A product that sticky is a product that customers have a hard time getting rid of. Companies with sticky products (or services) usually know how to hold on to their customers, which has a positive effect on the company profitability – and on the valuation of the company.
First something business speech: when it comes to how a company manages to retain customers, it is referred to as retention (usually a percentage on an annual basis). The percentage of customers that say goodbye each year is called churn, which cannot be translated. Well, yes, but not as business jargon: to churn means to churn – to make buttermilk from milk. Also the translation of stickiness (stickiness) you will not soon encounter as a term in the boardroom.
Primary business processes
The most sticky are technologies that are at the heart of a company's primary business processes. Depending on the sector, it can be about anything, but it is clear that (online) software in particular is often very sticky. For example, a lot has to be done before an accounting firm replaces the software with which it prepares the annual accounts of customers, or a trading firm must undoubtedly have very good reasons for replacing the platform on which all transactions are recorded.
The most classic example, across all industries, is that of enterprise resource planning packages. A company uses ERP software to support all important processes in the company: accounting, invoicing, human resources, purchasing and sales, and so on. The implementation of such a package – for example from SAP or Oracle – is usually customised, and requires large to enormous investments. Terminating a contract with an ERP party and switching to another service is another huge step.
Take Lease Plan. From 2016, the leasing company worked on the development and implementation of a new lease system, based on SAP infrastructure. In 2021, after five years of hard work, the system was still not live, but the world had changed. The accelerating digitization of the economy led Leaseplan's management to conclude that the company was actually developing the wrong ERP system. Leaseplan canceled the collaboration with SAP, a step that led to a cost of 88 million euros in 2021 alone.
More than just software
Not just 'pure' software companies can have sticky products. Stickiness suits many technology companies. Managed service providers (MSPs) are companies that implement and maintain third-party software: a classic example is the Microsoft Business Central MSP. These types of companies can distinguish themselves from the competition by building templates for certain sectors. Initially, an MSP is a consultant and trading company, but adding proprietary technology makes the product stickier and more valuable.
At the same time, not all high tech is sticky. For example, many software makers run the risk that every time the customer receives an invoice, that customer asks himself: "Do I have to continue with this?" Think of makers of survey software and presentation software, just to name a few. If a competitor makes a comparable product just a bit smarter or offers it cheaper, customers quickly walk away. This is because there are few or no consequences for that customer.
Stickiness and business valuation
How do potential buyers view stickiness? Suppose your company has a churn of four percent (more on that in a moment). If four percent of your customers leave every year, you can calculate that it will take 25 years before all your customers are gone. Now suppose you have 1,000 customers who pay 1,000 euros annually. Then your customer base represents a total value (also: life time value) of (25 x 1,000 x 1,000) 25 million euros.
The further into the future the expected revenue is, the less a buyer is willing to pay for it. But even then it is clear that churn has a major effect on the valuation of a company. Many companies focus almost exclusively on attracting new customers or also on upsell and deep sell, by making customers pay for additional modules and so on over and over again. It is equally important to focus on customer retention. Why not offer a new module for free, if this greatly increases the stickiness of your product?
Stickiness: how to?
How do you ensure that your product is super sticky and therefore that you have a low churn? It is important first that you determine for yourself what a low churn means. This is different for a software as a service (SaaS) company than for a data services supplier. And it is different for a start-up than for an established company.
Take the SaaS enterprise. There, the churn at a start-up can still be between 20 and 50 percent. This has to do with the fact that a start-up is searching and, for example, also sells its product to companies that later turn out not to be a good match. An established SaaS business has a churn of less than five percent in an ideal scenario.
Finally, how do you realize that five percent? At No Monkey Business, we always first ask our customers: “What problem does your customer have if he cancels the contract with you?” We then look at how the company's role with its customers can be increased – so that the product becomes stickier.
Rules for this are:
- Advance: retention rules, but don't try to make sticky what can't be made sticky. Stickiness is a huge advantage, but cultivating the opposite can also be an advantage. A simple product that a potential customer can get rid of quickly requires less thinking on the customer side. This leads, among other things, to shorter sales cycles.
- If you have a popular product that is not sticky, for example a software package, add a module that is sticky. Stand-alone project management software or time tracking software, for example, are not very sticky. Add an invoicing module and the situation is immediately very different. Every entrepreneur will scratch his head a few times before changing his billing system.
- The more products customers purchase from you, the more sticky you are as a supplier.
- Something similar applies to additional features. So make sure not only that you have a sticky product and preferably several, but also that the products themselves are further developed.
- What is obvious but is often skipped: make sure your product is used. Adding that invoicing module is one thing, ensuring that customers also start using it is quite another.
- Related to the above points: don't charge money for every new feature or product – and certainly not for training or online help tools. Guiding the customer and making it a co-owner of the product is super important for a low churn.
- Also IT consultancy can be made sticky: make sure you trusted advisor belongs to your customer. Entrepreneurs prefer to do business with companies they trust. You become a trusted advisor because you thought leader in your field, but also through personal attention!
So far on churn, stickiness, retention and life time value!