The Microsoft Dynamics channel has been busy for some time now with the transition from the traditional on-premise model to the cloud delivery model. With this, the customer is no longer the owner of the user rights to his licenses, but simply a buyer of a service that gets settled on a subscription basis.
In this new setting, the financial risks shift from the customer to the vendor and the customer has more power. This shift from a capital investment (CapEx) to an operational expense (OpEx) has already had a significant impact on customer loyalty and retention! After all, in a cloud model, it’s a lot easier for a customer to say goodbye to his supplier.
During Microsoft’s WPC 2013, last July, it was remarkable that – of the many hundreds of sessions – only two had customer retention in their titles! Both focused on Microsoft Dynamics, by the way. Winning new customers is apparently far more popular than retaining existing customers. However, if you analyze the business models, you discover that customer retention, or churn management, is one of the most important indicators of profitability.
Let’s start with the definition. Churn can be described as the situation in which an existing customer stopsbuying products and services from a given company.
In the traditional world of on-premise and CapEx, all the risk was for the customer. After all, he had already laidout the majority of the investment beforehand without the certainty that the solution fit. Or even before it could be put into operational use! As the illustration below shows, the on-premise partner receives at least 70% of the turnoverfrom a four-year period in the first year.
Illustration 1 – Investments in the traditional CapEx model
This is quite a different image from the world of subscription models based on OpEx! With a comparable totalinvestment of $2 million over 4 years’ time, the customer spends only 10% of the turnover in the first year! So the pot of gold is no longer available immediately at the start of the project, but should be filled only at the end of the contract term (at least if everything goes well).
With this, the financial risk has clearly shifted to the partner. Certainly if the agreed contract period is (much) shorter than four years. And what if the customer decides not to extend the cooperation and to terminate the contract after 12 months? Then the investments from the pre-sales phase, including the salesperson’s commission, probably haven’t even been “earned back” yet. Let alone that a red cent ever got earned on that project!
Illustration 2 – Investments in the OpEx cloud model
In the cloud model, the buyer has the opportunity to “taste” extensively before he actually becomes a user. If things taste good, he can then extend this with all sorts of smaller “micro-transactions.”
Customer loyalty, retention and churn management are terms for activities that vendors initiate to prevent churn. Customer retention is the primary driver for profitability in a cloud delivery model. As it turns out, it’s impossible to operate profitably with churn in excess of 35%. In practice, the first six months turn out to be crucially important to a successful, long-lasting relationship.
Retaining customers in the cloud demands for a complete different mindset and approach. Dynamics partners who want to be successful in the near future better start their preparation on time. How far is your company in this process?