How high-tech and software firms can bounce back from retention challenges

There has been a steady decline in net dollar retention rates for subscription software providers over the last couple of years. Industrywide, the median net retention rate declined to 111% in Q4 2023. While much of this has been driven by macroeconomic factors—such as seat compression due to market conditions, and historical over-purchasing fueled by recent rapid growth that has since tapered off—the reality is that an organization’s own operations are often partly to blame.

Retention challenges are driven by various root causes—many of which are controllable

There are many reasons for churn and compression that are difficult or impossible to control: economic turbulence, customer delays and their readiness to engage, customer M&A activity, customer leadership and budget changes, impacts of compliance, and regulation among others. 

Despite these uncontrollable forces, we find that in most cases, key retention issues stem from one (or more) of these addressable areas. 

Renewals process

There’s often a lack of core maturity surrounding basic renewals processes such as forecasting and pipeline management as well as key scenarios like handling delays and usage growth, introducing inefficiency into basic, foundational processes. There are also questions around the ownership and accountability model for renewals: for example, whether renewals should reside within sales or customer success, if a separate renewals function is necessary, and what the accountabilities/remits for renewals should be between customer success managers and sales reps when both are responsible. The absence of clarity here can result in disjointed efforts and missed opportunities. 

Data and visibility

Despite software providers possessing substantial volumes of data, it’s not actionable. Organizations often lack adequate visibility and insights into segment or cohort retention performance and predictive indicators such as customer health and risk. This can hinder proactive decision-making and targeted interventions aimed at enhancing retention. 

To add to the complexity, customer data is frequently siloed across the enterprise, making it difficult to paint the full picture of the customer and their journey.  

Data specific to churn and retention can also be a problem, with churn codes that are outdated or unspecific, and poor process hygiene around maintaining the library and how and when to apply churn codes and notes to contracting or churned accounts. 

Sales process

Misaligned sales incentives and poor deal hygiene often encourage the pursuit of high-risk deals, including one-time use cases, unqualified sales, or potential cannibalization—which are likely to churn or contract in subsequent years. Additionally, there’s sometimes a disconnect between the value proposition sold and what’s delivered to customers—exacerbating the problem. Churn is a common outcome when products don't meet customer expectations or fail to effectively address their needs. 

Customer engagement

Post-sales engagement models and supporting capabilities are often closely tied to retention performance. If post-sales/service models struggle to drive the right customer outcomes across healthy deployments, ongoing usage that’s tailored and appropriate for different segments often sees a negative impact to dollar retention.  

Confusion also persists regarding roles and responsibilities within the organization, especially among functions engaging with customers at different points in their journey. This lack of clarity among customer success managers, account executives, technical account managers, and others can lead to missed opportunities and even customer confusion. 

Product and development

Performance issues and service disruptions not only impact customer satisfaction but also contribute to increased churn as users seek more reliable alternatives. Integration challenges and gaps further complicate these issues, hindering user experiences and the full realization of product capabilities.  

A lack of accessibility to the product roadmap and communication with research and development/engineering teams exists at times, impeding transparency and collaboration while preventing customers (often larger enterprises) from feeling heard and valued in the evolution of the product. 

Identifying the common roadblock areas is often a good place to start, but there are also specific actions that we recommend improving retention—and ultimately drive growth faster. 

Considerations for dollar retention protection and growth

Improving customer retention takes time and effort, but we routinely suggest these areas as a priority:

1. Take a structured approach to retention visibility and calculations: Ensure you have sufficient and rapid insight into gross and net retention categories and their underlying components (e.g. logo churn, contraction and upsell, discounting and price increases) by segment and trending over time so you can make data-driven decisions.
2. Dive deep into the root causes: Don’t assume the answer; objectively examine performance trends and churn notes/reason codes to categorize the actual reasons, which ones are controllable, and their impact on retention rates. Use the analysis to create actionable playbooks with ownership for execution.
3. Mature the Renewals function: Improve hygiene around the base processes (forecasting and pipeline management, for example), and ensure collaboration across renewals, sales, and customer success teams to have a clear understanding of the best outreach and customer retention strategies. Leverage the right automation where possible.
4. Rethink the customer journey and post-sales model: Lay out the plan to drive differentiated, tailored engagement in all segments and across the lifecycle. Understand what investments and optimizations might be needed across offerings, systems/tools, and skillsets and profiles to enable this.

While this year is still unfolding and uncontrollable forces such as economic fluctuations and regulatory impacts exist, there are steps that software companies can take. Addressing these internal issues is often the first step to improving net revenue retention.