The case for CS as a critical business investment, stretch v. bad-fit customers, types of churn and how to combat each

Fighting Churn Newsletter

Special Announcement: ChurnZero will be at Customer SuccessCon East!

The ChurnZero team will be at Customer SuccessCon East in Boston on Thursday, October 20th, 2016 – and we want to see you there! We love this conference because it is deliberately designed to maximize opportunities for attendees to network with other customer success professionals and to directly interact with speakers. And with this year’s agenda you’ll definitely want that advantage; the schedule is full of sessions on leading edge strategies and best practices in Customer Success.

It’s not too late to register, do it today! Use promo code “ChurnZero” for a 10% discount on your registration. And come say hi to us on Thursday, October 20th!

Churn Fighting Focus: Customer Success is an investment that should make money

In this blog, we usually focus on best practices and new strategies for customer success, as we know many of our readers have already made the decision to invest – via human resources and technology – in their CS team. But with those readers’ permission, this week we want to acknowledge that many businesses are still assessing if they need a distinct CS team and/or how they should support that CS team. To put it plainly, many businesses are wondering if/how long they can delay the cost of investing in their CS team.

If that sounds like your company, this week’s churn fighting focus is for you. We are going to talk about why, like sales, customer success is an investment that should make money, not a cost to be put off as long as possible.

Let’s say you retain 95% of your customers month-to-month. That sounds like something to be proud of – until you do the math. That’s 5% churn per month or 60% per year. In other words, you have to replace 60% of your revenue every year just to break even. What if you have monthly 98% retention/2% churn? That’s still 25% a year or a quarter of your revenue.

The best-run SaaS companies can see up to -2% churn per month (on a revenue basis). Yes, that’s negative 2%, which means they make more money every month. How? Because the customers who stay with them buy and spend more over time than what the company loses from other customers leaving.

If you’re a CEO, it is time to take Customer Success as seriously as marketing, sales or product development with these rules:

  • Customer success is your core growth driver. All great companies’ customers come from one main source – word-of-mouth, whether the leads come via referrals directly or whether new customers are closed using case studies, references or testimonials. This is much more assure-able in recurring revenue models, where we can track renewal rates, upsell-amounts and referrals.
  • Customer success is 5x more important than Sales. Yes – Sales is your priority. But Sales only helps begin what will hopefully be a longer-term relationship. To function at all, Sales needs Customer Success resources – like references, stories and case studies. Generally, founders do a good job of doing whatever it takes to get a big deal closed – but often they do a poor job of everything after that, be cause they’re off to help with the next fire, drama or Big Deal. CEOs and founders: don’t focus on getting new customers so much that you ignore your current customers.
  • Start early, hire early. In SaaS, Customer Success is a “single-digit hire” – one of the first 10 hires. Another SaaS rule of thumb is having one Customer Success manager per $2M in revenue – hired in advance of that revenue, not after you have it. Silicon Valley companies with enough funding often now invest big at the beginning, with 2 to 4 people on the team right away. Remember, a Customer Success person, like a salesperson or a marketing budget, is an investment that should make money (a lot); it’s not just a cost to be put off as long as possible.
  • Visit customers in person. Unhappy customers don’t (always) complain before they leave. In-person visits can make all the difference in identifying their problems and in changing their attitudes. Here’s a good rule on this point – for every co-founder, the CEO, plus every Customer Success Manager: 1) Must meet onsite with five customers a month (that’s 60 per year) and 2) Get two customer badges every year as a bonus (that is, you visit so often they give you your own ID badge). A phone call is not a meeting. By visiting in person, regularly, your company will learn more about what’s really working or not, earn more trust – and those customers will (almost) never churn. It’s much harder to tell a friend you’re leaving them than some faceless company. What if you have nothing to say? Just show them your roadmap and ask for feedback on it and on issues they are having today. That alone will fill the meeting.
  • Customer Success needs financial responsibility and metrics. When your Customer Success function doesn’t have financial goals, its value can get muddled. One bad assumption is that “a great product will automatically create happy customers,” and therefore you won’t need to hire people to actively work with your customers. However easy or incredible your product is, you need humans talking to select categories of your customers. The whole point of Customer Success is to increase Net Negative Churn, so you need tools and processes to measure and improve the function, including how the people on your team perform. To justify investment (such as in headcount or tools), and to create the hunger that a Customer Success leader and team will need in order to deliver measurable results, Customer Success needs to own some financial results: usually at least on retention rates and perhaps even on upsell revenue.
  • Rule 6. Evolve Customer Success goals and metrics as you grow.
    • Traction ($0-$1M): What do customers want, and what do they do with our product?
    • Adoption ($1M-$5M): Why and how should customers include our product in their daily business?
    • Retention ($5M-$20M): Why do customers need to keep on using our product after the honeymoon?
    • Expansion ($20M-100M): Why should customers expand to more seats, more features?
    • Optimization ($100M+): Automation and improvements driven by data.

Still not convinced that you need to start investing in people and technology for your CS team (or have a higher up that is still not convinced)? We highly recommend downloading the “Executive Primer to Customer Success Management” thought leadership paper from Forrester.

Customer Success Around the Web

  • Stretch vs. Bad-Fit Customers: It’s great to know who your ideal customer is but it’s much easier – and required – to first identify the types of customers that are a bad fit and the characteristics that make them so. If you want to build a business that’s free from churn and designed to move customers along an ascension path, you must acquire customers that have success potential. But the reality is that there are times you should stretch for a customer fit, startup or not. The trick is not to convince yourself that you’re just “stretching” when you’re actually trying to justify signing bad-fit customers. There is a critical distinction between stretch customers and bad-fit customers, as this great read explores. A bad-fit customer will never be right for your business but a stretch customer could be a great fit in the future, depending on your company’s goals and roadmap.
  • Understanding the type of churn you are fighting: Customer churn is the boogeyman of SaaS and with good reason: even awesome products and smart growth strategies can be killed by out-of-control churn. But there is a wide variety in the types of churn your business could be experiencing and the key to effectively combating your churn is first determining which type(s) you suffer from. This read does a deep dive into the variations of churn  – from desired outcome churn to natural cause churn – and offers thoughtful and actionable solutions to each type.
  • Actionable ways to improve your CS: We heart a good listicle and this great one offers actionable ways to improve your customer success! Our favorite idea? Saying “thank you” to your customers. It’s a simple idea but one that many companies overlook. A sincere thank you can go a long way to making a customer feel heard and valued, which builds their affinity and trust towards your business. And remember that it’s not just the happy customers who need a thank you, it is also the ones you have pioneered though some tough times or been patient while getting to the bottom of a bug. Sending thank yous is also an opportunity for creativity; emails are great but posts on social, hand-written notes and specialized swag can also be fun ways to make your customer’s day.

Word to the Wise

This week’s wisdom comes from Jason Whitehead, CEO of Tri Tuns, a consulting group that specializes in approaches CSMs should employ to drive user adoption and ROI with their customers. In a recent conversation about how the CS team can work to make a customer’s first 90 days less risky, Whitehead offered several fresh perspectives on how CSMs can best address the people, process, technology and organizational needs of their customers. The full interview is worth a read but one particular point caught our attention:

jason-whitehead-ceo-of-tri-tuns

“One of the overarching problems I see in the SaaS industry, in general, is that many vendors are still approaching things from the old model where the focus was on delivering software. Today’s customers demand more. They demand to see measurable business results and clear ROI from their investment in technology. If they don’t see it, they walk. CSMs need to shift from being an expert in implementing their system to becoming an expert in helping their customers’ shift the way their employees do their jobs – using the SaaS system – to deliver measurable business results. CSMs need to become experts on helping people and organizations change; they cannot be just technologists. […] One of the first things CSMs need to do is meet with the customer to learn about their specific goals and to set realistic expectations about what it takes to achieve these. Many times customers have seen great demos and the salesperson set high expectations about what is possible. It’s now the CSM’s job to set expectations about what is realistic and practical within given time frames.”

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