The capacity to forecast that a specific customer is at a high risk of churning while there is still time to do something about it is a major new possible revenue generator for any company. We, at CustomerSuccessBox, spoke to some of the Top Customer Success Influencers to know how they manage churn!
Rick Adams is the Founder and CEO of Practical CSM. He’s a published author. His book Practical Customer Success Management: A best practice framework for rapid generation of customer success got published in 2019. It still is a much sought-after book on Customer Success. He’s also a trainer and a consultant who has trained and consulted with thousands of technology professionals in over 30 countries across 4 continents.
We asked Rick to share his opinion on customer churn and retention. The following is what he has to say.
Check out Rick’s interview where she gives insights into how you can manage churn efficiently. 👇
Q: Please introduce yourself.
A: Okay, well, my name is Rick Adams and I’m the CEO and founder of Practical CSM. And Practical CSM is principally around training and certification for Customer Success management. But our real focus is on training customer success managers into the role and certifying them as being professionally qualified to do their role. We provide an end-to-end training and certification process and program for customer success managers. We offer that online so that people can take it on a sort of self-study route perhaps during the periods where it’s a little bit easier for them to access because everybody’s got a heavy workload. So maybe it’s easier for them to access it at certain times of the day or night that is more convenient for them. And we also offer more of a standard instructor, led workshop type, if that is the preference and that’s pretty much what we do.
Q: What do you think are the common reasons why a ‘churn’ occurs?
A: Churn can occur for a whole range of reasons, obviously, and some of them are, let’s say less of a concern than others. Some of them might actually be what I will describe as natural, and in other words to be expected, and you’re not really going to do necessarily much about it. There’s a sort of a cadence of churn based upon what it is that you sell, who you sell it to, and what their requirements are, if your product is something that you feel your customers should be purchasing from you again, and again and again. Well, then suddenly, that’s repeat business, suddenly, we’re very interested in knowing well, are they buying it from us again? And again? And again? Or do they stop buying it from us when actually they still have that need? And that demand?
Oh, and I guess I should also mention customer experience. So whether the experience was frustrating or challenging or awkward or difficult, or whether it was pleasant and enjoyable and agreeable and nice and easy as well. I would say that those are the sorts of reasons why an organization will churn. Churn, obviously, meaning just to be clear where they have purchased from us, we’re expecting them to purchase again. And they don’t. That is an organization that has churned. They have not renewed. They have not bought it again. For example, we’re all familiar as consumers with, for example, our mobile phone will be, will be so generally speaking on a monthly contract. So maybe if we go to a different telephone company because we’re not happy with that one, well, then we’ve churned.
Well, why might we do that? Well, it might cost it’s cheaper over there, but it might be quality. We keep getting a signal drop, but that one’s got a bit better signal strength and the ratio of people. So are getting better quality. It may be that when there is a problem they’re really rude and arrogant and never get back to me. So it’s the experience. It may be that they sell other things as well. And so they’ve made it easier for me because if I buy this package, it includes these, these, these, and these other things.
And I don’t have to have several different contracts. So it may be around simplicity that is not just to do with that one thing, but the overall package, um, and perhaps one or two other things, but I think I’ve kind of covered it. And those for individuals that are just assigned for a company. So:
- Is it cheaper?
- Does that offer better quality?
- Is it less confusing or less challenging or less awkward to go somewhere else?
- What is the risk involved?
An interesting thing here is BELIEF, a belief in you as an organization. So where are you headed as a company, so I’ve got a really believe in your success because your success is tied up with my success,
Q: What should be the KPIs for measuring churn?
A: Obviously, churn itself is a ratio. So so the percentage of companies or customers who do churn, you know, compared to the ones who remain as customers and who renew. So you can do it as you know, as a churn ratio, or renewal ratio, whatever you want. Obviously, the higher the percentage who renew the better, the lower the percentage you churn, the better, and the two should be the same. Bearing in mind that what you’re doing is you’re only looking at your renewals, not net new business. And what it doesn’t do necessarily, though, is indicate the revenues that you’re getting from renewals.
So, for example, I’ve got 10 customers who are my previous customers. It’s coming up to their renewal period and let’s say, 8 of them renew. Two of them do not. Okay. So obviously I have an 80% renewal or a 20% churn ratio. Okay. That’s regardless of the fact that I might have 4 new customers, so I’ve got 10 customers, I get 4 new customers, and I have my 2 customers who churn. So that gives me my 8 old customers. And my 4 new ones equals 12. That’s higher than 10, but I’ve still got an 80% renewal or 20% chance because it’s nothing to do with those fours. We’ve said, okay, well, that’s fine. But supposing the two who left when my two biggest customers, yeah. The closing, those are my two smallest customers. Well then suddenly just saying 20% or 80%, that’s not the same in terms of revenues. That’s just the number of signatures on contracts. Okay. That’s a different thing.
to continue to observe our customers continue to observe ourselves, continue to take measurements, continue to analyze that data, and turn that analysis into some meaningful criteria for executive decision making.
So that is where we need to just go to another level, which is the NRR (Net Retention Rate), which is our net revenues.
So now what we’re looking at is we’re saying, okay, let’s add up all of the revenues from our previous. And now let’s add up all of the revenues from this series and see what the difference is. And it may well be that because we have increased the size of the sale, for example, those eight who left. Okay. So they may not be the biggest ones, although this one’s, or some average, they’re all the same size even initially, but maybe we’ve grown them.
So, now that NRR accounts for whether they were big ones or little ones in the first place, and also what the increases, what the differential is between the revenues last year and the revenues this year if it’s an annual recurring contract or monthly, or whatever, the period is. And again, it could be, it could be products being replaced as well. And that’s fine. It works the same way.
You’ve got to work out the periodicity a little bit more carefully. Obviously, a contract has an obvious cadence and periodicity to renew it and typically be annual or monthly. But by no means always, I mean, sometimes it can be longer as well. And by the way, there’s a lot of the attributes for us, the supplier in getting our customer to sign multi-year renewals because that’s guaranteed money. Right. So if we can convince our org, our customer, actually, you know, there’s some value to you in signing up for three years.
Well, then that means that we’ve got a guarantee of three years of business from that customer. This means that we should be able to give them some benefits for that. Well, what benefits can we give them so that they win and we win, and then that’s a better contract for both parties? And so, therefore, we end up with a longer contract period giving us, you know, more, revenues overall from that contract, initially, or certainly better cash flow and so on and so forth. There could be benefits in that, but then this is what NRR does. So instead of looking just at the numbers of deals, it looks at the numbers in the deals, i.e. the revenues.
Q: Who should be responsible for managing ‘churn’ in a firm?
A: It’s a great question. And I think it’s a multi-layer answer. I don’t think it should be as simple as saying, oh, it’s everyone, or, oh, it’s the customer success department or it’s, you know, account managers. There are more layers to this.
So I think, generally, customer experience is the responsibility of everybody. And we’ve already said that one of the reasons why customers might leave us is poor customer experience. All right? Well, let’s see, if anyone is customer-facing them very much. They are involved in making the customer’s experience as good as possible. Anybody within the organization, whoever they may be nice to have this sort of customer first sort of thinking.
So anybody within the organization, whoever they may be needs to have this sort of customer first sort of thinking in the sense of, you know, how can we improve things for our customer?
That’s not to say, you know, the customer’s always right. The customer does always pay and they pay for everything. In the long term, now in the short term, there is another type of customer, right? There’s the customer’s customer, and there’s the investor who is also a customer. So actually we want to be nice to our investors as well. If I could know very much about your lovely money, we’re really grateful for it. Yeah. But either way, it’s it they’re paying. Right. So they may not be right, but they are very important. They pay, they need to be treated, like gold. Okay. Uh, so, so we need to always put their needs first above ours and make sure that they know that we’re doing that.
And that we are, you know, customer-led, doesn’t mean that we do everything they say whenever they say, because as I said, customers, aren’t always right. There’s that famous quotation from Henry Ford where he said, if I’d asked my customers what they wanted, they’d have said faster horses. Okay. So, because we are who we are, knowing what we know and having the vision that we have, we actually may be able to, again, go back to that expression of evangelization. We may be able to convince the customer that actually what they think they want, isn’t what they want, and what they actually want is what we’ve got!
Yeah, I think that customer success actually does have a specific part to play. Customer Success is the bit that is post-sale, I’ve bought it, and now I need to get value out of it. That is a very important part of the overall experience that the customer has. It’s not the whole of it. But it is an important part of it. And the customer success team should be making sure not just that customers get value out of product X, whatever they purchase, but they know that they’ve got the value out of it.
So that’s a direct thing that CSMs are directly responsible for. So we’re all like at least indirectly, if not directly involved in customer experience and the customer success team should be making sure not just that customers get value out of product X, whatever they purchase from us, but they know that they’ve got the value out of it. But it’s not just a question of them getting it, but they’re going to be measuring it and they to be reporting it to the right people within the customer’s organization so that those people are aware of the value of continuing to make that renewal in our favor. That is, that’s how we influence our customers to renew with us.
Q: Do you have a framework/template/playbook in place for analyzing the churn?
A: Yeah, well, I mean, analyzing churn is, to be honest, it’s very true because it is a ratio. And, of course, what we’re looking for in the direction of travel. So if you take that measurement whatsoever, well, then it tells you something. So if we measure it today, we can say Well, today, our churn is 15% or 10%, or 3%. Okay, but what’s really interesting to know as well is that a figure that’s going up or going down, we want to know the direction of travel that we’re going in, it’s this percentage of renewal or this percentage of churn. And the direction is, we’re getting less churn or more churn.
So if I was to measure churn every month, and obviously, if I’m a large company, I may have, you know, hundreds or thousands even of customers renewing every month. So I can do that. So in this month, what was the percentage of customers who were due to renew, who did renew, and who did not renew, which is our question. So we were doing that every month. And if we now see that, six months ago, it was 99% and actually, it’s going down and it’s gone down over six months to 97%. Suddenly it doesn’t look so good suddenly we’re saying, okay, now this is a negative trend. And if we continue this trend, we find it 90. We’re great at 99, we’re okay. At 97. Yeah. But, if we allow this trend to continue, then we will be losing more and more of our customers. And we are effectively going to stop growing and I’ll ultimately die as an organization.
So actually it may be an indicator of us, getting worse rather than getting better or being where we should be. Of course, it could be the other way round. There could be that we take a measurement and we looked at six months ago and actually, the trend was, the trend was 83% and now it’s 97% and we’re doing really, really well. And, we’ve doubled, and our customers are loving us. Okay. So again, the ‘one’ figure very, very often is not enough to tell us that you’ve sufficient information. We need a bigger picture.
So what we want to do is we want a direction of travel. So, um, a little bit like the difference between speed and velocity is the speed in a direction, right? So what, what’s the direction? Is it upwards or downwards? So we want, we want the velocity of our, of our, um, renewals, not, not just the speed of our renewal. We want to know the direction of travel that we’re going in. It’s this percentage of renewal or this percentage of churn and the direction is we’re getting less churn or more churn. That’s what we really want to know.
And I would say that alongside that, then having done that, and of course, you can’t do it instantly. You can only need to take those measurements. And then over time, you need to review them with historical data. So you’ve got to have the historical data, and if you don’t have any data to start with, then you just have to wait for the periods until you do. So you can then look back over the historical data and do your trend line and extended on into the future and see where you think you’re going to be based upon if this trend continues at the rate that it has been continuing for the last six months, then in six months’ time, we will be here assuming, you know, nothing else goes wrong, assuming that the trend is going to continue. Well, that’s really powerful, predictive analytics.
Now, on the other side, then I think that the organization should be doing as well as doing these basic measurements are they should be talking to their customers. You should contact a number of your customers who did churn and a number of customers who did not churn, and you should be getting their consent to interview them in-depth, to find out why they made the decisions that they made so that you can understand that context of decision‑making to help you to plan better for the future. And that’s really, really important. So you’re going to learn a lot from that. So there’s only so much we can learn from a simple percentage. X percent tells you how many, it doesn’t tell you why.
Okay. So the difference here is between quality and quantity. So the quantitative stuff tends to be easier to do, right. You just look at the meter, then it’ll tell you fine, but the qualitative stuff actually, it’s harder to achieve. And that might well take, you know, a lot of, a lot of thought and effort to get to the point, why is this happening? And your customer is the person you need to be asking that question.
Q: How soon should you start the renewal process?
A: At the moment that you are forming a business where renewals are going to be important to you is the moment when you need to be thinking about how you’re going to get them.
Q: Do you have different retention strategies for different segments of customers?
A: Yes, I think so. So I think that’s a very, very, very valid point is that you need to get And if you’re going to do well, you have to understand your customer, the price-conscious customer, you might deal with very different to another segment where it’s about quality. So for them, it might not be about the cost, it might be about the SLA. And now I’ve got, you know, to different conversations I’m going to be having, I’m going to be having a renewal conversation about how we’re managing to keep costs absolutely to the bare minimum, and how we’re going to commit over this period to make sure that costs don’t go above x, or I got a conversation about, you know, what fantastic quality we’re delivering on how it’s best in class, and how we’re going to be guaranteeing that that quality remains the same over the next, you know, renewal period. In a sense, it’s not rocket science, is it? In a sense, it’s straightforward, go and find what your customer wants and deliver that to them.
Q: How do you know that when you’re off-track?
A: Well, this is where you go to your data analytics, and you measure the data on an ongoing basis. And you keep analyzing the data. And looking at that direction, remember, we talked about the direction of travel, upwards or downwards? Where are we headed? Are they believing in us and our vision? Is also service friendly, efficient, and effective? And all of these questions are the ones that we need to be asking ourselves, not just once, but you know, on an ongoing basis. And this is where we look at the figures and if the figures are down, we ask ourselves, well, why is it external factors beyond our control? If so, what are we going to do about that? Or is it actually factors that are in our control? In which case, what are we going to do about those? So we’ve got
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