Just keep the customer. How many times have you heard this? Yes, it is true that it costs more to reacquire Acme Incorporated than it does to retain them. But while this may be true, many companies do not realize that in the world of data or technology service subscriptions, this type of behavior can also become a silent black plague. Before you know it, you are too sick to do anything. Drastic measures are then prescribed to maintain your heath. That is when the dreaded medical terminology gets uttered….”Save the body. Cut off the leg.”
So what is a subscription swap? Why is it so deadly? Can anything be done to stop it?
Here is a simple example of the swap in the form of an imaginary company called Acme Trucking. They haul freight between various locations in the Atlanta area. They have five trucks and ten employees. They have hired your companies to provide a wireless software solution that allows their dispatcher to track the five trucks on the road via GPS. This allows them to respond to new customer requests on the fly, and keep track of driver behaviors like speed and gas consumption. They have a one year subscription to your service. And, because of their size, you did not discount their pricing to any great degree. Translation – this company is a great source of margin.
Acme was doing great over the past few years and they have just upgraded their small fleet by adding a refrigerated truck to the mix. But then the economy started to stall. Acme’s customers began to ship less. Some went out of business all together. The next thing you know, the owner of ACME is at his kitchen table making the toughest decision of his life – should he sell out? He has no other choice, so he cuts a deal with the big regional trucking company. They buy his fleet, absorb his drivers, and make him a regional manager. In the process he shuts down ACME and all that surrounds it, including his subscription to your service.
It’s a good thing that you also have a deal with that big regional trucking company. Your top sales guy worked for over two years to land that account. So it really doesn’t matter if ACME was rolled into the mix, right? You will still provide the service to his fleet, just under another company name. All remains well, right? Wrong.
To land that big trucking company, you had to cut them a sweet deal. While you were enjoying a flush 30% margin with Acme, you had to cut your margin drastically to get the contract with the big boy. This is something companies do every day. It is a standard strategy to acquire a big regional player to help promote your business in other parts of the country. But, in the situation above, what transpires is a quite loss of margin for your business. It’s also a very slow cancer that can spread across a company if you are not careful.
So why is it so dangerous? Because it get’s ignored. Acme’s demise was not very high profile in your company. You have lots of sales guys. This was one of many small businesses on the rooster. The sales rep who had Acme may complain because he will lose the account revenue to the national account rep – but this is expected and usually ignored in most companies. No alarm bells go off at the corporate offices either because you did not lose ACME to a competitor. This was just another victim of economic Darwinism.
But soon the Acme’s will add up. Your margins will become compressed, and you will be forced to cut costs to ensure that you can make your bottom line every quarter. This is the proverbial death of a thousand cuts. So, can you do anything to protect yourself from the dreaded subscription swap? Yes and no.
First, you can’t stop the economic conditions. The scenario played out above with Acme is happening right now across the globe in all industries and sectors. But, what you can do is ensure that you have put in place an ounce of prevention. Review all your accounts now. Move region by region, sales rep by sales rep. Determine what accounts have the greatest risk of flight or failure. Score them in simple categories of A, B and C. Discuss if any account merits qualifying for a contract renegotiation or temporary extension on terms. If you can help them stay in the game but at a slightly reduced margin, then do it. It’s better than the alternative, which may be a massive trade out of margin. But, to that end, if they are going to go under, then none of this matters.
That is why you need to be proactive. Attack your competitors customer base to ensure that if you lose one, you gain one back. Develop new pricing and product offerings that are modular to allow for effective up-selling. Do the math on an “all inclusive” plan as well. We made more money on Direct Connect at Nextel with an “all you can eat” plan versus “pay as you go.”
Look at your messaging and improve your retention value proposition. Make sure your product seems mission critical. Position it as the first thing a company should add, and the last thing it should remove. To that end, get your sales reps in the field to train your existing customers on every bell and whistle. If you lose an ACME to a bigger player, you don’t want that new subscription to be bare bones. In short, sure up your base.
While there is only so much a company can do to fight back the tide, I believe the ones who are proactive in dealing with the situation have the best shot of mitigating the loss of blood. Survival is about creating options – and you have options. These are just a few of the things you can do to ensure that you weather the storm ahead.