How to Develop an Early Warning System
to Combat Churn
As more companies embrace recurring revenue models—trading large upfront sales for annual or monthly recurring payments—they often neglect to invest in the relatively new and developing field of Customer Success. Many firms rely on their existing customer support team, with the hope that answering calls and emails quickly and accurately will combat customer churn and make for happy customers. A far better approach: invest in a customer success team that can proactively identify and help struggling customers before they churn.
Salesforce.com was one of the first companies to talk about the function and importance of Customer Success. Now Customer Success rivals sales, marketing, product management and engineering for the CEO’s attention. While the Customer Support team still exists, and focuses on metrics like “average response time” and “average resolution time,” the Customer Success team is the proactive arm, focusing on reducing churn.
Why is churn so important? A small change in churn has a huge compounding impact on a business’s value. A company growing 30% with 5% annual churn will have 52% more revenue in 5 years than a company growing at the same rate but with 15% annual churn. Driving down churn can be difficult. According to a 2015 Pacific Crest Private SaaS Company Survey of over 300 SaaS companies, the average dollar churn rate in 2015 was 7%. Companies with a lower ASP (<$25K a year) had higher churn rates (8-13%) while companies with a higher ASP (>$25K a year) tended to have lower rates (4-5%).
If you’re new to Customer Success—or if you want to improve your efforts—a great place to start is to develop a health score to measure your customers’ satisfaction and their likelihood to churn. Multiple factors can go into creating a health score but here are my top:
- Product usage – If you don’t have data on how customers are using your product (login frequency, feature usage, failed tasks) you’re flying blind. (Tools like Google Analytics, Mixpanel, Totango and Gainsight will help you discover this data.) If a customer normally logs in every day and they haven’t logged in for 5 days, reach out to them. Or, if you know your most successful customers are the ones that use a specific set of features, reach out to all customers and train them on these features. Even better, highlight these features during onboarding.
- User fulfillment – If a customer bought licenses for 10 users and they’re only using 3, don’t ignore this fact hoping they won’t notice. Call them and figure out how to get your product more embedded in their company.
- Tickets – Track how many times a customer has called or emailed you with a question or problem and how it was resolved.
- NPS score – Survey your customers by asking them the NPS question: “How likely are you to recommend our product to a friend?” https://www.netpromoter.com/know/. This is one of the most common ways of measuring sentiment. I recommend surveying your customers 30-90 days after implementation and 60-90 days before renewal.
- Onboarding – Track and rate the onboarding experience for each customer. How much time did you spend with them? Did you demo the critical features of the product? How many people did they involve in this experience?
- Customer Goals – Ask your customers to define what success with your product looks like and document this—or even better, measure this success metric in the product. When you follow up with them weeks or months later, ask them how they’re progressing with these goals.
Once you’re done gathering information, aggregate all of these data points in your CRM (or Excel) and create a simple formula for calculating a health score (Use A-F or 1-5) for each customer. You can then focus your team’s effort on the least healthy customers. You can also call your healthy customers and ask them to be references, beta testers, and maybe even candidates for an upsell.
When you’re getting the hang of it, consider software that will automatically aggregate all this data for you in real time, identify trends, and develop workflows. Some of the better platforms our team has evaluated include Gainsight, Totango, Preact and Bluenose.
Written by Taylor McKinley – Taylor is an Operating Partner at Mainsail Partners and works with Mainsail’s portfolio companies to drive improvements in product development, pricing, technology implementation, customer success and sales force optimization. Taylor also works with the investment teams to investigate new areas of investment for Mainsail. He is a graduate of Williams College and Stanford Business School. Send him your comments and best technology advice to firstname.lastname@example.org or via LinkedIn.
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