"To truly adopt new software, customers have to change their habits. Users must convert their aspiration into new routines." —Tomasz Tunguz
As a partner at Redpoint Ventures, Tomasz is no stranger to the challenges software companies face. As an experienced venture capital investor, Tomasz and Redpoint have studied a variety of factors to determine What is the most correlated business metric with Series A valuations?
The answer: negative churn.
For the uninitiated, negative churn means that your existing customers are paying you more (expansion) than they're paying you less (churn), over a given time period. Confusingly, there are many names for this metric, all referring to the same thing: account expansion, negative net churn, net retention, net expansion.
But the takeaway here is: whatever you call it, net retention is the #1 arbiter of Series A valuations.
In order for expansion to outpace churn, your customers have to adopt your software. And that's where habits come in. As Tomasz shares:
"I learned this selling billing and invoicing software to law firms. It was one thing to convince the managing director of a law firm to pay for the software over a 90 day sales cycle. But it was an entirely different matter to educate, convince and convert individual attorneys to use the software. That took far longer." Source: TomaszTunguz.com
That's the billion-dollar question that every software company is trying to figure out.
As we've cataloged in past DBT blog posts, achieving successful adoption usually starts with empowering a team to build new habits. Two key words here: 1) team, 2) habits.
It's no coincidence that Atlassian's ticker is TEAM. As I write the stock is trading at $22.82 with a market cap of $4.78 billion. Revenue and cash flow look like this:
Atlassian—a software company designed for teams—is growing substantially and kicking off plenty of cash because they've figured out something important: how to change customer habits.
But how does a company change customer habits? Based on five years of research, I've found the 3 best ways to change your customer habits are:
- Keep the executive sponsor engaged post-sale
- Make your product's value so undeniable they can't ignore it
Before we unpack these strategies, let's revisit the formula for how habits are created in the first place:
The formula, therefore. . . HABIT = cue + routine + reward
It's a virtuous cycle of a prompted action, the action itself, and then a Pavlovian shot of dopamine to keep the cycle going. Boom. Habit created. New routine established. But back to the how. . .
1. Keep the executive sponsor engaged post-sale
You'd be surprise how frequently the executive who made a software purchase vanishes after the product is bought. Based our DBT research, the frequency is 40% of the time. It's not his or her fault—they're busy. Very busy. Therefore, the challenge is on the account team to keep them engaged post-sale. Therefore, this strategy is both the most effective and the most within your control.
Backstory: The dirty little secret of SaaS companies is that software is incredibly easy to buy, but much harder to deploy (and therefore harder to reap the benefit of why said software was bought in the first place). Without the executive sponsor's influence, the actual users of the software are faced with a choice: 1) do what they usually do, 2) change.
As you might have guessed, they often chose option one :|
If you focus on a tight Sales >> Customer Success handoff where the executive sponsor stays involved, you will have greatly increased you chances to successfully deploy and change behavior. To do so, we recommend creating a workflow where the executive's goals are clearly documented in Salesforce so the Customer Success team can carry the torch:
2. Make the product's value so undeniable they can't ignore it
This really should be #1 but for the sake of practicality is is #2 because your product's value is (primarily) determined by your product and engineering team. If your product isn't valuable (accordingly to your customers), than this article doesn't really matter because your customers will eventually churn out.
But let's assume your product does create value. Then what?
A few things:
- Think about the "Reward"—what makes your customers want to keep coming back and using the product? How does the product reward them for the routine the user has completed?*
- Automate it: make that seminal value moment a thing. Celebrate it. Send them an email. A notification. Highlight the demonstrable show of value.
- Schedule a Business Review. Pull the usage and results data from your software and showcase the value to the business user AND the Executive Sponsor.
This is the step required to start the new routine. What brings your users back to the product? WHY do they come back? What prompts them to ditch their Gmail inbox and log into your software and DO STUFF?
It's kind of like running. Personally, if I don't set our my running shoes the night before, I likely won't run. It needs to be easy. I need a trigger to brave the foggy cold air at 6am and MAKE IT HAPPEN. The trigger is often simple, but nevertheless very effective is catalyzing action.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” —Aristotle
Hopefully you can influence your customers habits to help drive adoption and ultimately achieve negative net churn and thereby earn a lucrative valuation so that YOU = HAPPY.