For SaaS companies, growth and reducing customer churn is vital for survival.
Pacific Crest’s report showed that one third of SaaS companies ended 2015 with an annual customer churn rate above 15% – well above the acceptable rate of annual churn for SaaS companies, which sits at 7%. These companies are ending each year with a significantly different set of customers than when they started.
This is a simplified version of monthly churn rate across a five year period.
The white line represents zero churn, the red line shows an annual churn rate of 60%, and the orange line represents an annual churn rate of 30%.
In both the red and orange lines, from year three onwards is when most companies start to address their levels of churn. These companies are only just starting to realise their revenue and company growth is limited by their current level of churn.
This is too late to look at why customers churn, and Sunir Shah explains why this is:
“As the number of customers you have continues to grow over time, the number of customers who churn will also grow. Even if you keep your churn rate stable, the number of customers churning is going to keep getting bigger and bigger until it matches the number of customers you’re adding every month.”
It’s never easy to find the exact reasons why customers choose to leave. But by focusing on two customer support metrics, you can start analyzing and reducing churn today.
Collect useful customer data to tackle churn
If you’re not already, you should start collecting customer satisfaction scores (CSAT) and Net Promoter Scores (NPS).
CSAT directly measures the customer’s satisfaction with your product or service. This metric shows how happy your customers were with the whole process: from finding out how to contact you, the actual conversations and also any follow up correspondence you might have sent.
NPS was developed to measure customer loyalty. It helps you identify which customers are at risk of churning. It also helps identify your promoters who are helpful for case studies and referrals.
How to collect customer satisfaction scores:
After a support conversation, send your customer a quick one-question survey: “How would you rate your recent experience with our help desk?” With the options: “Bad” or “Good”.
Find your CSAT score by dividing the number of good responses by the total number of responses. Any score above 90% is good.
How to collect Net Promoter Score:
You should be sending out your survey for NPS to customers roughly every quarter or half year (or even better fully automate your NPS collection). Ask your customers how likely they are to recommend your product or company to someone else, on a scale of 0-10. Scores between 0-6 are detractors, and 9-10 are promoters.
Calculate your NPS by dividing the percentage of promoters from the percentage of detractors – you’ll be left with a score between -100 and 100. Anything above 0 is better than average, but check your industry benchmarks to see what you should be aiming for.
How do I measure customer loyalty with metrics?
While both of these metrics can give rough estimations of customer loyalty, neither of these metrics alone will be able to predict churn. The trick is, once you collected these metrics don’t view them in isolation.
Let’s say a customer scores over 90% CSAT on all five cases they create with you. But the customer then decides to leave, and you are left baffled, because CSAT indicates that they were happy.
They were happy support fixed their problem every time, but were unhappy with the product in general for having that problem.
The same applies for NPS. NPS surveys can capture an overall trend in customer loyalty, but the results won’t tell you WHY that trend is happening.
The key to uncovering your potential churners is to combine and layer your NPS data with your CSAT to get a more complete picture of your users.
Layering NPS and customer satisfaction scores on top of each other paints an interesting picture of whether your customer support is driving loyalty, or if it’s a possible reason for churn.
The trick is not to view these two metrics in their own world, but view them together. If you read them without comparing them to each other, you can get a distorted view.
Combine your NPS and CSAT scores to measure loyalty
- Pull data from your NPS surveys and customer satisfaction scores. Place them in a spreadsheet with the corresponding survey responses (to order them you could just use their account names).
- Use a scatter graph to plot customer data for both NPS and satisfaction.
- You’ll be left with four types of customers based on these types of clusters.
The end result of combining your CSAT and NPS score
- These are promoters of your product, but have suffered bad service experiences.
- These are loyal customers who love your product.
- These are customers who are not satisfied, and are not loyal.
- These customers are sitting with a high level of product frustration, or are not seeing enough value to stay.
From these results it’s tempting to jump onto the segment that came up as churners – don’t. This won’t be the best use of your time. These customers are already too far down the line of dissatisfaction and frustration to save them, and there are better customers to rescue.
Which group should I convince to stay?
The two groups that are most likely to stay are your “wildcards” and your “VIP support” group.
The wildcards need product education, and they can be nurtured through proactive customer success calls. But this takes a lot of resources out of your customer support team. You’ll only be able to do this if you have a large enough support team to care for current loyal customers and educate customers at risk of churn. Think about hiring another customer support agent if you want to do this.
For SaaS companies with small support teams, it’s best to focus on the VIP support category. Even though these customers that are at risk of churn, they are the easiest to convert into advocates.
When analyzing this category, you’ll see a high number of responses with low satisfaction scores, but middling to high NPS responses. There is a very strong chance you can turn them into advocates and help you drive new business.
- If they helped inspire a new upgrade to your service with their product feedback – say thank you with a personalised thank you note or some merchandise
- Proactively reach out to them and offer them some personalized support and make sure you take care of their issue.
You can track when a customer is likely to leave (and catch them before they do)
There’s not one true metric to predict churn. But by plotting your NPS scores with your CSAT scores, you’ll have a clearer view of where to invest your time in trying to keep customers loyal. It will be clear which customers are unsatisfied with your product and are at risk of churn. Take the time to nurture these customers and you can move them from potential churners to brand advocates.
by Adam Rogers
Adam Rogers is a content marketer at Kayako. His writing helps customers get better at customer service. You can find Adam writing about marketing and books on his own blog. Connect with him on LinkedIn and Twitter