Renewing software subscriptions is not like renewing maintenance contracts in which the hardware or software is already paid for, installed in the data center, and running critical parts of the business. And, by the way, leaving the customer a prisoner to the vendor in many ways. One of the imprisoning factors is the cost of hardware maintenance. If the hardware is critical to the company's infrastructure, then you are basically required to pay for insurance in the case of failures. Paying for maintenance is that insurance. To make things worse, the hardware vendor typically has a stranglehold on the maintenance market because they are often upgrading and replacing proprietary hardware components. Sure, over time, a few third-party options have sprung up, but vendors always keep at least 90 percent of the business, so the competition is token at best. The software maintenance business is an even better business for vendors because no one else can provide software upgrades and bug fixes for their proprietary software. So, the renewal of a maintenance contract – hardware or software – is mostly a formality, with a tiny bit of negotiation involved. Unfortunately, the assumptions about maintenance renewals carried over to the SaaS (Software as a Service) world that Dempsey and Salesforce lived in. Those assumptions were misleading at best.
The renewals Dempsey was responsible for were often battles, not givens. For most SaaS products, customers have choices. Even with 20,000 customers, Salesforce was still often as much nice-to-have as it was must-have, which is always the case in a new market, as CRM was at the time. The bottom line on SaaS renewals is that customers can, and do, choose to not renew their contracts at a much higher rate than for maintenance products. That's because they usually have choices. Other vendors in the same market offer easy conversions to their product and lower prices. Customers are not captive like they are to maintenance contracts. That's just one of many ways that the recurring revenue business model has shifted power from the vendor to the customer, and Salesforce in 2005 was no exception. Customers had choices – competitors, the option to build their own solution, or just to do without CRM altogether – and they exercised that choice. Boy, did they ever.
Into the middle of that reality strode Dempsey, understanding it in a way that no one else did because he was the man responsible for renewing Salesforce customers' contracts. The message he shared with the rest of the Salesforce executive team was not good news. The bottom line was simple and direct: despite what it looked like from the outside, Salesforce as a business was in a death spiral. Underneath the glowing results and amazing growth rates, there was a fundamental flaw in the business, and continuing on the current path would bring disaster. The culprit was summed up in one simple word —churn. Customers who decided they no longer wanted to be customers. Churn. A luxury afforded to customers in a recurring revenue business. Churn. A simple concept, totally part of our thinking today, but one that, in 2005, no other subscription-based B2B company had dealt with at this magnitude. Churn.
The churn rate at Salesforce was 8 percent. That doesn't sound so bad until you add these two words —per month! Do the math if you wish, but it will come out like this: almost every customer was exiting the business every year. Salesforce was starting to learn what every other subscription company has learned since (thank you, Salesforce). You can't pour enough business into the top of the funnel to sustain real growth if customers are leaking out the bottom at a high rate. Yes, you can show glowing growth rates for new customer acquisition, and that's a very good thing. But the allure and value of a recurring revenue business such as Salesforce is in growing the overall value of the installed base. That takes new customer acquisition plus high retention rates plus positive upsell results (selling more to existing customers). Only when all three of those gears are working do you have the healthy business engine that investors will reward.
Dempsey's presentation awakened Benioff and set the wheels in motion around a company-wide initiative to focus on, measure, and reduce churn. One simple, fact-based presentation delivered to the right audience at the right time started something that is only now, 10 years later, gaining full traction as a discipline and a business imperative for all recurring revenue businesses. Dr. Doom had effectively given birth to the customer success movement.
Attitudinal versus Behavioral Loyalty
Customer success is ultimately about loyalty. Every company wants loyal customers. Recurring revenue businesses, such as Salesforce, need loyal customers. Acquiring customers is expensive. Really expensive. That makes keeping them a necessity, no matter how big your market might be. It's simply a losing battle to try to out-acquire a high churn rate. So, if a business depends on loyalty, it's critical to understand what that word means.
Much has been written about different kinds of loyalty. The general consensus is that there are two kinds of loyalty – attitudinal loyalty and behavioral loyalty. These are sometimes referred to as emotional loyalty and intellectual loyalty. The premise is simple although the social science may be quite complex. The premise is that there are customers who are loyal because they have to be (behavioral/intellectual), and then there are customers who are loyal because they love a particular brand or product (attitudinal/emotional). As a vendor or brand, the latter is highly preferable for a variety of reasons: willingness to pay a higher price, less vulnerable to competition, more likely to advocate for “their” brand, and so forth. The housewife who shops at Hank's Grocery because it's the only place within 30 miles that sells bread and milk is behaviorally loyal. It's possible she's also attitudinally loyal (Hank could be her husband), too, but her basic loyalty is because she does not have options. That's the extreme example, but we're probably all behaviorally loyal to a variety of products. I get gas at the same place 90 percent of the time because it's convenient and, based on very little research, a good price. The fact that they shut down their credit card machines for 10 minutes at 7:00 every morning is annoying because that's exactly when I'm on my way to work. They don't know it, except for the cashier I expressed my frustration to one day, but this creates the opposite of attitudinal loyalty for me. Fortunately for them, the convenience continues to win the day for now. But they are vulnerable to another station popping up nearby, priced similarly, and with credit card shutdowns at 3 a.m. instead of 7 a.m. or, better yet, who has figured out that it's important not to shut down the credit card machines at all.
Attitudinal loyalty is much harder to create and sustain because it's expensive. It's expensive to build products that customers love instead of products that they simply own. It's expensive to create an experience that delights instead of one that just tries to not annoy. When my daughter was graduating from high school, she needed a laptop computer. What was it that caused her to stomp her foot and insist on a Mac when the Dell options were functionally comparable and much less expensive? The logical conversation I attempted with her did not move her an inch. Despite the fact that she couldn't cite a single speed, function, or quality argument for the Mac, her heart was set and her mind made up. I still don't know why (but she did get her Mac). Maybe it was because the cool kids all had one. Maybe it was because she loved her iPod. Maybe it was because she just liked jeans and black turtlenecks. I honestly don't know. But now I know what to call it – attitudinal loyalty or, in her case, more appropriately, emotional loyalty (because the discussion did include tears). And that's the kind of loyalty we all long for in our customers.
Apple has been chronicled in so many ways – papers, books, movies – that I will do it no justice here in comparison. It did something with regard to loyalty that looks and feels like magic but clearly isn't. There's just a certain quality to Apple's product, packaging, advertising, and presentation, and it creates not only a purchase but also an experience that somehow touches an emotional chord. Steve Jobs figured out how to create attitudinal loyalty perhaps better than anyone, before or since. And it's literally priceless. The fanaticism of Apple's loyal customers carried it through a very dark time when products weren't very good and its business teetered on the edge. Apple came out on the other