The evolving SaaS industry and the impact on churn and retention.
Point Nine Capital
Today on the show we have Christoph Janz, Managing Partner at Point Nine Capital.
In this episode, we talked about what Christoph loves the most about being an investor and what he misses as an entrepreneur, we also discussed how back in the day companies were flying blind when it came to churn and retention, and we then dove into the inspiration behind the infamous “Five ways to build a hundred million dollar business” post.
Finally, Christoph shared how much churn and retention come into the evaluation of companies he looks at and what are some of the best companies doing when it comes to actually retaining customers.
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EP 129 | Christoph Janz Interview
[00:01:29] Andrew Michael: Hey, Christoph, welcome to the show.
[00:01:32] Christoph Janz: I am Andrew. Thanks for having me.
[00:01:34] Andrew Michael: It's a pleasure. I'm really excited to stay. For the listeners. Christoph is the managing partner at Point Ninecapital a Berlin based venture capital firm focused on early stage internet investments and having made some early investments in SaaS startups, such as I'll go Leah automobile, Contentful, Typeform, and more Christophe started out his career as a founder himself.
We found a deal pilot.com, which was acquired by shopping.com friendly dot the acquired by German. ISP and page [00:02:00] flex acquired by live universe. So my first question for you, Christopher is what do you love most about being an investor and what do you miss the most about being an entrepreneur?
[00:02:08] Christoph Janz: That's a good question.
I, I think for me the difference is maybe not as big as maybe you might think, or maybe as it might be for others. I started 0.9 together with Pawel. It's it's not a job. We started this firm. So it's a very, it feels very entrepreneurial for us to be because it's not only about.
Making investment decisions and helping the founders along the way. It's also running and developing the firm. Nevertheless there are also like big differences in the sense that we are not scaling fast. So we're not. It's spending it all off time hiring or managing. So it's definitely very different from that perspective.
But I'd say I'm not missing something. Because because of what I just said about [00:03:00] 0.9 also being like our thing and our baby and the thing that we have been developing for the last 10 years. But also because we are working. On a daily basis, like all the time with very early stage companies.
So I think we're still quite close to like really early stage action, despite the fact that we're not in the driver's seat there. And. I what I like most about it is it's probably exactly that too, like being, having the opportunity to work with incredibly smart, ambitious people who come up with ideas that people would never come up ourselves.
And helping them maybe avoid some mistakes that we've seen elsewhere or accelerate their plans or help them increase their ambition for other. I think I liked pretty much everything about it.
[00:03:53] Andrew Michael: Yeah, I can see all of that. And I definitely see the perspective as well of this is your baby too.
Like you founded Point Nine [00:04:00] and it's a business in its own, right. As well. So to start up in its own, right. Just a slightly different way of scaling and growing the business. But you also recently just closed a new fund as well. And I read the newsletter really liked like how you circling the ninety nine, nine hundred and ninety 9,000, like really pointing with the number nine.
They're like What are the plans now? Where does this gonna do for you? As a firm and anything exciting coming up as a result of it?
[00:04:24] Christoph Janz: Yeah. So it's been a little while already, but time flies. So we're already ready really, right in the middle of investing of, out of that that fund and already starting to think about like what comes after this fund, since as a GC, you basically have to.
Keep raising funds every two to three years or so to basically stay in business. The biggest. Change. Last time, like when we raised and denounced this fund was the expansion of our partnership. We had to started the firm with Pawel and myself. So we're two [00:05:00] partners. And like with that fund, we've edited two additional equal partners.
So it doubled. Doubled the size of our partnership and that's been going like extremely well. So we couldn't be happier about that. They're the result of that and how we're working together as a team. And it feels like with the new partners, Louie and Ricardo, it feels like we've been as if we have been, had been working together forever and I think nothing really to it.
To point out yet in terms of what might be next with regard to a future funds or potential changes or really right. Really right in the middle of investing out of the current.
[00:05:43] Andrew Michael: Very nice. And like you've literally grown a hundred percent though, as well in terms of size. So talking about a lot about scaling, I think it's, it is a different shift and it's really good to see that it feels like you've been working all along together with with the guys.
So I'm interested obviously today churn and [00:06:00] retention being the topic wanted to chat to you about as the first question I had for you is obviously you come from this background as a founder. You still are one today to some degree as well. Operating a business and now investing in businesses and in operators, like, how is your view on trainer attention changed, if any, and how have you seen the market's evolving since you started out your career and then moved into investing?
[00:06:24] Christoph Janz: Yeah, it has changed a lot and many it's not so much because of the change in perspective from founder to investor and more because of just, it's been such a long time. Like when I started my internet startups, the first money in 1997 and the second one in 2005, it was just such a different. World like just starting with just the tech and the tools that you'll were able to use.
It was especially 1997 was just really early in terms of like just analytics. So it's like the, if you look at the landscape and the [00:07:00] tool, the tools, stacks in like marketing technology and web analytics, and even like very specific. Software solutions that help you understand user behavior, dress, mitigate, churn.
All these things basically didn't exist. So we didn't really have that day or whatever we wanted to get. It was a big pain to get it. So in comparison to today, we are probably flying blind. And ultimately we weren't really that much focused on retention. Because I think we, since those were like, those are consumer startups and although we had some repeat users, we didn't really think about it that much in terms of customer lifetime value.
And really very long customer lifetimes. I think we, our assumption was that any marketing dollars that we wanted to spend, we would have to They get a return on them pretty quickly, maybe [00:08:00] even at the first upon the first transaction. And I think almost everything I've learned about churn and retention and customer lifetime value.
And all of this comes more from my first SaaS investments, like in 2008 and nine. Free agent Zendesk Cleo, like the first SaaS companies I've been working with in that, around that time. And I think that even since then, obviously things have continued to evolve.
[00:08:32] Andrew Michael: Yep. What was the motivation back then as well?
To really start doubling down on SaaS, obviously coming then from a consumer background and being attracted to SaaS. And then really you carved out your niche in the space when it comes to SaaS investing. And I think definitely one of the most prolific investors in Europe when it comes to SaaS business.
So what was it that really attracted you to SaaS and what caught your eye? I
[00:08:53] Christoph Janz: think initially it was pretty random or lacked. Like I, I [00:09:00] knew about the very early generation of B2B software companies, like Basecamp, for example. So I've already. I had a strong interest in just basically software like great software, just from a product perspective, since that's also what I've been focused on as a founder.
And then the fact that like these first companies that I invested in, like Zendesk in particular were so consumerized, this is what, what made it easier for me to fall in love with them. So it's funny that. The reason that what brought me in onto the B2B side was that it was looked like B2C, right?
I wouldn't have. Intrigued by eight typical enterprise software websites at the time. But when I stumbled on Zendesk, because [00:10:00] I was raised basically just looking around for inspiration and for interesting things on online this didn't really look like an enterprise offering it. It already had.
Even at these early days, it had a very inspiring like brand look at it. Like the tone of voice the colors, like we had this little Buddha at the time at their mascot. So all of that spoke to me as a user and a human being. And then as I started to learn more about.
Obviously, I quickly started to appreciate what an amazing business model and B2B SaaS is. It's probably obvious to them, to the listeners of this podcast. So I'm not, I don't have to expanded into much detail, but I think it's just very rare to find a business that is recurring and has super high margin.
And ideally has a negative churn. Like I think this combination is what makes the best business model in the world. And I think that's what wall street has been discovering in the last couple of [00:11:00] years.
[00:11:00] Andrew Michael: Yeah. And the predictability, I think, with the SaaS businesses that can allows you to. Do a level of planning that's unseen in any other business, like just knowing what you can preempt in terms of revenue allows you to plan a lot more effectively.
Yeah. One of my favorites like posts of yours, obviously, and with this in mind, it is like the five ways to build a hundred million dollar business. And other sort of like you're hunting rabbits or elephants, like going after what drew the inspiration from that. And how did you bring together this analogy?
Because I think obviously, like you said, like Zendesk, definitely it has this more consumer side to feel it's definitely, now it's probably shifted quite a bit in terms of the markup and the customer demographic, but how did you come to this conclusion in the beginning and whether the inspiration coming up?
[00:11:47] Christoph Janz: I think. ==Two specific inspirations for this blog post or broader concept. One was a post that I read from a friend and other investor at bogus, the arts[00:12:00] founder of version one, a seed fund in out of Canada. And I think he spoke about or wrote about two, two ways to build a big.
Company like one being in constant role, the other one being in enterprise software. And then I remembered that like when, like some of the SAS companies I was working with in the early days, and I think this specific one was a company called property base, which has been acquired like many years ago.
Like where they're the salespeople. They will all base like using these, like some of these analogies, right? Like when they spoke about customers and like the big, biggest customers they will already use, they used to be called and elephant before IMB, try to popularize the term even more.
But then it just made me think, like what would be like the right analogy for different types. Of companies or customer profiles. And so that's how I came up with these animals. And it's obviously it's a [00:13:00] simplified concept, right? It's, there are a lot of simplifications into this. But they are, I think it like what it's like kind of stands for ultimately is that you have to get your Cox in the right balance with your lifetime value to build a.
A very large business, because if you just think about like, how many of these small customers do you have to acquire to build a very large company, then you start to think about what sales and marketing tactics might be might be useful or might be realistic for doing that. So I think it's maybe more like something more, a starting point for.
Yeah. Or maybe inspiration to look into things deeper rather than providing any direct answers. Yeah. And
[00:13:45] Andrew Michael: honestly, that's exactly what I was going to say. What I love about it is it's such a simple framework and it's a great way to think about your customer acquisition model that you're going to be driving like a good understanding.
Okay. This is the product we building. How many customers do we need to achieve to build anything of [00:14:00] significant scale? And then. Working backwards, just looking at, okay, what can we afford to actually acquire a customer? Does this make financial sense? Is this the right model for us? And is this the right sort of market fits here that we're going after it?
So I really enjoyed it from, and for that exact reason, it was just more about the thinking process. Like when evaluating businesses and ideas, it really gives you a strong framework to say, okay, Is this something that we can actually do viably like, yes, there may be a market for it, but just acquiring customers and the methods that we're going to need to employ just will not be financially viable.
So I think it's, it really helped me a lot as well. I'm thinking through some other ideas in the past, for sure. So I'm interested then as well, obviously you speak to a lot of customers, a lot of customers, a lot of companies, you evaluate a lot of opportunities. How much does churn and retention come into this evaluation of companies, especially because you're investing at the early stage.
How much are you looking into sort of these numbers and how does it change depending on the stage of the deal that you're looking at?
[00:14:54] Christoph Janz: Yeah. So for a significant part of the companies that we look [00:15:00] at and invest in. There is not enough data or really yet to draw any clear conclusions, like many of the companies that we invest in do not get generate significant revenue or have a very short history.
So in these cases we can't really make our decisions based on any real data, like historic numbers for churn and retention. And in these cases, it's more just trying to think about it. The potential could this be a business with lower churn or could it be one maybe with maybe high churn, but a way to acquire users at very low prices at the top of the funnel to offset that.
So in, in many of these cases, there isn't that much data yet in, in some cases, When we invest maybe in a, like somewhat later, like late seeds or early series a company then they're, they have some of the data already, maybe not a huge history but if a [00:16:00] company has maybe been operating or has been live.
One or two years then we'll of course, look look at the data and then it does play a role. Oftentimes we want to dig in really deeply and drill down into a specific segment of customers. Basically helping the founder to cherry pick his or her best customers because. And overall numbers across the entire customer base.
They might not look good because maybe they are a number of like non ICP customers in there, like users or customers who never should have been. One boarded or for whatever reason on the right fit. And it makes perfect sense then for four founders, when they pitched to investors to cherry pick the customer segments, and obviously you need to be transparent about it.
But then there is thing, nothing wrong with it. And I'm like, this is something that can then can give us the confidence. Yeah. In a company and an [00:17:00] investment. If we see that it's working in a certain segment, and then we try to extrapolate from that as opposed to using the overall average numbers.
And then the other thing where it becomes really important is when our companies then raise their series a or series B later after that, at this point in time. Investors, usually almost always expect a lot more data. And so then it becomes very relevant for us and the founders to work together and try to find out like if the company is already at the right stage for this type of financing or how they should look at the data, how we should present the data.
[00:17:42] Andrew Michael: Nice. Yeah, I think that's there's a few things I want to touch on, but in terms of like understanding who your ideal customer profile is really important, then I go to one of these realizations actually working at Hotjar. When in the beginning, early days, we identified who our ideal customer profile was.
And over time we started. Kept on revisiting [00:18:00] that and trying to understand and question it. And one of the things, and I can't remember who it was. I think we had some external person come in to chat to us about it and the notion yeah. Your customer base that you have today is a direct transfer relation to like the marketing that you've been doing, the product that you built, but it's not necessarily the best opportunity that's on the table.
And sometimes really taking a step back to evaluate what does the market look like? What does the landscape look like? What are the trends? Like where is like where are things going? And then taking another look at who are your ideal customers? Like, how do they fit in with this trends? How do they fit in with the market?
Sometimes? That's really a much bigger opportunity to go after, but sometimes we get blinded by just these are our customers. These are serving these other requests that are coming through and they take us in the wrong direction. I really love that point. The other thing I wanted to chat on was the.
Very early stage. You said there's some things when we questioned can these products be sticky? Can they have high levels of retention? What are some of those indicators that you chat about amongst yourselves? Saying, okay, like how does this evaluation process work? Because [00:19:00] at that stage you have no data.
So it's really just going on instinct. And what are some of those things that you're questioning between each other?
[00:19:08] Christoph Janz: Yeah. And maybe try to answer that in a second, but just to your previous point, I completely agree with that. And again, many of our most successful portfolio company. Have reinvented themselves multiple times or like significantly expanded their customer focus or even decided to over time, almost ignore their original customer segment and focus more on a more profitable one or one that provided better economics.
And I think in most cases it works. And move up market. I think it's much, much rare. I don't, I can't think of a case for a company where that's successfully moved to downmarket, but it's very often the case that a, it starts with an SMB. Offering. And then maybe at somewhere between five to 10 million, ARR, it becomes harder to scale that and [00:20:00] churn remains relatively higher because SMB is just turn it a higher rate.
And so we've seen many cases, these that were over the course of the year, the attention has very much shifted towards the enterprise. So I think that's really important to keep in, keep an open mind for that. So I just wanted to. Yeah, I agree completely with that. And on, on the other question, I think we don't have a, really a recipe for that.
I think if, I think we, we try to. Get a sense for like how happy are the early customers I know could be by talking to them or it could be by just talking to like potential customers from our networks. So we're just, I think it would be too much to say that we're really trying to somehow assess re retention or churn.
It's probably more about trying to get a sense for. Like the opportunity. And is there a pool in the market? Is there some [00:21:00] signs of customers and loving that? And then of course we can think about it. Is there a for example, a strong potential for expansion revenue? If it's a product that may be used by only a few people in a company or only by a team or a department, but there is potentially.
For additional rollout and expansions. And then we can think about is it easy because it's maybe price per seed and it's obvious that you can add more seats or add some something else, which is a valuable metric. And then if on the other hand it's clear that this product is only sold to very small businesses.
Then I think we, we know that it's harder to domestic. Increased the, let's say number of people using it and therefore like the ARPA. And we have to assume that churn will. Somewhat higher end. And so we did try to think about all of this, but it's not really mathematical yet at this time.
[00:21:56] Andrew Michael: Yeah, for sure. It's very difficult. I think one of the questions, like I love that [00:22:00] she came from David dominant, the CEO of Hotjar one conversation we're having it's at one point. And he said the question he asked himself was like, if things had to go really bad, like we've had COVID.
How high on the budget list is your product or service is it going to be the first thing that people are going to throw out or is it going to be the last thing they're going to throw out? And I think that's also a good measure for stickiness in terms of okay, the product I'm building now.
Is it something that's like vital to that business to keep an operating running? Or is it going to be, and obviously it's not always the case. There's really great businesses that might be on the other end just because of the sheer volume of the problem and the pain. But I always found that it as well as another nice yard stick I can measure and questions.
Okay. Like where do I believe this? It's
[00:22:42] Christoph Janz: Yeah, it's probably classical like painkiller versus vitamin iQuestion. And if it's not a painkiller it's harder to sell it in the first place. And you have a higher risk of being kicked out if something happens
[00:22:55] Andrew Michael: for sure. Nice.
You obviously see a lot of companies [00:23:00] then as well. And having like invested, obviously in the early days of Zendesk, I'm pretty sure they've obviously evolved quite a bit of attempt to the sophistication when it comes to churn and retention. And what are some of the best companies doing when it comes to actually retaining customers?
Like how are you seeing them investing in retention and How do you see them operates as businesses?
[00:23:19] Christoph Janz: Yeah. It's I think it's a lot of different things, right? It's we, you spoke about it a little bit before and like really retention is more than any one person or when, or any one department in the company can possibly like control just by themselves.
I do think it's great if somebody owns it, like in terms of responsibility, for the for the KPIs and good. If there is some OKR or whatever goal framework you're using if it's clear that there is somebody who thinks only about retention, but it doesn't mean, yeah. This person can do everything by themselves [00:24:00] to really have the impact on retention, because it's a function of everything from product and tech to sales, marketing, customer support, customer success, everything ultimately called it.
Everything ultimately eh, like contributes to the success or the failure. And you can see that in your retention numbers. Because it's ultimately customers will leave sooner or later if they're not happy and if they're not using the product or not getting value out of it. So I think you can do it.
There is no quick fix for this, right? There are many tactical things that you can do and you should do it, right? Like when obviously you like, like the basics, not make it too hard for them. Companies to enter a new credit card, if the credit card has expired or like consider like using a product like Brian Beck, which is a 0.9 portfolio company, which helps you as a SAS company [00:25:00] define really smart deflection workflow.
So if some, if a customer. Is a volatile churn. You can offer that let's say a hibernation option or a discount or something to reduce churn. I think that's all super valuable, but ultimately the product needs to provide great value to to the customer. If that's not the case, then they'll always the struggle.
And to to do, to get it, to get done. To really get your head around that. I think there's lots of great analytics solutions out there. You obviously, Hotjar like really well and that. Yeah, there are like solutions also specifically for customer success to monitor for like customer health and try to detect churn earlier and then try to draw conclusions from it that you should then try to feed back into like people who make product decisions.
[00:25:57] Andrew Michael: Yeah, definitely. So what you're [00:26:00] pretty much saying is like what the premise of the show is. If everybody's involved, it's really good to have strong alignments, like having someone owning it, it doesn't actually need to be any specific department, but as long as there's somebody watching that number regularly, it can be a part of the company's Ocala as it should be.
Essentially you're running a subscription business with people, canceling subscriptions. Do you really have a business? So I really love that as well. I think alignment is critical and like having this canvas ending, I think also then giving ownership to teams and knowing how the work that they do is actually impacting churn and retention is really powerful.
So being able to communicate that back and saying like how the little actions you might be doing in your departments, whether it's like sending out an email or talking to a customer, like having a direct input metric that you could say, okay, this is going to impact the output, which has turned into retention.
Cool. I want to ask a question that I ask every guest that joins the show. And so the question goes like this, let's imagine a hypothetical scenario. Now you joined a new company and general [00:27:00] attention is not doing good at this company. And the CEO comes to you and says, Hey, first off, like we really need to turn things around and we have 90 days to do it.
We really need to make a dense match in retention and numbers. You're in charge. What do you do? But the caveat in this is that you're not going to give the same standard answer that everybody gives that I'm going to go and speak to customers, understand what the biggest pain points are. And then I'm going to pick one of those and that you're going to choose something that you've seen be most effective in the past, and you're going to run blindly with it and just hope that it works.
Like what would be the one thing that you've seen be most effective in reducing churn quickly.
[00:27:38] Christoph Janz: While did they get it with a calm yard? You're making it really hard because I would have said the same thing I would have said, knowing maybe not knowing much about his company. I do have to understand like what differentiates a successful customer from an unsuccessful one, and then try to find out.
Like, why is that, is it because it's a different customer or is it because they got a [00:28:00] different experience with the product or is there something broken in somewhere? Is that something that we can learn from what differentiates the bad ones from the good ones? And then try to find more good ones or turn the bad ones into good ones.
So very hard without that knowledge Yeah, like in the absence of any additional data, let me think. I think in the absence of that, and really like really only if you're really forbid me to talk to customers, I think I would do a campaign to promote annual contracts. Assuming the company does a lot of monthly contract.
It's because that might have a chance to just increase. Like retention across the board. If you give people a certain discount for subscribing, like to an end of the contract, and it might be duct tape [00:29:00] in the sense that if they don't love the product, then they will launch our next month. But maybe six months later when they can last 12 months later when they can turn.
But I think for a. Deeper. For a solution maybe to the core issue. I think that's, that would require me to do some of the things that I'm not allowed to do in this famine.
[00:29:24] Andrew Michael: Yeah. If I show it on the annual buy your time, like it's stuck type, but maybe it buys you time to figure things out. Because I think also 90 days is a little bit unrealistic when it comes to and attention, but it's more just about understanding what are those quick things we would try to do?
Yeah. They're not trying to come back to it. It's normally it's not enough time. Lecturing and attention is a much bigger nuanced problem. We need to thinking about speaking to customers is the place you start. Cool. So last question I have for you then first off is what's one thing, today about general retention that you wish you knew when you got started with your career.
[00:29:54] Christoph Janz: I think, maybe one thing to point out is, and this is something that I've maybe I [00:30:00] haven't learned six months ago by maybe like a number of years ago. And then maybe it's obvious, but I mentioned it nevertheless. I think it's basically just the simple mathematical truth of what happens if your churn rate is not negative.
If you just keep churning, let's say 20% of your customers. You're over a year. Just think, just thinking about what that means, how many customers, whatever increasing number of customers you have to add every year, basically not even to grow, but basically to stop to prevent you from from shrinking.
And this is, I think something that. And it makes it hard for companies or for many companies that do have turned to grow beyond let's say 10 or 20 million. Yeah. Or because they just have to keep adding more and more customers just to offset the chart and then on top to keep growing. And I think that's it just underlines why it's so [00:31:00] important to minimize it.
Churn and strive for like negative churn on a dollar basis. I think that's maybe one thing to point out. And then, the other thing I would just highlight again, is there are so many great products today. Like including bright back that I mentioned, but also product analytics, software, or marketing technology that help you truly understand that.
Mitigate churn in a way that just wasn't possible just a couple of years ago. Yeah,
[00:31:30] Andrew Michael: absolutely. It has changed incredibly and to the points as well. I think for me there was this, she one of the like aha moments as well in my career, like respite focused attention and retention was when we just put together like a churn calculator and we actually have one on Churn FM as well.
If you want to go in. In your metrics and understand, like at what point do you hit a growth ceiling? And I think those are one of those aha moments. Like when you actually realize, okay, we really need to focus on this. Now we really need to make things and spin things around. Otherwise the business is going to stall and at some point it might even decline or [00:32:00] it's inevitable, that would decline just because of, there's not a never ending markets.
Definitely for me as well, that was like an eye opener. This is real. Like you really need to pay attention to an early you can and the better you are the . So Christoph, it's been a pleasure chatting to you today. Is there any final thoughts you want to leave the listeners with? Anything they should be aware of with your work or.
[00:32:20] Christoph Janz: Thanks so much, Andrew. We're continue to be very bullish about the future of SaaS and very active. If anybody out there is listening and wants to chat or talk about all things, sides or pitch a SaaS company. I'm all yours.
[00:32:41] Andrew Michael: Awesome. And we'll definitely, obviously leave some notes in the show notes.
So if anybody wants to check out Point Nice capital, there'll be links there, but obviously you can Google them and find them online too. Christmas, it's been a pleasure seeing you today. I really appreciate it. Best of luck.
Thank you, Andrew.
[00:33:00] 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 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.