Monthly renewals: How can you incentivise retention and expansion for these?

Liam Dunne

Hey everyone. I'm building a comp plan for our larger customer segment as we're growing our team and have some ambitious growth goals for 2022!

I've searched far and wide for material on this but it seems as though most companies deal with annual contracts only, or monthly customers are placed in a completely separate segment. In our case, some of our monthly customers are paying us quite a bit of money, more than some annual contracts, so we're very keen to retain (and hopefully expand) them, and of course incentivise this for the team.

For annual customers, we'll be working towards an NRR goal tracked on a quarterly basis - fairly straightforward. We have an existing amount of revenue, and we want to maintain a certain NRR figure.

For monthly customers, I'm a little bit stumped. I've looked at tracking results, and compensating, for these across each quarter but keep running into some issues. A big thing to also consider is that the number of monthly customers in this segment will continue to grow throughout the year, we'll need a plan in place so these are also being considered as part of our quarterly retention & expansion targets.

Any thoughts and guidance would be appreciated!

Thank you

Sarah Solana

Hi Liam,
I'll open with, tracking monthly is always difficult.  For incentive plans, I've always been 2 months on the rears, because our finance and sales ops teams could never keep up with a true MoM comparison. 

That being said, I've used Net Dollar Retention in combination with Upsell/Cross Sell incentives. Accounts became "active" on a CSMs portfolio after the first quarter of carrying them. We decided on a quarter for portfolio activation based on claw backs for non-starts. I've found that incentives for the upsell peice drove more monthly renewals than anything else. 

Hope that helps!

Stewart Stokes

Just spitballing here, but could you do a quarterly NRR target that uses ARR as of the start of each quarter as the  base?  That way, you don't have to separate out monthly vs annual contracts?

For example, let's say you have $10M ARR as of 01/01/22 and have an NRR target of 100%.  On 03/31/22 you look at the ARR for only those accounts that were customers as of 01/01/22.  If they still provide $10M ARR, you've met your goal.  For then next quarter, let's say you added $2M in new business.  You now have a base of $12M.  Let's say you set a target of 105% NRR.  Again, looking at only the accounts that were customers as of 04/01/22 you are looking to ensure you have $12.6M in ARR as of 06/30/22.  Essentially, each quarter you re-calculate your base and set a new NRR target (or you could just keep the same NRR target throughout the year and just re-calculate the base).  

Would something like this work?

Liam Dunne

Hi Stewart, really appreciate the thoughts! This is something I looked at, but I had a few concerns but it's very possible I might be being too picky.

When working on a quarterly basis with annual contracts, you're dealing with a new set of customers every quarter so it's reasonable to expect expansion on every renewal. When working with monthly customers, you're taking the same (+ any new customers) into each quarter so the expectation falls a bit. However - being devil's advocate to my own point, expansions can (and will) happen at random points throughout the year, not just renewals, so I could be overthinking that bit.

With your logic, when a new monthly customer is onboarded, in my mind it would make sense to get their ARR by calculating [MRR * months remaining in year]. This way we get a true figure for their value this year rather than getting an inflated 12-month number, which wouldn't be relevant for this year's target. Thoughts on that?

Stewart Stokes

1) I was assuming that the timing of any expansions is fairly random and not tied to the renewal date. If it IS correlated pretty closely to the renewal date, then you might want to do something to correct for that.  For example, you could determine what % of annual contracts are up for renewal in that each quarter and set higher targets in quarters with higher renewals.

2) Can you explain why you'd calculate new customer value based on month's remaining in the year instead of annualized revenue?  In my mind, since the expansion $ would be booked based on annualized revenue, the base should be calculated the same way.  Also, I was originally suggesting that you combine annual and monthly customers so you just have one target.  If you don't do this, and you separate them, then you could just use MRR for monthly customers.  At the start of each quarter, determine the total MRR of all monthly customers as of the start of that quarter, pick a % increase you want to see from that segment, and track towards that. For example, if your monthly customers come into the quarter at $1M MRR and you want 10% growth in that quarter, you target $1.1M at the end of the quarter.

Ultimately, I think the best path is to make things simple for the CSMs and do whatever you need to do behind the scenes to account for nuances of annual vs monthly.

Jay Wilson

Hi Liam,

My last gig was 75% monthly renewals. We broke our quarterly targets out as follows:

• 75% - Retention (target customer count retained). This would vary based on the segment of our business.
• 25% - Revenue growth (% subscription & add-on spend growth based on historical trends & seasonality). 

I'd be happy to talk through some of the pros and cons of this approach. We felt it gave us good ownership and focus on the things we were accountable for and rewarded strong performance. Certainly wasn't perfect, but I'm a big fan of tying incentives to the ultimate end goal.

I'd be happy to talk through on a call if helpful.

Good luck to you!

Jay

Mark Flanagan

Can you let us know why it wasn't perfect, Jay?

Jay Wilson

Hi Mark,

Long time, no chat! Hope you're well. Sorry for the slow reply. I must admit I get bogged down in coming back to these forums. 

The revenue measurement was tricky. Given that we had nearly 10 add-on products, there were a lot of variables, including seasonality and changes to the products. That said, we tried to set a balance of fair and attainable goals that were held to company targets. While the CSM couldn't control every aspect, it does make it a priority to emphasize adoption in the conversations. 

Hope this helps!

Jay

Ed Powers

You might want to consider a compensation plan that rewards behaviors, rather than outcomes, @Liam Dunne.

Two reasons:

1. NRR is a result that depends on myriad factors: meeting customer expectations for quality and value, strength of attachment to your company, costs and risks of switching to someone else, customer-specific issues (growth, available funds, change in needs, etc.), and the ability to capitalize on emerging opportunities your company can address. That's why customer retention and growth transcend the Customer Success function and involve the whole company: Sales, Marketing, Product, Development, Operations, Support, and even Finance and Accounting. 
2. About 40 years of research into human motivation by Richard M. Ryan and Edward Deci show that extrinsic motivation for factors outside a person's perceived locus of causality is demotivating. Once employees learn that most outcomes are beyond their control, they tend to view extrinsic rewards as being unfair, manipulative, and controlling. Numerous studies have shown pay-for-performance systems undermine employee engagement, persistence, curiosity, creativity, flexibility, integrity, happiness, and teamwork--which are exactly the behaviors we leaders seek to build. 

What might be a better approach? Study your process and identify the actions your CSMs can personally take that influence NRR. This will vary by company, and it's best to use data and proper analysis to test your beliefs. Executing an effective onboarding process, ensuring the customer realizes the value they expect, earning the customer's trust, and effectively uncovering new revenue opportunities might be places to start. These are things within a CSM's locus of causality where each has a high degree of autonomy and competence. Measure these behaviors and demonstrate the cause-and-effect between their specific actions and business outcomes. Then collaborate on goal-setting and engage them in process improvement and problem-solving.

For example, members of my very technical CSM team recognized they lacked the knowledge and skills to detect and qualify potential opportunities in their day-to-day conversations. We delivered skills-based training to make the opportunity identification process easy and completely natural, and we provided a small incentive (no goals or quotas) to reward them for handing off CSQLs. We focused on the specific behaviors, not the results, but with some practice and reinforcement, we increased NRR by 7% in the first year alone. 

Consider giving this a try. I think you'll like the team's engagement and the results you'll get along the way.

Steve Bernstein

@Ed Powers provides great advice here, @Liam Dunne .  I'd add that there are  some things that "every" B2B CS organization should be focused on, which are entirely in the control of the CSM, and some of those things have dramatic impact on NRR, for example:

A) Strengthening relationships with all the "right" contacts in an account, including key stakeholders (decision makers, budget holders, champion, key influencers, power users, etc).  There are 3 parts to this: 
  - (1) What percentage accounts in your CRM have the "buying committee" defined?  I mean, if a typical sales and/or renewal cycle involves a Champion, a Program Manager, and a Decision Maker, then how many accounts have those 3 contacts identified by the CSM?
  - (2) The second part is to establish how you know if there's an "engaged relationship" with those contacts. The best method we've found for that is to engage those contacts via a request for feedback -- what is working and what needs improvement -- via a simple assessment/questionnaire (if you know me then you know I hate the word "survey" ...but I digress).  It's not enough to look at usage (the stakeholder team often doesn't even use the product) because that's the bare minimum you'd expect.  Asking those contacts to "help me help you" by providing the assessment not only shows you the level of engagement, but also provides very valuable insight for the CSM to course-correct).  And with this motion you can measure if the contact responded to the request or not.  BTW, we KNOW that silent accounts (those not willing to provide feedback) are far more likely to churn, often 7x-10x more likely.  Also, stay away from begging for 10s and instead request feedback and watch the improvement from the follow-up actions.
- (3) And speaking of follow-up actions from #2, what percentage of feedback submissions have been followed-up upon with a recorded root-cause?  Especially if a contact is unhappy then you'll want to know what they experienced compared to what they expected (and where those expectations came from).  Those root-causes are gold in order to drive improvements that prevent issues from ever happening in the first place.

Another example is to utilize a KPI such as Customer Acquisition Cost (CAC) and/or Lifetime Value (LTV). If CSMs are doing there jobs well then you will see declining CAC because of the referral economics, and increasing LTV through better retention and expansion. That said, those KPIs lag so you'd need more time to get reliable data here.

Hope this helps -- happy to provide more info.