Soapbox: The 80/20 rule is a fallacy, customer-driven product innovation drives revenue
The small business SaaS sector is long overdue for a growth model that focuses on what its customers actually need.
As many companies focus on improving customer retention and churn rates in response to private equity valuation demands, the issue of churn, in particular, has become front and center for many SaaS solution companies serving the local and small business industries. Many business leaders subscribe to the old adage that it costs more to win a new customer than to retain an existing one, also known as the “80/20” rule – stating that 20 percent of your customers represent 80 percent of your sales. This is actually a fallacy and usually leads to higher churn rates due to misaligned customers who will likely jump ship after a short time.
Whether providing technology or services to local businesses, it’s difficult to drive a profit margin if you’re chasing the back of the cart. Instead, companies should focus their energy, resources and investments into delivering high-value products or services that solve the real-world pain points of their target customers. Rather than bleeding themselves dry to stop potential turnover, this growth-minded approach leads with a customer priority-centric view that enables the business to produce what their customers actually require. With that model in place, churn naturally reduces due to increased alignment with customer needs and the resulting customer engagement. And guess what, now you are growing the customer base and driving revenue increases.
This concept is easier said than done, but it is long overdue in the SMB SaaS sector and necessary for sustained innovation and customer satisfaction. As the whole premise of SMB SaaS is to offer a one-stop-shop to address SMB and local business needs, solution providers must build their businesses around a foundation of sound offerings that are designed to meet their target audience’s specific needs – and be willing to adapt their products as those needs rapidly evolve. This will ultimately lead to organic growth and remove the threat of churn overall.