For just about any growing company in this “as-a-service” world, two of the most important metrics are customer churn and lifetime value. A common practice has been to invest in customer acquisition at all costs, which assumes that churn is inevitable, and the best way to overcome it is to add tons of new customers.
But is this the right long-term investment? Sure, growth of users is extremely important, but it can come at the expense of investing in ways to understand, predict and minimize customer churn. The best way to predict churn and increase lifetime value is to have a firm grasp of the health of every customer at all times.
This focus on lifetime value has created both a big job market (according to a search on LinkedIn, more than 2,800 “customer success”-related job openings exist), as well as spawned a hot new product market.
There are hundreds of indicators of the health of your relationship with each customer. The challenge is prioritizing these and getting the right signals versus noise. Any investment in a system that helps understand these indicators needs to be preceded by having deep customer knowledge.
This literally comes by talking to customers four to five times per day for an extended period of time, because the important customer health indicators -- and the weights that should be assigned to each -- are different for every company.
In general, however, the insights that these indicators give you to predict customer churn are fairly universal. Here are three important things they should tell you.
1. Which customers should churn based on low-value product feature use
You should have very solid assumptions of the product features that deliver the most value and justify customers paying for your product. Understanding which high-value features customers are using or not using is a good indicator of customer health. Look at customers who haven’t renewed in the last month, and find out if there were certain features they didn’t use as a possible reason for why they were unhappy.
If customers are churning, then look at customers that are coming up for renewal. If a group of those are also not using key features, figure out a plan to get a customer to use your product it to its full potential. This requires being more like a consultant and spending time with customers to educate them on real-world applications of high-value features -- on the phone, via video conference or in-person.
Conversely, knowing which high-value features that customers who renew use -- and don't use -- the most will help you decide which ones to invest in.
2. How much customers are engaged during the first 90 days of the relationship
Understanding customer health at certain points of the lifecycle is extremely important, especially the first 90 days of the relationship. If a customer’s health is low in that period, you will likely lose them, so it’s an urgent problem that the customer success team needs to fix.
Has the customer stopped using your software? Were they using low-value features before they stopped logging in? What problems with the product were they encountering? Were they opening tickets for these?
These are all important indicators during a very critical time in the customer lifecycle. Understanding and using them to decide what action to take for this group of customers will go a long way towards reducing churn. This also applies to the period of time just prior to a customer’s renewal.
3. How active customers are beyond use of your product
Beyond quantitative indicators like those described above, qualitative signals are just as important. These come from customers’ interaction with you. Was the kickoff meeting difficult to schedule -- and how did it go? Do customers come to your events? Do they interact with your product team for feature input or ideas or for user experience testing? Have they done a case study with your marketing team?
Considering customer interactions in conjunction with in-app usage, and the customer lifecycle provides a more well-rounded understanding of customer health.
These customer health indicators allow you to take quick action. In one instance where we saw a large negative change, we reached out to the customer and found out that the person who bought our product left the company abruptly, and the person who took over the role didn’t know about any of the products he inherited, including ours.
That new contact was happy to have us train him and welcomed our advice on using some high-value features. We now have a new product champion.
Rely on data, not intuition.
There is not a one-size-fits-all approach to measuring customer health. The most important thing to keep in mind is measuring customer health takes patience. Collecting enough data and fine-tuning your inputs to effectively correlate customer health with churn is time-intensive process, and it doesn’t stop there.
Only when you look at customer health against things like stage of customer lifecycle, customer size and industry will you be able to take the right action that will make the most significant impact.