Growth and new business VS retention: Which metric influences a company’s acquisition.
Founder and Managing Partner
Today on the show we have Lowell Ricklefs, CEO and co-founder of Traction Advising.
In this episode, Lowell shared his experience from a buyer’s perspective of SaaS businesses, the reasons to acquire vs buy, and how they evaluate potential acquisition targets.
We then approached acquisitions from the seller side and talked about when the right time is for Founders to start to think about an acquisition, the steps they should take before they begin the process, and the key metrics that influence the valuation they get.
As usual, I'm excited to hear what you think of this episode, and if you have any feedback, I would love to hear from you. You can email me directly at Andrew@churn.fm. Don't forget to follow us on Twitter.
[00:01:27] Andrew Michael: Hey Lowell. Welcome to the show.
[00:01:29] Lowell Ricklefs: Thanks Andrew.
[00:01:30] Andrew Michael: It's great to have you for the listeners.
Lowell's the founder and CEO of traction advising, which specializes in helping B2B SaaS companies with over 5 million in ARR get acquired and whereas helped over 30 technology companies get acquired prior to finding traction. Lowell served as co-founder and CEO, a chair. CEO of $120 million public company startups hero and a global VP of Rockwell.
He's also a global mentor investor board member and CEO coach. So [00:02:00] my first question for you all is you heard a lot about startups not being sold, but rather their boats. Do you agree with.
[00:02:08] Lowell Ricklefs: I do, but I think for different reasons and other people talk about it, uh, I view selling a company from the buyer's perspective.
I mean, just having been a part of acquiring, you know, over a dozen companies, I knew the M and a process really well. I knew why, um, you know, fortune 500 companies, um, mid tier companies would buy in the process that took to get through. So I look at like, what's the strategic fit from the buyer side. So we, we really approached selling a company.
As walking the buyers through the buying process, we try to find, we look at the different segments of why someone might buy your company. Like, is it a product extension? Is it geographic extension? Um, is it completely different, but do, do you sell to the same buyers that they do? Like, so your product is bought by, um, the head of HR at SMB, right?
So it's just another [00:03:00] product that they can buy that their existing Salesforce can sell into. So, um, I, I think some people. Misunderstand that to believe that they shouldn't try to sell their company, that they should wait until someone reaches out to buy them. And I think that's a mistake because the reason companies are so aggressive at reaching out to try to buy you is they don't want to be a part of a process where they have to pay a premium.
And if they can find you on their own, it might be a right fit and they might even pay. What you're looking for, you will always get a better deal if there's competition. Uh, simplest example would be one of the companies. We were a part of original offers were at 40 million to the competition, eventually sold for 110 million.
So 70 million in value is created by the same people, same buyers, but their price went up because the fear of losing it to the competitor outweighed their desire.
[00:03:48] Andrew Michael: So FOMO caved in and, uh, then the valuation went up. So that's very interesting, like the lens that you viewed from as well, obviously, like you say, having had this experience and as a [00:04:00] buyer side, maybe we could start there.
What are some of, like, what would a typical process look like on an M and a side of things like, uh, for companies, do you start out internally with the sort of target, uh, company or. Idea in mind and then God looking like maybe walk us through what a typical process would look like on the buyer side.
[00:04:19] Lowell Ricklefs: Yeah. So we would typically be representing the seller right in the sales process
[00:04:26] Andrew Michael: actually now more from the buyer side. So you mentioned you quiet the total process. If you're a buyer, what did that
[00:04:32] Lowell Ricklefs: look like? So a lot of what you'll see a lot of it on the buyer side is what you'll see today. It depends on, so you've got financial buyers who have pretty aggressive marketing teams and they may reach out to hundreds and hundreds of companies.
And they're just really trying to be on your radar. They may not be serious at buying at this point in time, but at a strategic, when you're looking at buying a company, you've got a, you've got a need, you know, you might be, uh, uh, for example, once we were European company based in [00:05:00] France, strong presence in Europe, And we wanted to move into the U S and we could grow organically, but it's a big market.
And so, you know, you look at how could we buy a company, probably a competitor that's already in that space that already has a footprint. And, and, and so we did, so we reviewed, uh, the companies that were out there, uh, those that look to be the best fit, both in size and culture, the different metrics, um, the team that's, that's involved in it.
And then, you know, reach out, have some conversations. Are they interested in having that conversation and it's delicate, right? Because particularly when you're talking to competitors about buying them, you, you need to understand everything, but you don't necessarily want to share anything because they're competitors.
So it's a delicate dance, um, to kind of build that level of trust and align expectations in future. Combination of the entity. Um, one of the things that's important, I don't want to get too tactical through it all, but one of the things, once you get into it, you understand, are there's a strategic fit, [00:06:00] then you look at, well, the idea is one plus one equals three.
Right? Sounds simple. But then you, you you'll literally take the P and L of both companies and you'll match them up, you know, line by line. They're always a little bit different and try to understand. Well, we don't need to market two brands. We'll market one brand. So how much does that save? You know, and if we've got two products, instead of one product, we've got multiple data centers, this is before, you know, AWS, we only need one.
How do we migrate from one or the other? So there, there are areas where you'll invest because you know, it will cost more and there are areas where you can, you can save money, but. Every buyer has a combined model that they believe what the revenue growth will look like as a combined entity. What the cost structure will look like as a combined entity.
And the idea is that that looks. As a combination of the entity then without, and then the other thing that I think is important is once, once a buyer is interested to the point where they're building out those models and those models look good, buying your company becomes a part of their future. So it's no longer something that would be nice to [00:07:00] have.
They now wake up every day, imagining you as a part of their future. So losing that, um, is something that they don't want to happen, which is when they'll often pay more as a result or give you favorable. Okay.
[00:07:12] Andrew Michael: And in that sense, so from a buyer side of things that they almost really, um, putting that into the projections side as well, and sort of saying, okay, like modeling this out to bring this new business in what's that going to do to revenue?
How's this going to improve growth over time. Uh, and like you said, Seeing that future unfold in front of them. So I can definitely see how the farmer can kick in then as well, when they've maybe progressed a little bit better to pull back. And it's maybe part of some aggressive targets that need to be hit elsewhere from other obligations that they've been made.
Uh, but that's in the public or private markets.
[00:07:45] Lowell Ricklefs: Yeah, cause you're often fighting against buy versus belt. Right? It's a, you know, we could build this, but we already have a backlog that's three years out, but if we buy it, we can have it today. And whether it's a product or a new country that that's often with a strategic that's [00:08:00] often I almost guarantee that that discussion will happen internally.
So why is, how does this advance them? Did reach their goals. At the end of the day, the buyer only cares about their reaching their objectives, and most companies struggle to hit their growth targets. Right? I mean, most companies that you talked to very few year in year out are exceeding their, their, their targets for organic growth.
So often they'll augment that with, um, acquiring companies offs.
[00:08:27] Andrew Michael: For sure. And I think, yeah, it's like, it's just a delicate balance that needs to be striking when you said like the build versus buyer. I think that is definitely, uh, one of the things often in my mind, and maybe you can correct me if I'm wrong, but I think when you think about like the build versus buy concepts, I think for a lot of big of these strategic organizations, it almost like the buying pays itself off with.
12 months, 18 months. Like, are there any sort of calculations where you're coming in and you're saying, okay, we're going to make this acquisition, but we anticipate it's going to do X amount of revenue. Is there any sort of [00:09:00] time period where you like the payback period that you set when setting out sort of an acquisition targets?
[00:09:06] Lowell Ricklefs: I would say if, uh, the financial buyers in particular, you know, they've got their internal rates of return, you know, they will look at what what's the return on their investments. So they're very locked into that. In fact, That's the basis from which they make decisions is what's what's the financial return because their goal is to make money on invested money, right?
That's at the end of the day, they're their banks, uh, where a strategic really has a business that they're trying to operate. So it's, it's less tied to sort of that return on the investment. I mean, it is, it's more, you know, hitting the strategic targets. It's the other day always comes back to resident revenue or profitability, right.
One or both of those. And they will have targets in place to, to kind of guide their decisions to make that
[00:09:55] Andrew Michael: happen. All right. So we've talked a little bit about the bias [00:10:00] side now, and from the perspective of strategic, let's talk a little bit about the seller side now from a startup founder.
Uh, as you mentioned, like you typically work with companies doing over 5 million an hour or. First of all, like when is a time for a farmer to actually start to think about the initiating this process and what would be some of the metrics that you would say, okay, like this is where I'd want to see a business before they even start thinking about looking for a buyer.
[00:10:25] Lowell Ricklefs: Yeah. Good question. Um, I, I get asked that a lot when entrepreneurs will call and they'll say, you know, when, when should I sell? It depends on a lot of things there, kind of, you've got, you've got personal. And then I think business reasons for wanting to sell sometimes. Uh, typically people are five to 10 years into the business companies that ended up in that sort of five to 10 million range are typically.
Uh, linear growth companies. So they, they didn't hit that hockey stick, that exponential growth that they had thought they might hit when they were new. Uh, those are good businesses. Those are great businesses. Honestly, in that area, I would advise [00:11:00] someone if they do have that exponential growth, that, that they, they might not want to sell.
They might want to realize that exponential growth because the company will be worth exponentially more if they can hit those targets. But you've got on the personal side. I do see some people 5, 6, 7, 10 years. That either want to de-risk their personal balance sheet, right? They may, they may not have any money.
It's all, but they're on paper. They're worth quite a bit in the company. And so they want to de-risk their balance sheet. So become a, quite a part of something larger than. Some chips off the table. They may have some institutional money, right? They, these funds have a 10 year life cycle. They may have gotten in the middle of the fund, you know, five years later, the fund is looking to liquidate their investors.
So maybe pressure from investors to liquidate. There could be, um, some macro level, um, issues that are, that are affecting things. For example, you may be in an industry that, that wasn't that high. But then COVID may have [00:12:00] made that industry particularly hot, which can be good and bad because it will create winners and losers.
Right. If you've got, um, you know, Microsoft and, and, and companies that will take out a competitor of a billion dollar valuations, or start investing hundreds of millions or billions of dollars into that space. Well, the space is now hot, which is good, but it also makes it that much more difficult for you to compete.
If you're a 6 million ARR company, that's kind of bootstrap running on your own way. So you'll see a lot of consolidations start to happen when an industry becomes hot and big, big players get taken out. So that's a good reason to consolidate because if you get left behind you, your risk that your company may be worth less.
So there, there are a lot of reasons. Um, and some of them are personal, you know, and some of them are, are business-related. So it really just depends. And often we'll, we'll just talk people through the different issues that. Discussing, we don't have all of the answers. We sometimes have thoughts and feedback that we can give, but it's a matter of weighing all of that in [00:13:00] the, the, the risk of, of continuing to run on your own and the reward of running on your own, uh, versus the risk of, um, of, of waiting.
You know, another thing that comes up quite a bit, valuations, public market valuations over the past three years. Now, if we were having this conversation three months ago, Maybe four months ago, you know, had doubled, right? I mean, they were, they were exotic public, the private valuations, particularly for the smaller companies.
Hadn't quite doubled. They'd maybe gone up 50%. Now you see some of the public company evaluations drop the private valuations. Haven't dropped as much. So there, there are similar, but people do worry w with, with basically free money out there for the last number of years, valuations were able to run up pretty high as interest rates rise.
You know, a lot of this is fueled by leverage buyouts. As money gets more excited. You know, the expectations for return come down in the multiples, kind of come down with it. So sometimes people want to, there's been a bad rush in the last year for people that say, [00:14:00] Hey, the multiples are as high now as they've ever been in history.
I want to get out before things collapse. Right? Cause you've got rising interest rates. You've got, um, you've got a war. You've got a lot of things that are going on. That probably aren't good for the global economic picture. Like where it ends up. I don't know. I don't have a crystal ball, but some people are.
[00:14:17] Andrew Michael: Yeah, for sure. I think you're definitely, like you say three, four months ago, that would probably like the peak and sweet spot. Uh, if you're ever thinking of selling your company, I think for the foreseeable future, at least like I think there's a lot of uncertainty in the markets now, and this is maybe also something to think about. So obviously there's the timing and you mentioned like there's different personal reasons and there's other motivations and reasons why you want it, but the timing in the markets.
Is there sort of a, such a thing as can you Tom, the markets or it's like, what do you advise your customers typically? So has your advice changed today as you had like three, four months ago when it comes to like helping a company find a buyer.[00:15:00]
[00:15:00] Lowell Ricklefs: You know, I, again, I, I don't think you can really time the market, right? If you look at the public stock markets, um, I think you're more lucky than good if you really know. And trust me, this comes from a background of, of 30 years of thinking I could and trying and seeing multiple trends, including disasters and thinking.
I knew when to cash out and then sit on it and wait until it hit a low. And then. It just turns out you, you, you really can't the smartest people in the world. Try to time it. And I don't think you really can't. I would say. The, the valuations are, are high right now, I would say unsustainably high, particularly for the, the CDE rounds for fundraisers.
That, that just, just didn't make sense. I think they're coming back down to more realistic levels, but on the M and a front, I think the valuations are, I think they're high, but they're reasonable. I think it, it makes business sense for them to be where they are. I don't think [00:16:00] they'll collapse anytime soon.
I don't think they'll go a lot higher, but you know, in 2007 we didn't think they would drop, you know, and they did right. There was, there was a liquidity problem. Then you couldn't get access to money. So you couldn't leverage buyouts. So the multiples, the market just dried up. I mean, you just, I have to console a company, so could something like that happen again?
It, it could, can you predict those things? Um, I can't, so I, I think it's tough to predict. Um, yeah, that's the short answer. I don't think, I think it's tough to protect.
[00:16:33] Andrew Michael: Cool. And then the next question I had for you is you sort of mentioned that 5 million era companies get acquired, like why that specific number, like, what is it about companies above that threshold, um, that you like to work with?
[00:16:47] Lowell Ricklefs: So it really comes down below a million. You can sell your company, but it's really hard. You've got to find like the right fit. It, part of that is it, it costs the buyer anywhere from [00:17:00] on the low end two to 300,000, you know, on the higher end, you know, close to a million bucks, what they'll spend in expenses to buy the company.
And so you've got that expense. So do you really want to spend a million bucks to buy a million bucks in revenue? It's like, is that really a good use of money? The other thing is most companies are trying to move the needle with the revenue, at least to some degree, you know, they, they want the team, they want the tech, then what, the capability behind the tech.
But, but they want to bump the needle on the revenue. So, you know, if you're a a hundred million dollar company and you buy a 5 million company. You know, 5% is decent, like that moves the needle. But if you're a billion dollar company and buy a company with 1 million in revenue just doesn't move the needle.
So, so that makes it difficult. There are. So there just aren't many you you've, you've proven and, and I don't want to minimize the hardest to get to nine bucks. It's super hard, but at two to three, you're a little bit more viable. Um, but you'll have fewer choices when you get above five to 6 million, it moves the revenue needle a little bit, you know, for [00:18:00] most companies it's, it's noticeable and it's easier to see a path from five to 50 than it is from like one to 50.
It's still a bit of a stretch if you built out a fair amount, more infrastructure, but I, I kind of coach people, people usually think about what's my company worth. And then I tell them, you know, structure will matter more than the price. $20 million offer. That's all cash at close is very different than 5 million cash or close and 10 million in private stock and an earn-out.
Right. I mean, there's also, you say, wow, that's really risky. So I think it's, um, it, it, it depends a lot on what the structure looks like as well. Not just the, the total value.
[00:18:36] Andrew Michael: Yeah. So obviously there's then like different aspects to this to consider as well going in, um, one of the things that we haven't really touched on then is sort of specific metrics. So one of them being like the error target, and I think it makes sense in terms of what you mentioned now, having. Being something really significant in terms of revenue, because then it makes financial sense for the end buyer as well.
And it really moves the needle maybe in terms [00:19:00] of their revenue targets and so forth. But are there any specific metrics that founders should be really like focused on? And, um, in your opinion, what would be said, like the top three metrics that potential buyers are looking to see, uh, when acquiring a company.
[00:19:15] Lowell Ricklefs: Yeah, I would tell you, I would even start with, you know, historically companies were bought on multiples of EBITDA. So of profitability, SAS, I feel like really kind of created the whole concept of companies actually being bought on multiples of, of revenue being valued on multiples of revenue. And there's a reason behind it, and it really comes down to growth and retention.
Those are the two primary reasons people pay premiums for SAS companies. Uh, there are multiple metrics that they'll look at and they'll do a fair amount of due diligence, but that's really what it comes down to. And it's because they're buying a, a quote unquote, you know, guaranteed revenue stream over time.
And retention really is a measure of the quality of that, um, revenue stream over time. [00:20:00] If you've got 50%. Churn. It's not really SAS. It's not really long-term subscription revenue. It's a two year contract and it, and, and those companies get valued, like a licensed software that that's got into your license.
So, you know, if you're, if so, so the one metric on the growth side, if you're shrinking it, it can be difficult to sell the company to anyone at any value. A buyer once told me no one wants to catch a falling knife, right. Kind of graphic, but it makes sense. Um, flat growth is okay. If you're at, you know, over 40%, but you need any category.
And if you're over a hundred percent, it's it puts you in a pretty elite category, uh, retention, which I know you, you know, a lot about, you know, the, the logo churn and net revenue retention is what really determines the level of interest and, and drives a lot of the value. I mean, other things they'll look at your total available market.
Okay. Growing a lot, but your total markets, 10 million, you know, it's, it's a nice business. It's it has some value, but it [00:21:00] it's got a real limit. It's got a cap on it. Uh, profitability does matter. Um, you see anecdotally companies that, that get sold for exotic valuations that are burning money, but I'll tell you the vast majority of companies that get bought and sold, or at least revenue neutral.
And when it comes from. Either, if they'll pay a premium for your company, they don't want to have to continue to invest in it going forward. They want to pay for it. And they want the thing to at least run on its own or be profitable. And it's a leap of faith part. It depends on the gross margin. They can dig into it, but if you're burning cash, it does make it tougher.
The other one that I get throughout there and sorry, I know this is more than three is customer concentration. If you've got 80% of your revenue with one client that might feel great while you're building your business, um, that's a liability when you're selling it, because if that one client goes through.
Your business is a fraction of what they just paid for it. So those are kind of the core metrics that they will dig into to determine the valuation of.
[00:21:53] Andrew Michael: Yeah. And it makes sense. I think like, obviously one on the last point, if you have the majority of your revenue with one customer, [00:22:00] that's a very scary place.
I mean, even for a founder to here. Um, but yeah, ultimately like buying a subscription businesses and SAS is that you ultimately only have a subscription business if people are in Ewing. And like you say, I think the, um, the revenue multiples then comers or results in. How much does the revenue multiple, how much is the revenue?
Multiple will dictate it by, um, the retention rates. So you mentioned logo retention, and you mentioned, uh, net retention, uh, in our, how much does that influence the final, uh, multiple that gets given,
[00:22:36] Lowell Ricklefs: um, dramatically. I mean, I think it's arguably. The most important metric, um, and the one to, to get right.
Really focus on, on getting it right. You know, if you've got, you know, if your net retention is, you know, 80% or below, I don't wanna say it's a tough company to sell, but it does. So two answers to your question. One is it affects the [00:23:00] valuation. But before that it even determines whether or not a buyer is interested in pursuing it, or whether they pass, if certain metrics.
They won't pay anything for it. So, you know, but if you can get 120% or higher net retention, 130, 140% extremely attractive and really makes people want to dig and understand what's going on underneath that, I think that says more than anything about the quality and the value of what you're selling. If you've got high net revenue,
[00:23:32] Andrew Michael: Yeah.
And if you're sitting at the one 40 mark, I think you're really in sort of the elite category there. I think some of like the category leaders, if you see today and we've seen the stock market site perform over of late, it really is like that net retention is one of the main drivers. I think even in the public markets you see with the valuations that startups are getting.
And I think more and more now, like people are starting to understand the value of retention when it comes to growth as a really, really powerful lever. [00:24:00] So obviously these metrics are important then. What are some of the things that you advise startups to start thinking about in terms of like preparing for, um, due diligence when it comes to an acquisition?
So obviously like the buyer's going to want to mention a few things. And you also mentioned, like, in the case, typically, maybe if it's a competitor, there are certain things you're going to want to share, but things are going also want to keep private so you can make sure you're not exposing too much.
How do you advise founders to think about, uh, what the. Information to provide through the due diligence process and what should they be a little bit cautious.
[00:24:35] Lowell Ricklefs: Yeah, I, some of it starts with, um, the not so interesting back office stuff. And some of it's more on the, on the front end. I use the, the, the, the house analogy quite a bit.
If you're just selling your house, you should, you know, clean up the yard and put some paint on it and, you know, get rid of the dirty carpet. Um, it's kinda similar. So there's some foundational stuff in the background. When it's three of you writing [00:25:00] code and a business idea on a napkin. You know, spending money on attorneys for IP assignment, you know, it doesn't sound like a big deal, but if you've got three.
You know, or however many founders and people are touching the code and you don't really formalize things for a year or two. And then sometimes the three of you may not get along, you know, 10 years later when there's an exit might even be on speaking terms. And the buyer wants to make sure that you've got.
That everyone that has written the code signed an IP assignment. If someone hasn't done that, it's common that someone won't have signed it. You need to go back and get them to sign it. And that can be difficult. So get your back office in order, make sure your financials are accurate. Most small SAS companies do cash financials, which is, which is fine.
The purchase will almost always be predicated on a cruel, um, financing. So they'll, they'll do what they call it Q the, during the purchase. And they'll, they'll, they'll effectively create a set of a Crow, but, but you'll want to make sure that you've got things accurate that the revenue is accurately reflected.
It usually is. It's the [00:26:00] expenses where you'll see are not always accurately reflected just sometimes you just. Part-time bookkeeper that just missed some things, but you want to make sure that that's correct so that your business truly is profitable. Um, and under a cruel, sometimes it, it may look like it.
If you're pulling in long-term contracts upfront, it feels profitable because the, the checking account keeps growing. But, uh, it might just be that your top line revenue growth is outpacing your, your expenses on a quilt might look a bit different. So, so that part makes sure you get it straight. And then, you know, You know, it kind of comes back to on the, on the retention thing.
There, there, there's simple things I think people can do when you're building a business, you sign up anyone under the sun and if they churn, in some ways you don't really care, you're trying to, you're trying to make money. You're trying to stay alive, generate more revenue. And as, as you well know, it does matter when you're selling your company.
Like if you've got a lot of people that sign up and they look badly on your turn metrics, you want to find a way to put them on a trial or make sure that they'd actually don't, [00:27:00] don't hit those numbers. You know, people should, you know, long before they sell, take a look at, you know, client services and, and the effect on keeping clients, as opposed to just bringing new ones in the door.
I see a lot of companies who are really good at selling, but they don't give much thought to, you know, retaining people. And as, as again, as I think I'm speaking to the choir here, but, um, it it's critical that you keep people it's much easier to keep them than it is to go bring in new ones. So those are, those are kind of the, the high level items to start off on details of.
[00:27:34] Andrew Michael: It's interesting hearing you say that. I think as well, from the perspective of like a lot of companies not paying attention to like customer success and client services. Um, because obviously I think I definitely have a bias from the people I speak to and the information I consume and I hear, and it definitely feels like that has changed a lot, but yeah.
Do from Thompson. I'm curious stories like this, where you go into companies and people haven't paid enough attention, um, to turn it into retention and really like getting [00:28:00] the ducks in a row and aligned. And one of the things I think as well, Early stage companies, like, as you said, you just want to get the revenue.
And I think like the way, the analogy that I like to think about is like, if you're trying to build a fire, uh, like typically what you're going to need in the beginning is a little tweaks and a little bit of like fire lighters and fire thing to get the engine and to get the fire starting to burn and over time.
Put in logs, which become your ideal customer profile. And those are the ones are going to keep the fire burning bright and thing. But you always going to be burning through a certain amount of this fuel. That's going to just need the business grow, but ultimately you need to be getting better and better than understanding and identifying like that ideal customer profile.
And like, as you mentioned, like when you have sales teams, like the sales, this is who we selling to. Like, if this profile doesn't meet. Then, like you say, go on to trial or finding another plan for them. But I think early stage companies, it's very hard for you to just sort of say, okay, we don't want this revenue now.
Like we need to focus on ideal customer profile to, to like [00:29:00] ensure we have good retention numbers because ultimately I think there's always going to be a certain amount of churn and that's acceptable. And it's about figuring out the right balance, I guess, in the timing, as you say, like when it comes to selling, like what's going to reflect better if.
Turn down a little bit of revenue in the short term to focus on increasing retention in the longterm or revenue. And that's also why I was asking the question of like, what is more important, I guess, is like, is growth and new business versus retention? Like which one would you say of those two would be more critically evaluated.
[00:29:34] Lowell Ricklefs: Uh, I'd probably say growth through, uh, like high net retention, but that's cheating. Um, I get asked that question and I've asked that of some of the buyers. I said, I get asked this question, like, which one is more important and they just kind of say it, it just kind of depends on the business. Um, but I think, but I would say as you, as you reach the limits, like a high growth company with low retention, doesn't have a lot of value, a lower growth [00:30:00] company with extremely high retention opens people's eyes.
So I think. If you look at, if you built around anything, I think you want to build around that retention and kind of back to your, I like your fireplace analogy. I do think some people just don't stop and think about. Asking their clients who left. Why did you leave? Right. I mean, it just, just, but just having that mindset to why don't we, cause that's who you want to find out that get honest answers from the people who leave.
Why are you leaving? You know, w was it a wrong fit from the start? Is there like what's missing? What would have made you stay and start closing those gaps? I think, um, is often not very hard to do, but just requires you need to stop and, and focus a little bit differently than you do for that heavy. Sales effort,
[00:30:45] Andrew Michael: push.
Um, ah, I think another thing I like as well to talk about is when you told like us and customers, why did you leave another good one tough points it's relate to speak to your customer is asking people that have just renewed it. So if you're on annual contracts and I've just renewed my contract set the same [00:31:00] similar question, learning.
What nearly stopped you from renewing today? Um, because in that sense as well, you're getting like, what are those pain points, potentially. Some of the customers that ended up leaving for, but you still getting it from potentially a better fit customer who stuck around irrespective of like the shortcomings that the product might have.
And they're probably more likely to be responsive and to give you that feedback at that point in time, because they've still got to use you back another year or 18 months, really four months, sort of the contract length. Um, Cool. I think we're running up on time. So I want to make sure I ask you a couple of questions.
I ask every guest, uh, let's imagine a hypothetical scenario. You joining your company, join churn, and retention is not ingrained at this company. And the CEO comes to you and says, hello. Like we are to turn things around. You're in charge. We have three months to do it. What do you do? The catch is you're not going to tell me that I'm going to go speak to customers and speak to people that left and identify the biggest problem and do that.
You're just going to pick one tactic that you've seen be effective at companies in the past and run with that. [00:32:00] Blindly hoping that the same principles and tactics applied would work at this company.
[00:32:06] Lowell Ricklefs: Well, wait, it's tough because the first thing I'd love to do is go talk to people and you know, that all that matters is what they think.
But yeah, I dig into the data I would want to understand is what are the patterns in the data of who's leaving and why? Like how long have they been around? Are they SMB? Are there certain industries or verticals that we're stickier in are not sticky with? Um, I mean, I would, I would dig through, uh, I mean, customer support tickets.
I don't know if that's cheating. I mean, that's, that's anyone that's reached out or like, what are the biggest complaints that we see? Um, and I, I, I I'll tell you I'll just do this myself. I mean, even when, you know, let's see over $120 million company, I would, I would dig in, I want to see what that customer experience was like myself.
I would, I would, I walked through it cause you can talk about it at a high level, but until you experience it as a real person, you're like, well, this is dumb. Like that was, I hated that experience. Why do we do this? Um, But I, [00:33:00] I dig into the data and try to see if there's a picture in the data that, that points me in one direction or another.
And, and even like a, like a, honestly like a word cloud on some of the support tickets to find out what, what are people talking about? The most, the things that kind of jump out as a, Hey, this is this, these are things people are talking about, or this is a common theme. Um, or those, yeah. And look at like, you know, who's turning the most is that people that have been around for a year, two years, is it like one year people that are spending hours of people that have been there two, three years.
I don't know, again, I'd like to slice and dice it as much as possible to try to see a picture and then zero in, and then ultimately I'd eventually want to go talk to those people. But if I had to find out why, they're, why they're turning out as, as well as talk to the customer, support people about what, what do you, why do you think they're, what do you think they're true.
[00:33:45] Andrew Michael: It's sort of a cop out answer because you get to speak to there.
[00:33:52] Lowell Ricklefs: I'll stick around.
[00:33:54] Andrew Michael: Uh, last question then is like, what's one thing that, you know, today about general attention that [00:34:00] you wish you knew when you got started with your career?
[00:34:04] Lowell Ricklefs: Um, well the one thing I guess would be, I think the simplest thing would be. To categorize some people differently, like until they're truly a long-term subscriber, don't count them in your metrics. I think just talking to, to buyers who are very, very good at this, some are publicly traded. They're they're very good.
Being smart about when someone hits those metrics or not. And it's two things. One, it hits the metrics, which, which looks good. Uh, but they, they, it also, it makes them better at screening out people that probably aren't good clients for them. So it's just a smarter way to do business. That that was by the biggest eye-opener.
[00:34:53] Andrew Michael: Yeah. So just to unpack that and understand a little bit what you're saying and correct me, if I'm wrong is really trying to segment [00:35:00] your users better, to understand sort of, uh, what are the right fit customers in that sense and how that impacts churn and retention as a result. So from my understanding, maybe this is something like a similar episode we had previously, um, from, we were talking with the CEO of a Hora pulse was how they went about dissecting and looking at churn was really like.
They did sort of the exit survey asking why did you leave or, or thing. And they've got to realize that, okay, 20% of our customers, because we SMB stop using us because they small businesses and they went out of business. So that 20% is not really channel retention. That's. Just the nature of doing business with small business companies and maybe the same thing applies in, in sort of larger clients is where you realize, okay, if a customer is not a good fit, like they're going to come for two, three months and they're going to turn a new way.
But finding that ideal segments turn, did I get that right? Or were you saying something else? Yeah,
[00:35:54] Lowell Ricklefs: I think it's almost like qualifying your buyers, like knowing who the right fit is or [00:36:00] understanding who's just a bad fit. Like you can't fix it for them. Like, you know that they're a high propensity. Uh, it is a part of it.
I think it might be different things for different business, like if you're SMB versus enterprise, but I think if you're enterprise, in some ways it might be, um, we are not going to do a freemium model or, you know, we're, we're going to give you like a seven day trial instead of like this freemium upsell and it's, and we're going to raise the prices like it's it's now you may lose a small percentage of people that that would have upgrade.
But it's going to force people to be the serious unified who this serious buyers are. They're not going to spend that much money unless they're serious. You're kind of screening out people. Now you will lose a few, but those.
[00:36:45] Andrew Michael: Yeah. On the other side. Yeah. Cause I've heard of as well other companies, and I'm not sure how much I, I live in this other companies where they say, okay, 60% of our attorneys happening in the first 60 or 90 days, we only consider somebody a [00:37:00] customer of the 90 days.
And when we look at retention, we're looking at retaining customers for people that have been with us for longer than three months. So they sort of. Bucket in terms of like high churners, like first 60 or 90 days, we don't even consider looking at retention metrics during that period. We start counting people as retained customers from 90 days onwards.
And, uh, I'd be interested to hear your perspective on that because in my mind it sounds like I'm cooking the numbers of it. Uh, in this aspect, when we're looking at essentially it does make some sense to, in the logic of explaining.
[00:37:36] Lowell Ricklefs: Yeah, I would, I would consider that a trial. So if the first 90 days were trial, but you can't just randomly look at the data and say, you know, Hey I right.
120 days, it looks good. Now it's 60 days, but I would, I would consider that a trial the first 90 days, it's like an employee on probation. You know, they're not an employee yet. They're, they're, uh, I don't know what they're called, but they're on probation and the rules are different when you're on probation than they [00:38:00] are once you're a full employee.
So. Put your, uh, put your customers on, call it probation and you can fire them and they can quit and it's okay. But once they're a customer, then, then you get to work harder to keep them. But maybe, I don't
[00:38:15] Andrew Michael: know, uh, see the way your friend did as well. It makes more sense. Cool. Well, lo it's been a pleasure chatting today.
Is there any final thoughts you want to leave the listeners with? Like anything they should be aware of? Uh, before we end today?
[00:38:31] Lowell Ricklefs: Um, I mean, I just appreciate a hardest to, to build a business. I think it just helpful to take the time. I think. As a former CEO and a business, it's easy to lose sight of the forest through the trees that you're chasing.
It's really, really hard. Um, so I think take a step back, talk to people that aren't as close to it. Um, I mean, people like yourself that, that, that can take a kind of an independent view of some of the issues that you're struggling [00:39:00] with. And. I think can help you solve some problems that, that are tougher to do when you're, you're in it.
And you're driven by the urgencies of the.
[00:39:10] Andrew Michael: Yeah, I see that as well. Like, so Fonda as well, myself, sometimes you also get locked into your own biases and it's always great to have a different perspective come in and just like point you maybe in a different direction. You don't even looking a lot. It's been a pleasure chatting to you today.
Uh, obviously for the listeners, we'll make sure to leave all the notes and any links to references we chatted about today. So. I want to check out what laws doing a will. So make sure to have the websites for traction may have to check out, but thank you so much for joining. I really appreciate it, and I wish you best of luck going forward.
[00:39:41] Lowell Ricklefs: Thanks so much, really, really pleasure to meet you. Cheers.
[00:39:43] Andrew Michael: And that's a wrap for the show today with me, Andrew, Michael, I really hope you enjoyed it. And you're able to pull out something valuable for your business to keep up to date with [00:40:00] churn.fm and be notified about new episodes. Blog posts and more subscribe to our mailing list by visiting churn.fm. Also, don't forget to subscribe to our show on iTunes, Google play, or wherever you listen to your podcasts.
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My name is Andrew Michael and I started CHURN.FM, as I was tired of hearing stories about some magical silver bullet that solved churn for company X.
In this podcast, you will hear from founders and subscription economy pros working in product, marketing, customer success, support, and operations roles across different stages of company growth, who are taking a systematic approach to increase retention and engagement within their organizations.