The Cloud Effect

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We are all aware of the profound effect the cloud is having on the way technology solutions are purchased. But we are only just beginning to see the impact it has on our customer relationships.

In his book Consumption Economics, J.B. Wood explains the effect the cloud will have on the business models of technology companies. "In the new economics of the cloud, driving usage is even more critical, since nearly all the revenue will be based on consumption, and switching costs will be low for disgruntled customers."

This shift in business models means understanding that unhappy customers are more likely to switch vendors than they may have previously been. Companies will need an effective way to monitor relationships and, in particular, anticipate when customers may not be renewing their services.

No Longer Trapped

A number of companies in technology sectors classify a segment of customers as "trapped"—meaning they show every indication they will continue to work with you, but they're not happy about it. They don't have a positive attitude about your company and would not be inclined to recommend your solutions. This is particularly common when an individual or a company has made a substantial investment in a technology solution. It is too hard or expensive to switch.

With cloud-based solutions, customers are not nearly as trapped. When the time for renewal rolls around, they can simply decide if there is a better solution. It may be easier to stick with what they have, but the cost and trouble of switching is greatly reduced.

Focus on Renewals

With this in mind, companies need to be much more focused on customer relationships to make sure customers keep coming back. Unfortunately, too many companies ignore their customers until renewal time rolls around. In desperation, they may resort to offering incentives, discounts, and free upgrades to keep customers or to get them back. Ultimately these efforts may not be enough to prevent the "leaky bucket syndrome"—losing customers at a faster rate than they are being added. To prevent this, companies need to closely monitor their customer relationships and take the following actions:

  • Watch closely. Monitor customer usage to understand the nature and frequency of the use of service needs.
  • Listen carefully. Collect customer insights to improve solutions, correct problems, and build relationships.
  • Learn eagerly. Companies must be knowledgeable in the key areas that have the most impact in predicting the likelihood of renewal.

This requires companies to have systems in place so they act upon what they discover—all toward building a loyal base of customers that will keep coming back and will recommend your services to others.

Renewing the Rent

Let's consider an example from an unusual source—apartment complexes. The tenant/apartment manager relationship is actually pretty similar to that of the client and vendor—the tenant pays as he goes, there's an annual contract (or lease), and a key set of situations and experiences will determine if he stays another year.

Mark Juleen, vice president of marketing for J.C. Hart, a builder, developer, and manager of apartment complexes, says, "For some, our apartments are a quick stop and for others, it is their home. Either way, I want [residents] to be loyal—to recommend us to others, and to remain [with us] as long as possible."

The move-in process and service calls are critical, so Juleen measures them carefully. He has systems in place to help him know whether a tenant plans to renew or not and what he can do about it.

A Clear View

In a few words, there is a need for clarity in the cloud. Companies offering cloud-based solutions need to modify the way they manage and monitor customer relationships. They need a system to effectively watch, listen, and learn from their customers to achieve a high retention rate and to develop loyal relationships. And in the new economics of the cloud, developing a loyal base of customers is the foundation on which they can grow.

Patrick Gibbons is a principal at Walker, a leading customer strategy consulting firm. He can be reached at pgibbons@walkerinfo.com.

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