A critical metric used to judge B2B SaaS, and especially platform businesses, is their renewal rate among users. (Or 1- minus the churn rate.) This number is important because every investor knows it is impossible to build a great business if a company spends its precious capital to acquire customers (CAC) only to lose them every year. (Box, which just filed its S-1 has a renewal rate of 130% or more. Their issue is their CAC!)
But what are the forces that drive great renewal rates of 95% or more annually and how can an application build them? I thought it would be worthwhile to summarize in one place, as many of the sources of stickiness as I can recall having run into over the years.
Application stickiness can result from any, or ideally all of the following:
1. Pure Unadulterated Value. This one is obvious, but it can never be repeated enough. Simple, great functionality delivered at a low (maybe even free price) drives superior stickiness–come what may. 90% or more of us use Google search for this reason, regardless of what browser platform we are on–Android, Windows, Apple, etc. Google is better search and its free. Build a better mousetrap and the may not come, but they will likely stay!
2. Brand. A brand provides stickiness because a brand cut through the clutter of choice, builds trust, and if its use is seen by others, says something about us to the world. A solid brand helps users feel good and proud about their choice to use your application.
3. UI/UX. An experience that is easy, pleasant, and even fun for the user always drives stickiness relative to one that makes the user work to achieve the same result. Part of the enduring appeal of eBay is that auctions provide excitement. Ebay made the thrill of winning easy to experience. If you have ever sold enterprise software, you know that for all the scripted demos in the world, a product that looks “sexy” is a powerful weapon. Buyers get wowed not just because a “sexy” interface sells, but because they know that their end users are easier to woo with honey than with vinegar.
4. User Data Investment. If you can convince users to invest time in inputting their data into the application, even though those costs are sunk, users may be reluctant to repeat that process again when a new application comes along. This “data investment” can be in the form of credit card information, preferences, UI customization–anything that tailors or improves the application for the user and commits to “investing” further in the relationship. Behavioral economists have shown that “loss aversion” and “endowment effects” make us want to stick with something we have already bought and invested in, even though this course of action may not be entirely rational.
5. User Membership Investment. Besides data, a small, direct investment can also engender the behavioral effects mentioned. The folks at Amazon Prime and Costco understand this effect quite well. Those small membership fees, as well as inherent value, keep us coming back.
6. Volume Incentives. Volume rebates, loyalty programs, and other direct incentives to drive more volume clearly drive stickiness–perhaps even beyond their true economic value. The airlines, credit card companies, and p-card providers are masters at this game.
7. Volume-Driven Functionality. As opposed to direct economic incentives, in this age of algorithms and machine learning, some applications drive stickiness simply by improving the user’s experience with each additional usage. The more a user engages with some applications, the better those applications predict the user’s needs, offer suggestions, interpret the user’s voice, etc. This form of stickiness can also be thought of as a combination of items 1, 3, and 4 from above.
8. Business Process Investment. To be truly valuable to a user, many enterprise applications need to be integrated into other applications (general ledger, HR systems, inventory, warehouse systems, CRM, etc.). All of these forms of investment, while sunk costs, increase value and make businesses especially reluctant to change. These investments are a common reason why business applications are often stickier than consumer ones.
9. Network Investment. This is, of course, my favorite form of stickiness. If an application is shared not only by one person or one company, but is shared and integrated across a social network, customer network, or supply chain network, it takes an entire ecosystem to change applications, not just one entity. This “ecosystem stickiness” is what makes LinkedIn and many business platforms and networks so compelling. It does me no good to move to a LinkedIn new competitor unless I convince all of my friends and business associates too as well. Likewise, changing a source to settle application means not only internal change, but also asking your supply base to change. That is not fun, especially if all of the benefits of change accrue to just one side of the equation!
A great enterprise software platform can often achieve almost all of these forms of stickiness. That is why they are hard to build rapidly, but often enduring in value. Just ask the EDI “dinosaurs”.
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