By Matt Renner –Test Your Knowledge. Here’s a quick test, see if you can answer these acronyms without Googling them.
What is your CAC? LTV? ACV? ROR? ROA? Negative churn? CHS?
Do you know these for your B2B business as well as your B2C business? Do you know how they directly impact your top and bottom line revenue? Can you pull up a dashboard and share it with your entire leadership or executive team right now?
If you know what these acronyms stand for and why they are important then you are already one step ahead of your competition.
If you do not know what they stand for, why they are important, why you should pay attention or how they directly affect your top and bottom line, well…I would say, “Houston, you have a problem.”
Of course, if your name is Houston, then I would just say that you have a problem.
But if your name is Houston and you know all of this, then I apologize.
More on acronyms later.
Know Your Situation
In any business, smart decisions are driven from having a clear vision and mission, experience, discipline or operating system and data. Today, business owners have access to more data than ever before (thanks Captain Obvious) and sometimes this can be paralyzing. It is amazing to me how many business owners and operators do not know critical data points regarding the drivers of the biggest revenue channels in their businesses. They don’t know their internal core Key Performance Indicators (KPIs) to determine the health of their own rental portfolios and things of this nature.
When I hear this, I will sometimes challenge them a little bit, asking why they don’t focus on these things and if they feel their business deserves better. Then they’ll start to open up and ask what data they should I focus on, which KPIs are most important, what levers should be pulled and how to align compensation with the most important KPIs or objectives.
To that I would say, “It’s not about how many, it’s really about which ones you choose and how often you review them.” What’s important is you do actually choose your KPIs, create a repeatable operating system and review them with extreme focus and discipline.
Maybe you have been running your business for many years and you’ve done well, but are now under attack by the onslaught of startups, guarantees, technology, marketplaces, platforms and changing consumer behavior…or the sheer energy of the millennial and next generations. Or maybe you are the next generation millennial (myself included here) and are trying to compete with those who have been there, done that and figured all this stuff out. Whoever you are and whatever your situation is, I think a smart idea to consider is to model your KPIs off an industry that has significant benchmarking data and proven success metrics in place…that are publicly available.
Just an idea, but what if you started thinking about your business KPIs like a SaaS business?
SaaS stands for Software as a Service. Think Salesforce, Box, TRACK. These are SaaS. Cloud-based software delivered via the internet. Why should you consider this?
Try This Experiment
Go to Google and type “acceptable churn rate of vacation rental homes” or something to that effect.
I did this and I couldn’t find anything in the top ten results that even had a graph or a chart of relevant, up-to-date data on this. There was nothing. Does that mean no one is talking about it? That’s what it signals to me.
Now go to Google and type “acceptable churn rate of SaaS.”
There are at least three pages of acceptable benchmarking, up-to-date studies by numerous SaaS companies and thought leaders who share the acceptable churn rate of SaaS businesses. In fact, the only thing I saw in the SERPs that was remotely close to property management was a Quora question that was asking what the acceptable churn rate was for property management SaaS companies.
I don’t know what your numbers should be. I don’t know what’s good or bad in your area. I am, in fact, not an expert at retention of homeowners at a property management company. I am, however, somewhat of an expert in the subscription marketplace and SaaS business arena and I think they parallel each other. After all, if you land a homeowner and that home is worth $30,000 a year to your business and if you keep that homeowner from leaving your business for ten years, 90% of your revenue is going to be made after the first year.
The same can be said for marketplace and SaaS business. After all, aren’t they all subscription businesses? Isn’t the owner subscribing to your services?
So why not model yourself after an industry that clearly has the customer acquisition and churn model figured out? Couldn’t you apply these concepts to your business to get clarity around which levers you need to pull and how to prioritize the most important tasks or objectives in your business to focus on…like reducing owner churn?
I think the answer is yes. Now let’s talk about how to do this in a practical, methodical way. Remember, these things don’t change overnight, but with thoughtful reflection, detailed planning, dashboarding and transparency, and a willingness to hold and be held for an accountable, testing and selective focus, you can create repeatable systems – with great data – to improve your business and achieve sustained growth.
Select Your KPIs
Think of your mission, vision and core values as the destination. Think of KPIs as the GPS to that destination. If you choose the wrong route, data and KPIs to focus on, you will have to recalculate more frequently. Choose the right route and you will arrive at your destination faster, with less wear on your tires and with more gas in your tank. (I feel my metaphor game is strong right now.)
As the chief sales hacker for a marketplace (ResortsandLodges.com) and SaaS company (TRACK Hospitality Software) for the better part of eight years, I’ve had the privilege of working with many of you, as well as many resorts, hotels and lodging companies outside of the VR space — 99% of which I would say are independent small businesses. There are some common things I typically see in the best run independent companies and vice versa — commonalities I see in companies that are struggling to survive.
One of the main commonalities of top performing companies is they identify the key KPIs that are core to the success of their business, they align their objectives around them and they display them and review them with ferocious discipline and tenacity.
Here are some KPIs around which you might want to build your internal operating system. You may want to change the actual nomenclature of the acronym if it doesn’t make sense for you, but I think the concepts are the most important pieces to take from this. I’m focusing on B2B, which in your case is your business relationship with your inventory suppliers, aka your homeowners.
Renewal of Revenue (ROR) tracks the retention of your revenue. It is arguably your most important metric if you have traction in Monthly Recurring Revenue (MRR). If you only have five homes, retention may not be as important a factor as new customer acquisition. Think of it this way, if you retain 80% of your revenue per year, you are churning $2 million on every $10 million. It should be easier to close a contract renewal than to close a contract for a new customer if you are doing your job right in customer success. Put a keen eye on ROR and put repeatable processes in place to be able to predict the health of your revenue base. Then track your ROR like a hawk. This really goes hand-in-hand with bookings, of course, but you can apply it in multiple ways when thinking of your owner renewals and repeat guests.
Tips for ROR Reporting and Dashboarding
- Segment the revenue channels of your business
- Determine your baseline goals for ROR
- Dashboard and review daily, weekly, monthly, quarterly and annually
- Align compensation with your goals and objectives
- Perform frequent performance reviews with your Owners. Develop a process, train it into your people and stick with it for best performance. If you can, force compliance.
ROA (Renewal of Accounts)
In the SaaS business, we look at, not only ROR, but also Renewal of Accounts (ROA). This metric means different things for different businesses. For example, we work with a company that purposely shed several hundred homes and condos that were not very profitable, drove down their Average Daily Rate (ADR) and were problem owners. But once they got to the number they wanted, they focused on driving higher revenue and expansion on this smaller number of homes, retaining these accounts (owners/homes/condos) and acquiring new owners with similar properties to the highly successful ones they wanted to retain.
Too many whales, not enough fish…An ocean needs a healthy mix of both. So do most businesses.
You can add new properties and big earners to your inventory — a great idea. But if you add one home that brings in $40,000 per year and lose ten homes that collectively bring in $40,000 a year, you have decreased your inventory quite significantly even though you maintained the $40k. You might think “no big deal, we didn’t lose any money.” But If you fail to retain the one property for $40,000 the next year, you no longer have the ten to make up that revenue. Having a good mix of whales and fish is generally a good idea.
Again, it depends on your objectives, but if your goal is to not churn your owners, then you need to make ROA a core KPI.
Tips for ROA Reporting and Dashboarding
- Segment homes/owners and report on them together and separately
- Determine your baseline goal for ROA
- Dashboard and review weekly, monthly, quarterly and annually
- Consider making this a selling point with new owners if the results are outstanding
- Align compensation to your goals and objectives (not just for your executives)
ACV, CAC and LTV
What is your Average Contract Value (ACV) today? If you’ve been in business more than a year or two and have over $1 million in Annual Recurring Revenue (ARR), you likely have found your ACV sweet spot. Get focused and go after it…or change your model if it’s not working and go upstream or downstream.
If you know your ACV, and you know with predictability the following KPIs, your Customer Acquisition Cost (CAC), ROR and ROA, then you should be able to predict with some level of confidence what the Lifetime Value (LTV) of your customer is and how long it will take to payback a new customer acquisition. This will guide you in making compensation decisions with your sales and customer success teams who will be aligned with these goals and numbers. It all works together.
If you can pay back your customer acquisition cost in SaaS in twelve months, you generally have a scalable business that you can grow organically. If you pay it back in six months, you are going to grow faster, and if you can pay it back in three to four months, then you should be in hyper-growth mode. What are these metrics for your business?
Again, set goals, benchmark, report, review and align compensation across your company to these goals and objectives.
If you want to know more about these things, I recommend following @saastr on Twitter.
While you’re at it go ahead and give me a follow too @socialmattr.
Do you know if your customers are healthy? How do you know? How do you proactively find out? Is it a system that can be trained and repeated by your people? One idea you should consider is creating a Customer Health Score (CHS). An owner with a low CHS is less likely to renew. Wouldn’t you want to know if four months into a one-year contract, an owner is experiencing issues with one of your customer success agents? Or if they don’t think their expectations are being met? Of course you want to know this, but it can’t be done ad-hoc. You need to create a system around this and drive compliance. It’s to everyone’s benefit, both internally and externally.
Tips for Creating a CHS
- Identify what a healthy customer looks like, what are the factors?
- Review all the reasons customers haven’t renewed in the past
- Rank the reasons in importance
- You can apply weight to these factors if some are more important than others or keep them all equal in weight.
- Perform regular account reviews and record the CHS in a software program like your ERP/PMS or CRM.
- Find out what CHS score leads to the highest retention and lowest churn rates
- Set your goals for where you want the customers to be health-wise
- Identify customers with a low health score and perform tasks to increase these
- Dashboard, review and report on this daily, weekly, monthly, quarterly and annually
This might sound bad, but it’s not. It’s actually good. If you have negative churn that means you’re growing more than you’re shrinking. (Captain Obvious strikes again.)
The way you achieve negative churn is quite simple. Here is a brief math equation:
- $1,000,000 Gross Revenue Business
- $100,000 Revenue Churned
- $300,000 New Revenue Acquired
In this case your Negative Churn is 20%.
In layman’s terms you grew $200,000, because even though you lost $100,000 you added $300,000 in new business. (For more information on negative churn and why it is a powerful KPI, I would recommend following @ttunguz on twitter.) What you want to do is track negative churn on gross revenue, cash and accounts. You may want to apply this KPI to your B2B and your B2C business.
If you don’t have negative churn, your business is contracting. Businesses are like beautiful flowers (harp playing in the background), if they’re not growing they’re dying, and we don’t want that, so get your numbers figured out, establish a baseline of where you are today and where you want to go tomorrow.
Tips for Creating Negative Churn
- Set your growth goals
- Identify your key KPIs…I like the ones I’ve just described
- Each KPI should have very specific tasks that need to be executed consistently and at a high level to come together and achieve the ultimate goal of negative churn, or in other words, growth. Use tasks like account reviews, product reviews, in-person meetings, performance reviews, etc.
- Dashboard, review and report on this daily, weekly, monthly, quarterly and annually. The more you review it, the more it becomes a part of your daily routine. If it isn’t visible, then your people won’t be thinking about it and executing on it.
These are some ideas for KPIs based on what we track and report on daily, weekly monthly, quarterly and annually in our own business. They are the same KPIs used by some of the largest, most successful SaaS companies in the world. Since implementing these key KPIs, internally, to achieve our goals several years ago (along with aligning our compensation plans, job descriptions and seats on the bus), we have seen over a 20% net increase in our own retention rates and have been experiencing record growth.
Perhaps these concepts will work for you and help you keep more of your owners, grow your relationships and confidently invest in new objectives. Maybe they’ll help you launch your rental business like a rocket into hyper growth!
Houston. Rocket. See what I did there? See how I tied that back together from the beginning? See how I pointed out the obvious again? Aren’t KPIs a little obvious too? Well, in that case, I think we all need to be captains.
By Matt Renner, VP Sales/Partner, TRACK Hospitality Software and ResortsandLodges.com