methods may work in the short term, it's not sustainable. The customer base for most types of software is smaller than it seems, and a vendor can quickly burn through it by souring relationships.