Isolating churn you can ignore, scaling CS with logical customer segmentation, approaches for proactive CS
Churn Fighting Focus: Can you ignore 95% of your churn?
As Customer Success pros, our instinct is obsessively worry about and vehemently fight any and all churn. Every customer we lose is a disappointment, any dips in our retention rate make us cringe. But when you dig a little deeper, it turns out that numbers can be deceptive; if you’re take them at face value, without digging deeper and fully understanding the situation, you’re opening yourself up to be blindsided. And in the case of churn, this could not be more true.
Let’s consider an example: Anyone who has flown recently is aware of Spirit Airlines’ reputation of rampant customer dissatisfaction. In a recent travel report published by the American Customer Satisfaction Index, Spirit had an abysmal score, the lowest of the airlines and far below the average benchmark. Yet, despite mounting discontent among its customers, Spirit was actually the second most profitable airline in 2015 and it’s growth rate is far from plateauing, let alone decreasing. How is this possible? It turns our that all those customers who were “dissatisfied” with Spirit’s poor service were still opting to fly with Spirit. Their deciding factor on the airline they would patronize was not the quality of the service they received, but rather the most affordable ticket fare. And thus Spirit – who understood their numbers – continues to give their customers precisely what they want (cheap flights) – nothing more, nothing less.
As this interesting post by Kissmetrics explores, numbers don’t always speak the truth. And for Customer Success teams that want to strategically and effectively combat churn, understanding the details behind their churn rate is vitally important. Specifically, Kissmetrics believes understanding and effective handling (not reducing/mitigating) your voluntary churn – or churn that happens when a customer doesn’t receive the value they had expected to receive from your product – is the key. Should you try to get back every one of your churned customers? Kissmetrics resoundingly says NO – and that you may even be able to ignore up to 95% of your churn for valid reasons.
- Churned Customers Worth Fight For – As Kissmetrics wisely points out, not all users who choose to leave your product would have been good customers to your business in the long run. Lincoln Murphy, Customer Success guru, refers to these customers as “Bad Fit Customers”; according to him, if a customer neither receives value from you immediately, nor in the future (under realistic assumptions), then you are better off without these customers anyway. So when a Bad Fit customer leaves you, it is, in fact, good churn. It keeps you from spending your limited resources on a situation that will prove to be futile. However, there are are customers for whom you – apart from delivering immediate value – will be able to deliver future value, in a particular timeframe. Lincoln calls them “Stretch Customers” and these are the ones whom you can strive to get back, provided the stretch is worth it.
- Filtering out the 5% Stretch Customers – As Kissmetrics explains, “a freemium model is infamous for papering over the cracks, by showing a huge number of sign-ups and concealing the actual count of the right, engaged customers. Given this, it’s our job to dig through the fluff and identify the churn that matters.” By experience, Kissmetrics learned that Stretch Customers typically account for only about 5% of churn. And to identify that 5%, they recommend a top-down approach, with three major activities:
- Capturing the Right Data – Fact: When a user has decided to leave your product for good, filling out an elaborate questionnaire will be the last thing that they’ll want to do. Kissmetrics recommends putting yourself in the customer’s shoes and instead “designing your customer exit process in a way that you can discover the right reason for their account cancellation, in the most non-intrusive manner.” First important adjustment to make? Do away with open-ended questions; in most cases the user will simply skip that question (if it’s an optional field) or will type in some gibberish to get it over with (if it’s made mandatory). Instead, give them a list of specific reasons for cancellation and towards the end, make it optional for the users to type out their feedback.
- Using the Captured Data – When a customer leaves, Kissmetrics advises that you work to understand two critical things: first, are they a Stretch Customer and second, will rectifying their pain-point align with your product vision. We definitely recommend checking out the full read to learn more about how to thoughtfully answer these two questions but the real devil is what happens when you begin to determine what distinguishes Bad Fit Customers from Stretch Customers.
- Spotting Mistakes and Preventing Them in the Future – Once you’ve separated the Bad Fit Customers from the Stretch counterparts, your next step will be to figure out how to prevent less of the former from onboarding and more of the latter from churning, in the future. Kissmetrics has three words for you: Root Cause Analysis. According to Andrew Tate’s interesting framework, you should be able to trace every cancellation back to a root problem. And those root problems typically fall into one of four categories: 1) Bought away, 2) Moved away, 3) Pulled away or 4) Pushed away. Once you know in which categories your churn is falling, then it is possible to understand your hidden problems and find your strongest solution. Kissmetrics offers great guidance on potential problems and solutions for each of the four Tate categories, check out the full post for more details.
For those of you who might have just read all of this and realized what you’re really grappling with is involuntary churn – congratulations, this is typically a much easier problem to solve! We recommend this read for some useful tactics to combat involuntary churn, particularly around smart dunning mechanisms.
Customer Success Around the Web
- Logical customer segmentation is they key to scaling CS: Customers that pay more need more human interaction, right? And customers that pay less don’t deserve as much human interaction, right? Segmenting customers based on how much they pay us is one of those traps that a lot of Customer Success organizations fall into, mostly because it seems logical and it’s what the industry has been doing for a long time. But this doesn’t mean that this practice is right or effective. This thoughtful read explores creating “Appropriate Experiences” for each of your customer segments based on the customer’s point of view, rather than an internal point of view. This important exercise can help you determine the type and level of coverage (humans and technology) that each type of customer needs, empowering you to deliver success right on target (not too much and not too little).
- Approaches for proactive CS: We all know that preventing a fire is much easier than putting one out; this mentality can easily be applied to how one approaches best-practice business tactics. Take for example a scenario when a company is proactive – as opposed to reactive – in their approach towards ensuring that Customer Success is put at the very top of a company’s business model. When the customer succeeds, everyone succeeds, but there is only one chance to succeed. This engaging read breaks down three primary areas of focus that require constant attention when working with new clients – onboarding, ongoing success, and support – and dives into ways to develop and execute proactive strategies for all these areas.
- Top quartile SaaS growers focus on gross churn: SaaS entrepreneurs are bombarded with blog posts with an array of metrics and variables on which they need to focus in order to build their companies. Within the world of Customer Success, there are so many metrics that are touted: gross churn, net churn, logo churn, renewal rates, NPS score, etc. To better understand which customer success metrics most impact growth, this interesting read examines a subset of companies in SaaSRadar, McKinsey’s database of pre-IPO SaaS companies. The conclusion is that gross churn, by far, is the most impactful metric. We recommend checking out the full read to learn more about what gross churn is and why it matters.
Word to the Wise
This week’s wisdom comes from a fascinating post about how HubSpot was able to boost their customer retention by making churn a sales rep problem. Yes, you read that right!
For any VP of Sales, increasing a company’s run rate from $300K to $3MM over the span of six months is an impressive feat. But when Mark Roberge attempted to do that at HubSpot, he ran into a big problem: ARR was up. Customer count was up. But churn had skyrocketed.
As Roberge outlines in his book, The Sales Acceleration Formula, his first instinct was to blame the Customer Success team. After all, they were the ones responsible for ensuring customer retention. If churn had increased, it had to do with their performance as a department. However, after close analysis, the sales team at HubSpot discovered something surprising: Customer Success wasn’t the issue. Sales was the real problem. In an effort to ramp from $300K to $3MM, the team had gone after prospects that were unlikely to have success with their product. Put simply, it was a short-term win with a hefty long-term cost. So then Roberge and the team at HubSpot did something unexpected: They made churn a sales rep problem. Once they did, they were able to turn the ship around and finally boost customer retention.
We highly recommend checking out the full read, it’s definitely worth your time. But one point in particular caught our attention: the idea that a key ingredient for minimizing churn is your sales compensation structure:
“If you’re like a lot of organizations, you’ve probably sent the wrong signals to sales reps about what matters the most. That’s why it’s crucial that you take a hard look at how comp structure may be impacting churn. Once HubSpot realized that their churn rate was a sales problem, they dug into the data once again to determine the catalyst. As it turned out, the sales compensation plan they had in place was practically encouraging reps to ignore the potential for churn: Under the plan, sales team members were paid $2 for every $1 of MRR brought in. They were rewarded almost solely on the amount of MRR they generated, and churn was almost not factored into the equation at all. Based on the plan, reps only received commission after their accounts had been customers for 4 months. If they churned in less than that, no commission. While this might have seemed like an effective measure on the surface, HubSpot’s analysis discovered that most customers churned right after the 4 month mark. As Roberge ultimately discovered, compensation plans are the single greatest leverage VPs have to change their sales team’s behavior. By changing the compensation plan to align with customer milestones, they were able to turn the ship around.”