Identify leading indicators of churn, how to tell if you’re joining a CS-focused company, the right customers at the right time
In the battle against churn, knowledge is power. As such, we devote copious amounts of time to capturing and assessing reasons for churn, from both the customer’s perspective and from our own internal perspective. We call cancelled customers, we send feedback surveys, we scour recent product usage, we review recent support tickets, seeking a clear answer for why a customer left. The goal? To calculate and understand our all-important churn rate.
But in this quest to produce a clear churn rate, we often forget a critical fact: churn rate is a lagging indicator. When a customer leaves you, that decision actually happened well before their point of cancellation. The reasons for leaving have been in the customer’s mind for weeks, maybe months; a psychological shift as occurred that makes it much harder to persuade them to stay. So while understanding your rate of churn is paramount, simply having that number will not illuminate the way to impact it.
How do we figure out when the moment of potential churn is being sparked? It starts with cohort analysis, which can help you reveal the most common periods in which customers are churning. Let’s consider this example:
In this chart, the rows represent the customers’ cohorts, or the group of every customer you brought in each month. The columns represent the number of months after the initial sale. The cell values represent the percentage of customers from that cohort (row) that remained paying for the service on that given month (column). You can discover different things when you analyze columns or rows. On this figure for instance, if you look at the columns, you can see a drop on the retention rate for every cohort on the sixth month. Something is happening there and you can ask yourself why. Is that the contract period? Is it the end of the implementation phase? What else could be happening on the sixth month? In that same chart, looking at the rows, you can also see a drop in the retention rates after June. You can ask yourself what you did in June that made that happen.
While cohort analysis is an extremely helpful first step, the limitation is that you’re still assessing the same metric, your churn rate. What you really need are leading indicators, or insights that will help you predict – and then prevent – churn. In this thoughtful post, Guilherme Lopes, Co-Founder and VP of Customer Success at ResDigtais, shares how he uncovered the leading indicators of churn for his marketing automation product. The full read is definitely worth your time, but here is an outline of the steps he took to isolate his leading indicators of churn to get you started:
- Start with correlations: Lopes puts it very clearly: “You can look for any piece of data that correlates to churn. It’s quite simple, just gather all the data you can about your customers. Then break customers down into two different buckets along with their data, the ones that have already churned and the ones that have not. Next, compare the average of each data in those two different buckets. When you see a significant difference it’s because you found a correlation.” If you’re not sure where to start, the data points that often correlate to churn are: 1) product usage (how consistently do they use your product, particularly your stickiest features?), 2) customer KPIs (are they achieving the ROI they expect and need?) and 3) support tickets (are they engaged with the product and your resources enough to ask for help?). But…
- Correlation does not imply causation: This phrase is probably stuck in your head from that one super excited Statistics teacher you had in high school. And it’s true; as Lopes discovered a few months into attacking their correlation indicators, focusing on correlations – as many of us do! – isn’t a completely effective approach. As he explains it, “The problem with those leading indicators was that they were too much focused on the numbers themselves, on the company’s problems and not on the customers’ problems. Even though they were predicting churn in some way, they were still part of the symptoms and not the disease. So, we started it all over again with the reasons that were leading to the churn.” To do this, they decided to…
- Look to your CSMs and your customers for clarity: Lopes developed a survey for his CSMs to take, asking them focus on customer history and negotiations they had with the customer before cancellation. He also surveyed his cancelled customers, but did so two to three months after they churned and anonymously, so the customer would feel confident that no one was trying to convince them to purchase again. The result was pretty incredible: “Those surveys showed us that 60 percent of the churns were happening, either because lack of adoption/implementation or expectations failure. Which means 60 percent of the churns were linked to the very beginning of the customer lifecycle. Either they were expecting something the product couldn’t offer, or they had failed trying to implement it and extracting a first value out of it. Yes, there were other 40 percent of customers that were leaving because the product had had some bugs, the competition was cheaper, the service had been poor, etc. But each one of those reasons represented too little, and they were very different from one another. We needed focus, focus on the one thing that would solve 60 percent of the churn rate. That focus was the initial value the customers were not seeing.”
- The plan that worked: Lopes dives deep into how they reconfigured their onboarding process and began to carefully track when their accounts achieved key milestones in their customer journey – we definitely encourage you to check it out. But there are several components of Lopes’ “Plan that Worked” that are worth highlighting:
- “We had leading indicators that were clearly more correlated to the customer’s success than the customer’s churn.”
- “Our plan involved practically everyone in the company, not only the Customer Success Team. Our plan set leading indicators for almost every team and those leading indicators were linked to the teams’ goals and OKRs.”
- “The lower churn rates increased the confidence the VC funds had on us, but more than that, they increased the confidence on the excellent leading indicators results. These indicators showed that we would keep improving retention rates and our SaaS business was solid. Exactly what they needed to close a 20 million dollar investment round.”
A similar plan can be made for any kind of company. The fundamental logic for that plan to work is: Stop firefighting the churn and start working on leading indicators to your customers’ success. If you’re interested in learning more about leading indicators of churn (what they commonly are and how to discover your own), we recommend this read, this read and this read.
Customer Success Around the Web
- How do you know if you’re joining a Customer Success focused company? Many organizations may believe that they are truly customer-focused and put significant resources in place to make sure customers are successful. And while many believe they have all the right pieces in place, it can be daunting for a job candidate to ask the right question in order to ensure they’re joining an organization who puts action behind the words “Customer Success.” As CSMs know, building a culture of customer success spans the entire organization and starts at the top with the executive team. If each and every member of the executive team at an organization isn’t laser focused on the customer, then that’s cause for red flags. But as an outsider looking to join, how can they spot those red flags and either ask deeper questions or potentially decide against joining? This interesting post examines each top-level executive’s role in building a culture of Customer Success, as well as the questions that potential job seekers should ask in order to determine when the organization is truly focused on the customer, getting to be customer-focused…or not.
- The right customers at the right time: The old “take any customer you can get” adage is short-sighted because the customers you have at different stages of your business impact how your product evolves and how your team prioritizes. Especially for venture-backed businesses that optimize for growth before cashflow, not all customers are equal. What makes a customer attractive throughout the lifecycle of a company? It really varies, depending on the stage of your company and product. In this post, entrepreneur Scott Belsky takes a closer look at the concept of an “ideal customer” and how the right customer for your business can (and should) change with time.
- 3 critical questions CS execs need to answer: The three questions in this post were inspired by Mikael Blaisdell of the Customer Success Association. The questions are designed to help you think about important elements of your Customer Success program, which in turn can help you clarify and operationalize your CS program. From examining how you define the primary purpose of your CS team to being able to identify the greatest challenges facing your team, having clear answers to these questions is paramount for the success of an CS team.
Word to the Wise
This week’s wisdom comes from Rob Van Brewster, Vice President of Global Alliances at Twilio, the cloud communications platform for building voice & messaging applications. Delivering stellar customer service has been a hallmark of his 20+ year career in enterprise sales leadership at technology companies including Twilio, Eloqua, and Salesforce.com. In a recent interview, Brewster talked about his perspective on the role of customer experience and Net Promoter Score in the success of SaaS businesses. The full interview is definitely worth reading but his thoughts on what SaaS companies need to do to succeed were particularly interesting to us:
“You certainly need great software with amazing uptime that will solve your customer’s problems. However, you also need to differentiate yourselves with customer service/success, especially if you’re in a competitive market. You need to make it clear that you’re someone with whom the customer will want to continue doing business. You can do that by solving problems immediately and taking responsibility for them. You need to do everything you can to help your customers, rather than just focusing on your needs. Operational transparency also helps to separate the winners and losers in customer success.“