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This is a condensed version of a post that originally appeared on forEntrepreneurs.com: Managing Customer Success to Reduce Churn.
The health of a SaaS business is directly tied to its ability to retain its customers and prevent churn, which is accomplished by ensuring their customers are happy. Customers must be getting the promised business benefits they signed up for. This post covers how to measure customer happiness, and how to actively manage your business to achieve customer happiness and reduce churn.
For a recap on why lowering churn should be such a high priority, read this post: Why Churn is SO critical to success in SaaS.
If you are a recurring revenue business, most of your revenue comes after the initial sale. When customers churn, you need to replace that revenue with new bookings — which becomes harder and harder as you scale. When a business is small, the amount of money lost due to churn is generally limited and can be replaced without too much of a problem. In the below example of a SaaS company in its third year with $10M of recurring revenue and a 2.5% monthly revenue churn rate, the $3M per year they lose to churn can be fairly easily replaced with new bookings. However, when the company gets larger, as demonstrated below in the company’s sixth year with $100M to renew, the amount being lost to churn becomes much larger. The same 30% annual churn results in $30M of lost bookings. Finding an additional $30M in bookings just to stay at the same revenue level as the previous year is a huge problem.
There are two solutions:
Negative Revenue Churn comes when the expansion or upsell/cross sell revenue from the customers who don’t churn exceeds the revenue lost from the customers who do churn.
The bottom line is obvious: If you want to stop your customers from churning, you will need to make them happy with your product/service.
Customers bought your product to get a clear business benefit; but to make them happy, I believe you need to make sure they are getting the business benefits they initially hoped for. For some startups, this will mean taking the time to figure out a really simple way to express the key business outcomes that their product will deliver. Communicating that your product is increasing the number of leads or conversion rates, especially if you can quantify those increases, is the type of benefits message that will resonate with the CEO of your buyer.
HubSpot may have been the first company to introduce the notion of a measurement to predict churn with their CHI score (Customer Happiness Index). The CHI score measured which parts of the product each customer was using, and awarded a higher score for features that were thought to be more sticky.
As an example, HubSpot had realized their SEO product was not particularly sticky, as the customer would do a lot of work in the early days, but after setting their site up correctly, they would have gained most of the benefits. Many churned at that point. However if the customer had hosted their blog with HubSpot, or was using HubSpot’s Contact Database to track customer details and behaviors, those were sticky features, and would make it harder for the customer to churn.
Recency and frequency of activity would also help provide a good indicator of customer engagement. However HubSpot soon found that although useful, CHI was not a great predictor of churn. Just because someone was using the product, didn’t mean they were necessarily happy with the product. But, they were still on the right track.
I believe that a big part of measuring Customer Happiness is not to measure feature usage, but to measure business outcomes, e.g., what was the increase in leads or conversion rates. This data can be helpful to your customer to quantify how your product is delivering results. It is also helpful to you to identify customers not getting value out of your product and who are thus at risk of churning.
In addition to measuring the business outcomes, the complete Customer Happiness Score also needs to take into consideration other items:
It is also perhaps worth stating that what we are really looking for is a Churn Prediction score, not just a Customer Happiness score. There are some other indicators that can be useful to predict churn:
Now that we have a way to measure Customer Happiness/ Health (or likelihood of churning), we can start to look at ways to manage and improve this. Managing churn and customer happiness is not a simple function that can be handed off to one department of your company. Customer happiness is impacted by nearly all departments in the business including customer support, on-boarding, consultants, renewal sales team, and many others like pricing, product management, product development, marketing, and more. Given this, how do we go about managing churn and customer happiness?
Even though customer happiness is a company-wide initiative, there are two obvious starting places where we can help ensure lower churn:
As Nick Mehta, the CEO of Gainsight describes, there are five ways they have seen this structured organizationally:
1. Single Member Model: Firefighter CSM
The first model is great for early stage companies, where one or a few people may do everything from on-boarding to training, support, renewal, upsell, reference management, etc. In the early days, this person is your eyes and ears.
2. Sales Oriented Model
In a sales oriented model, customer success is part of the sales function. This works really well when you’re selling to smaller customers and the product is lower touch, where there’s less customization, and less deployment.
3. Service Oriented Model
A third model is to have customer success management as a function in services. This model works well in higher touch businesses where the product is more complicated, or the deals are bigger.
4. Integrated Model
In the integrated model you actually have a Chief Customer officer who owns revenue of existing customers. Underneath them, there might be a customer success management team that’s very customer focused and a renewals team that’s responsible for actually getting the renewal. Separately, a sales team focuses on new business sales. This kind of focus is usually a very good thing.
5. Split Model
A split model is common in more mature companies, where a renewal team reports into sales which is responsible for existing customer revenue, and a CSM team reports to services. Despite the different bosses, they’re tied together at the hip and work side by side.
There are different ways to think about doing this depending on the size/value of the customer. We recommend segmenting your customer base, and developing different tactics for each segment:
For the automated approach, look at triggering in app messaging based on usage patterns. For example if a customer has used part of your product, but not yet moved on to the place where they will derive the really powerful business benefits, then you may want to message them in the application itself, or by email.
For more in-depth discussion on this topic that includes a more detailed look at each type of customer success model and a list of the best CRM resources I have found, read the full post here: Managing Customer Success to Reduce Churn.
Follow us on Twitter: David Skok, @BostonVC and Matrix Partners, @Matrix Partners.
