Don’t Manage Customer Churn. Prevent It.
When Mikael Blaisdell started out as a customer relationship consultant in the 1980s, he would often get panicked calls from tech companies after they received negative reviews for their customer support. Each time they’d ask the same question: “How quickly can you fix it?”
And each time, he’d answer the same way.
“You didn’t get into it overnight,” Blaisdell would say. “And you’re not going to get out of it overnight”
Since then, customer relationships have only become more important to business success. The rise of SaaS means companies only see value from customers they retain over a long period. At the same time, it’s never been easier for a customer to jump ship for a competing product.
“You can be signing contracts as fast as you can print them out ... and you’ll be doing it right up until the day you go out of business because it’s not sustainable,” said Blaisdell, who is also the executive director for the Customer Success Association. “If you haven’t recouped your customer acquisition cost ... you have a dead loss.”
Fixing churn, much like improving the customer experience, can’t be done overnight. While a customer success team can help, mitigating churn requires an organizational overhaul that places the customer at the center.
7 Tips for Managing Customer Churn
- Measure both account-based churn and net dollar churn to get a full picture of your churn rate.
- Run a cohort analysis to identify your strongest customers and the ones most likely to churn. Build your ideal customer profile to target those top-tier customers.
- Collect exit-survey data to identify the common causes of churn. Use that data to tell a story to the CEO to convince them to adopt a culture around managing churn.
- Listen to your customer support team. It often hears the rumbles of churn before any other team.
- Build a customer plan with actionable metrics and deadlines that deliver on the customer’s goal.
- Track product usage and translate that into ROI terms. This increases the odds for renewal.
- Create a smooth off-boarding process. There’s always the chance to win them back.
Building a Culture to Manage Churn
As one of ringDNA’s earliest employees, COO Kanwar Saluja has been involved in every part of the customer journey from sales to support to renewals. During that time, he’s learned that the seeds of customer displeasure can be planted at any point during their experience with the company.
If a prospect isn’t vetted properly or expectations aren’t clearly established during the onboarding process, they’re going to churn. If the customer stops seeing value from the product or loses faith in its reliability, they’re primed to leave.
The best way to stop that from happening is to make it a company-wide responsibility, Saluja said.
“The foundational requirement for reducing churn is ensuring you have a company-wide cultural and behavioral mindset that’s dedicated to customer success,” he said.
This approach is what customer success consultant Ed Powers calls the preventative method to combatting churn. Overall, there are three common strategies companies can take to retain their customers.
“The foundational requirement for reducing churn is ensuring you have a company-wide cultural and behavioral mindset that’s dedicated to customer success.”
The first is reactive, which involves tossing incentives and discounts at a customer when they don’t want to stay. This might trim about 10 percent of churn, but it’s akin to kicking the can down the road, Powers said.
The second option is to take a proactive approach, which involves hiring a customer success team to improve the customer experience. This is the most common step companies take, but Powers warns that the churn rate will eventually plateau. A customer success team can improve health scores and adoption rates, but there’s a limit to its reach.
In the preventative method, churn is everyone’s responsibility. At this stage, the key question becomes: “How do we create an environment where customers wouldn’t dream of going anywhere else?” Powers said. From the prospects that sales reps bring on to the features the engineers deploy, everyone is aligned on preventing churn from happening in the first place.
This is how companies can see their churn rate drop significantly, Powers said.
So, where do you start?
Start Tracking Account-Based Churn and Net Dollar Churn
The first step is to get a sense of the current churn rate and understand why some customers leave and others stay, Saluja said. There are two different types of churn a company needs to measure:
- Account-based churn, which measures the percentage of customers that leaves the company in a given year.
- Net dollar churn, which tracks the amount of revenue a company loses each year as a result of a customer downgrade or churn.
Tracking the account churn alone can be misleading. For example, a company can retain 99 out of 100 accounts and have an exceptional churn rate. However, if that one customer accounted for 90 percent of the company’s revenue, that 99 percent retention rate won’t do it much good.
Measuring both gives a company a more complete picture of its churn rate and goals.
Run a Cohort Analysis
Once a company has a handle on its churn rates, it’s time to run a cohort analysis.
The analysis involves comparing the profiles of customers who stay and grow with the product with those who leave. This helps a company identify patterns in company size, industry, vertical and even funding background.
For ringDNA, the analysis revealed that its strongest customers were SMB and enterprise companies in the software, technology and medical fields. However, its most successful SMB customers were all backed by reputable VC firms.
That information helps a company tighten the criteria for its ideal customer profile and ensure that it signs prospects that are less likely to churn.
Conduct an Exit Survey
Additionally, it’s important to understand why a customer decides to churn. This is where exit surveys come in handy. Powers suggests making the survey a necessary step in the off-boarding process. Ultimately, he’s found there are three common causes for churn:
- Customer service
When he builds an exit survey, he gives the customer a series of about 20 options they can check that relate to each of those three categories. A product option might be, “The product wasn’t reliable,” a services option might be, “I wasn’t treated fairly,” and a financial option might be, “We’re going through financial difficulties.”
“When you can show data, it does raise a lot of eyebrows because people start to understand, ‘Oh, we’re all responsible for this.’”
Providing choices makes it simple and painless for the customer to give feedback, and it allows the company to pinpoint where it needs to improve, Powers said. Each team can then be measured on and held responsible for its portion of churn.
Combined, the churn rate, cohort analysis and exit survey arm a customer success leader with the data they need to get buy-in from the CEO. Without the CEO on board, organizational change can’t happen, Powers said.
“When you can show data, it does raise a lot of eyebrows because people start to understand, ‘Oh, we’re all responsible for this,’” he said.
Guide Sales to Ideal Customers
One of the most important steps a company can take to reduce churn is to get sales and marketing on the same page as the customer success team.
Blaisdell likes to call salespeople the fighter pilots of the business world. And, like fighter pilots, reps are singularly focused on their goal, which in this case is closing deals and bringing in revenue.
This is great for the company’s immediate bottom line, but without the right guidance, reps may not take the time to distinguish between good-fit and bad-fit customers. As a result, the company will still see high rates of churn no matter how good its customer success team is.
“You have to say: ‘We’re going to guide you to your target. We have the data that shows the ideal prospect, the one that’s going to make the most money ... and here’s how you close them.’”
That’s why Blaisdell said customer success needs to operate like a guiding system for the sales and marketing teams. The more information the CS leader can provide about the company’s ideal customer profile and how to close those customers, the more influence they can have on the sales and marketing strategy.
“You have to treat them like fighter pilots,” Blaisdell said. “You have to say: ‘We’re going to guide you to your target. We have the data that shows the ideal prospect, the one that’s going to make the most money ... and here’s how you close them.’ Salespeople will lap that up.”
Using data from the cohort analysis, customer success managers can work with reps to identify the churn risk of a particular prospect and what they’d need to do to make the prospect more valuable to the company, Blaisdell said.
“It’s not a matter of just saying to the salespeople: ‘No, go away. We’re not going to close this one,’” he added. “It’s a matter of saying ‘We aren’t going to close this one because as the deal is structured now, it doesn’t look good for us. But if we change the deal, then it does look better.’”
Still, commission remains one of the most powerful motivators for sales reps, which is why it’s also important to align the compensation plan around retention. Two ways a company can do that is through a claw-back provision if a customer churns and a second commission if a customer is retained, Blaisdell said.
Ultimately, this incentivizes reps to bring on the best-fit customers and arms them with the data they need to sell successfully. The end result is a healthier network of customers that are more likely to grow with the product.
Listen to Your Customer Support Team
Even if the sales and marketing teams do everything right to bring on the best customers, it doesn’t guarantee those customers will stick around. If the product isn’t reliable or new features fail to solve customers’ needs, they’re still going to churn.
That’s why one of the most valuable steps ringDNA took to reduce churn was having its customer support team lead a meeting with engineers, product managers and the department heads every week, Saluja said. During the meeting, the support team highlights some of the most frequent feedback it has received from customers during the past week.
“The days of ‘Move fast and break things’ are over.”
Most companies treat customer support as an afterthought, but those employees are often the ones who hear the rumblings of churn first, according to Saluja. This meeting helps the company balance the tug of war between launching new features and improving product reliability.
“The days of ‘Move fast and break things’ are over,” Saluja said. “The support team and the success team are treated like a customer here, and we’re constantly trying to balance releasing new features versus ensuring stability.”
Create a Customer Plan Around the Customer’s Goals
From the moment a customer signs the contract, the case for contract renewal begins. This is where the customer success team steps in.
If a customer success manager has any hope of retaining that customer, they need to create a clearly defined customer journey.
The customer journey should be a shared document with the customer that charts the steps they can expect to take with your product to reach their goal. At ringDNA, the first three months typically center on onboarding the customer and getting them up and running, Saluja said. The next three months focus on increasing adoption, and the final six months focus on nurturing the customer and introducing them to new features.
Building that plan starts with the customer success manager understanding what the customer wants to accomplish with the product — and then setting expectations around how they’ll reach that goal.
To do that, the customer success manager needs to get into the mindset of their buyer, Saluja said. They need to identify what the client’s overarching business goals are and how the product fits into that goal. They need to note key stakeholders and seek those stakeholders out to increase adoption, and they should have an understanding of how the company’s budgeting process works.
“If you’re not on a texting basis with your sponsor, you’re just another vendor.”
RingDNA provides its CSMs with a list of 100 questions they can ask customers that have nothing to do with the product. Focusing on the customers themselves can help the CSM serve as a consultant on the journey.
“Remember, customers want to solve their problems, not yours,” Saluja said. “Any misalignment here, and it will increase the risk of churn.”
A good litmus test to measure the strength of a customer relationship is to see when the CSM last texted the customer.
“If you’re not on a texting basis with your sponsor, you’re just another vendor,” he added.
Ultimately, an effective customer plan provides the blueprint for that relationship. It’s the customer success manager’s responsibility to build on that.
“If you’re not talking to them, you are leaving them wide open to your competitors who will provide the coaching for how to increase that value,” Blaisdell said.
Chart Product Usage and ROI
Last year, ringDNA faced the renewal of one of its larger customers. To convince them to stay, ringDNA decided to run a little experiment with its product.
One of ringDNA’s product-value propositions is that it saves reps time dialing phone numbers through its auto-dialer. So, a product team member sat with a stopwatch and timed how long it took a sales rep to input a 10-digit phone number, and then compared that with how long it took using ringDNA. They then extrapolated that data to a day’s worth of calls, and then a month and then a year to calculate the time savings a customer would experience using the product.
“This was amazing. It really helped us with a massive renewal.”
During the renewal conversation, the customer success manager used that data to tell a story of how the client was benefiting from the product. It worked because it put the ROI of the product into terms the customer cared about.
“This was amazing. It really helped us with a massive renewal,” Saluja said. “In fact, they took that analysis and put it into their renewal justification document, which they needed to present internally.”
Tracking product usage and the value it provides a customer is crucial for mitigating churn. As in ringDNA’s case, it can help make the ROI case for the product. But it can also stop a customer from drifting away from the platform.
The customer success team’s goal is for customers to continue expanding their usage of the product and purchasing more tools. If that progress stops or plateaus, it can be a sign of trouble, Blaisdell said.
If there is a drop in usage without a cause, the CSM needs to set up a meeting with the customer and find out why. If it’s because the customer is struggling financially and laying off staff, as was often the case at the start of the COVID-19 pandemic, it might make sense to reduce the contract.
But if a customer is only using half its available features, then it’s a sign the CSM needs to make a better ROI case. This is where sharing customer stories around features and providing data to back that up can open the customer’s mind.
Create a Smooth Off-Boarding Experience
No matter how effective a company is at mitigating churn, it’s impossible to completely prevent it. Some churn is inevitable — just like death, taxes and awkward Zoom meetings.
“When somebody off ramps, they join the ranks of the inactive customers.”
There are always going to be customers who get bought out, go through an economic downturn or stray to a competitor. That’s why, in Blaisdell’s opinion, customers come in two flavors: active customers and inactive customers.
The best thing a company can do when a customer leaves is create a smooth off-boarding experience and learn from the churn. This can include a short exit survey or interview and a kind note asking to keep in touch.
After all, there’s always a chance to win them back.
“When somebody off ramps, they join the ranks of the inactive customers,” Blaisdell said. “If you’re smart, you’ll track that because something may change later on. You may come out with a new product, and you want to be remembered kindly.”