Can you feel the buzz? The world of Software-as-a-Service Customer Success is hopping right now. Gone are the days when the only customer-oriented focus was on acquisition. “Retain, retain, retain” has become the new do-or-die motto. And I couldn’t be happier. For those of us who’ve operated in a retention mindset for a long time, it’s refreshing that something we’ve been going on and on about is now becoming common sense. It’s clear that the SaaS companies that succeed will be those that master not only getting customers in the door, but keeping them, and keeping them delighted.
That said, though, I can’t help but consider a possible downside to this sudden focus on retention. I’ve even been caught in the middle of it myself. If we are dedicated purely to retaining our customers, to avoiding churn of any kind at all cost, are we best serving our customers needs and those of our companies? In short, is there such a thing as a customer who should not be retained?
The SaaS companies most likely to get caught in a scenario where they need to answer this question and find themselves unable to do so are those whose primary or sole metric around customer success is a retention target. Don’t get me wrong — having a solid, thoughtful, aggressive retention or churn target is critical. If your SaaS company doesn’t have one yet, it’s the right place to start. And there’s a lot to consider: Should you define it on a customer or a revenue basis? What’s the right target to aim for? Is it best to track pure or net churn ? (I highly recommend Lincoln Murphy’s SaaS Churn & Customer Retention Guide for thorough, expert advice on the subject.)
But don’t stop there! Kudos for defining a retention target, and for optimizing your customer success and other business operations in support of that important measure. Now it’s time to move on to the next layers of the onion, and I highly recommend these two metrics as the next steps to tackle:
1. Cost to Serve. Can you accurately assess how much employee time and other resources are needed to sustain each of your customers at any given point in their lifecycle? Sure, if you ask your support team who are their biggest sinks, they’ll easily be able to rattle off the top five “Hall of Fame”, and probably have some colorful anecdotes to go along with them. But what would it take for you to have real, systematic data on support cases, escalations, and other “staffed” interactions available for analysis in combination with other critical streams such as product usage, lifecycle stage and subscription information? With data like that readily available, it becomes much easier to provide an informed answer to the question: “How far should we really go to keep this customer?”
2. Customer Lifetime Value. Can you predict what a particular customer is likely to spend with your company in total over all time? For this metric, you may have some historical averages at your disposal. If you’re lucky, you might even know that customers of a certain size or in a specific vertical tend to stick around for X years and pay Y dollars per year, so you can do some simple math. But how realistic is that model when you’re facing an individual customer who’s threatening to leave and asking for the sun, moon and stars “in consideration”? How much “consideration” is the right amount? What’s the right price for the sun, moon and stars? When, if ever, will you reach breakeven? Once again, good data is key. You need to be able to zero in on what other customers that truly look and behave like the at-risk customer have paid for your service, and how long they have stayed.
And last but not least, when faced with a customer escalation that constitutes a churn risk, it’s also important to assess that customer’s potential impact in your market. Have they served as a reference or provided referrals in the past? If retained, what would it take to ensure that they continue to do so? Are they active and influential in social media? It’s safe to always operate under the assumption that your customer, whether they stay or go, will not hesitate to complain publicly about perceived mistreatment, lack of satisfaction with your product or services, or unprofessionalism.
It’s all too common an experience for SaaS companies to go all out in a fight to keep a customer. They might give the customer a special, unheard of, ongoing price reduction, and even throw in some free services, guaranteed to make them succeed beyond their wildest dreams. Then find out a few months down the road that their now lowest paying customer is still far and away their highest support cost burden, is still writing terrible rants on review sites, and has no intention of going anywhere, ever thanks to the sweet pricing they’ve been given. And perhaps saddest of all, the customer is not gaining any real value from using the application, and maybe another one would have been a better fit. It’s a worst case scenario for all parties.
To avoid it, don’t just fall back on the easy answer to the question: “Is it good to keep customers?” Of course it is, generally speaking. Instead, arm yourself to be able to answer the real question: “Is it good to keep this customer?” And to answer that, you need to know how much you stand to lose, how much you stand to gain, and what the customer’s disposition will be if you do or don’t retain them. Paint a more complete picture with not only a retention target, but also calculated cost to serve and customer lifetime value. You need to have these metrics and the data pipeline behind them solidly in place before the customer is on fire and your team needs to make a snap decision.
Far too often, the challenges are less about retention than they are associated with the back end of the customer life cycle (risk, voluntary or forced churn, potential recovery/win-back), and have occurred because the organization is not sufficiently disciplined or focused about bringing in the right, and best potential, customers in the first place: http://customerthink.com/avoiding-the-one-night-stand-targeting-customers-who-will-stay-with-you/ and http://customerthink.com/when-push-marketing-goes-too-far/ and http://customerthink.com/perceived-value-and-customer-life-stages-a-tale-of-two-bakeries/ We call this the ‘Casanova Complex’.
Rachel – it’s great that you point out that a strategic objective should never be ‘retain, no matter what!’ Many times, a business changes its product focus, or ‘delivery model’, causing customers that were once valuable to become peripheral, and difficult to serve. Also, as you have mentioned, customer expectations change.
But when that happens, executives should not explain it away by perceiving customer requests as asking for the ‘sun, moon, and stars.’ I know firsthand that this can be an immediate reaction – from the top, all the way down! Such requests must be monitored and always considered when discussing changes to strategy and execution.
To some, the idea that profitability should be designed into the product plan up front might be heretic (People have compellingly argued that if businesses do what they are passionate about, profits will follow). But in an article I wrote in 2011, a professor who studied IT outsourcing found that “‘clients were most satisfied when suppliers earned their target margins.’ In fact, in a recent IT outsourcing study she conducted, 60% of the cases (n = 85) matched those criteria. Similarly, a large percentage of negative outcomes occurred in situations in which vendor margins were below expectation.” (Does this Software Make Me Look Fat?) http://customerthink.com/does_this_software_make_me_look_fat/.
Her finding was consistent with my anecdotal experience. Buyers who squeezed all the profit out of the vendor often became the customers who were most flamingly unhappy. On the flip side, salespeople who discounted the margins out of their selling price created internal resentments. Those salespeople frequently set themselves up for a bumpy ride with a client who never got done beating up the installed account team for more and more and more support. But without sufficient profits to parse into departmental P&L’s, those teams became more and more reticent to provide it.