Churn Analysis: An Ounce of Prevention is Worth a Pound of Cure
The Ambulance vs. The Fence
The old adage is that an ounce of prevention is worth a pound of cure. In talking with customer success leaders and teams, I am often reminded of an old poem, The Ambulance in the Valley. In this 1895 parable, the author argues that it is better to focus efforts on preventing an outcome rather than repairing afterward. Is your customer success team operating the reactive ambulance or proactively building road signs and fences?
Too often the customer success team is the “ambulance down in the valley.” Customer success managers (CSMs) rush customers who have slipped off the cliff to churn war room and through escalation meetings. We diagnose their injuries, assign a severity level (from stable condition to critical condition to code red) and call-in senior executive champions.
At Insight, we encourage our portfolio companies to take a difference approach and, where possible, fix the sharp turns and build better road signs and hazard lights in the customer experience rather than investing in bigger hospitals and hiring more CSMs to operate ambulances down in the valley.
In order to shift your organization’s mentality, the first step is to proactively identify the cliffs and sharp turns in your customer journey. We call this process, churn analysis.
Successful SaaS companies use churn analysis to establish a baseline, prioritize interventions, and set achievable targets. Without churn analysis, the customer success team will spin its wheels and stall on the road the customer success excellence.
Goal of churn analysis
A churn analysis study will identify the common patterns that lead to preventable customer churn. Then, as the Customer Success leader, you can work with the relevant internal stakeholders to fix specific causes. For example, churn analysis might find the latest product update is prompting churn that's far above the baseline rate. Or it might find that first contract churn rate is much higher than second or third contract renewal, and those customers who churn in the first renewal cycle have poor adoption metrics.
In this article, we will discuss common reasons for SaaS customer churn and share best practices for churn analysis.
Common churn reasons
Every company loses customers over time. Some churn drivers are controllable (or factors that the business can influence) and other are uncontrollable (or factors that the business cannot change such as bankruptcy or M&A). Focus your churn study to double-click on the controllable reasons. A sub-set of these controllable issues will be the primary focus of the customer success team.
The common culprits for controllable SaaS churn link to a few key drivers:
- Perceived value: Your service is perceived to have not provided value
- Customer relationship: Your company needs to strengthen the relationship with key customer stakeholders
- Competitive landscape: There are new alternatives in the conversation
As a team, form hypotheses and brainstorm a list of churn reasons that are specific to your business. Some common reasons across Insight’s SaaS portfolio include:
- The customer didn't use the product
- The customer used the product, but didn't find value from it
- The product didn't work as promised
- The customer's budget shifted
- The product's primary champion left the customer company
- The customer company's senior leadership didn't champion the product
- The customer found a competing product they liked better
You can augment and adapt this list for your company.
Studying customer churn
Next, build a customer dataset and test your hypotheses. Start by collecting available customer insights. For each customer, you want to know the customer’s annual value, the date of their first contract, their industry, their Net promoter score, support ticket history, and usage history. If your company has analyzed churn in the past, accessing this type of customer data may be easier. If you are starting from scratch, start simple, use readily available data points and be creative.
One simple approach is to pull the list of customers who churned in the last 18 months as well as a list of customers with large upsells in the last 18 months (adjust time frame based on your contract length and sales cycle). Ask the customer success, sales and support teams to categorize the reason(s) for churn or expansion. Then schedule a working session to discuss and debate. As the customer success leader, you want to be relentless about determining the root causes, tracing back to specific moments the customer journey, and defining leading indicators.
A robust initial churn analysis process often takes 2 weeks to 4 weeks and involves a cross-functional team to pull together the relevant data. Moving forward your team should have standard dashboard to monitor churn reasons on a monthly or quarterly basis.
Benefit of churn analysis
Churn analysis is mission critical because not all preventable churn can be mitigated by your customer success team. Many drivers of churn require collaboration with sales teams, product teams and other departments. For example, in the short-term, your company may lean on CSMs to direct traffic during the onboarding process. Overtime, however, you likely want to coordinate with product to include in-app notifications that can serve as road signs and free up time for your CSMs.
Customer success leaders and teams fail when they set unachievable goals. This often occurs when customer success leaders are not clear about the type of churn that they can impact, in what timeframe and with what cross-functional support.
A higher than average churn rate is costing your business money and a reactive customer success motion causes dissatisfaction on your customer success team. Regular analysis can help you determine what percentage of your churn rate was preventable, allowing you to implement a plan to improve customer retention over time. For additional insights on customer success, check out our Roadmap to Customer Success Excellence.