Customer Success: Churn and RetentionA working summary of the various forms of churn and retention within an organization.
Summarizing Churn and Retention
Two primary concerns for a company regarding churn rates involve customer churn and revenue churn. A business's customer churn rate represents the pace at which customers discontinue their relationship with the company. In other words, how fast are customers deciding to leave or cancel? Concerning SaaS businesses, this broadly references subscriptions to a service. The customer churn rate concerns how many subscribers have ended their subscription over a given period. This rate could be calculated by dividing the number of customers lost over a period with the number of customers recorded at the beginning of that period. There are numerous methods of calculating churn rates, and many companies are most concerned with the impact attrition has on revenue.
The customer churn rate may not always equate to the revenue churn rate. Much of the difference between customer churn and revenue churn is attributed to multi-level product lines. Many SaaS companies offer varying price points for different tiers of service. Variance in the product line produces a diversity of value in the customers, resulting in different metrics for customer and revenue churn rates. For example, if a bulk of calculated churn occurs with customers using basic or entry-level services, then the customer churn will likely measure higher than revenue churn.
In tandem with measuring churn or attrition rates in customers and revenue, a critical metric for companies also concerns net dollar retention, also known as Net Revenue Retention (NRR). This metric offers insight on the percentage of revenue an organization derives from customers that were retained over a measured period, after accounting for upgrades, downgrades, cross-sells, and other expansion transactions. If the formula results in a number greater than 100%, then expansion from the current customer base more than offset losses from that same customer base. An NRR rate below 100% is a reason for an organization to be concerned and implement rigorous corrective efforts. Prevailing rates of success have been identified as being around 105%, while about 120% is considered highly effective.
How Customer Success Impacts Churn and Retention
A core principle guiding the impact of customer success management for reducing churn and increasing retention is the priority on earnings made from existing customers over new customers. As a parallel, it is commonly more efficient and less expensive route for companies to retain employees than to engage the extensive process of hiring and training new employees. Similarly, existing customers have already been introduced to a service and trained on the service through the onboarding process. Customer success teams execute and maintain these processes directly.
Customer success teams contribute directly to reducing churn and increasing retention through two primary methods. The first of these methods is by increasing value for the customer. At every stage following the initial sale, a customer success manager is working closely and regularly with the customer to ensure they are achieving the highest possible value from the service. This entails educating the customer on the nuances of the service, as well as understanding the nuances of the customer’s need, tailoring the service to each context. As value for the customer increases, the rate of churn commonly decreases. A satisfied customer is much more likely to renew a contract. In addition, the satisfaction of the customer maintains the potential for upsells or cross-sales, which is also known as revenue expansion. As the customer success manager understands the evolving needs of a customer, they can employ higher-value services, increasing revenue retention.
The second core feature of the customer success process that reduces churn and increases revenue retention is the identification mitigation of risk. Customer success managers not only look to expand value but to predict when the current value is not being met or perceived by the customer. Foreseeing at-risk customers is accomplished by standard customer success practice and measurement. Because the customer success manager remains proactively involved in a close relationship with the customer, they are well-positioned to understand and identify customer concerns. As a result, they can mitigate concerns before they become issues that would result in the customer terminating their contract. Additionally, customer success modalities measure these relationships with customers to produce actionable metrics on why customers end, extend or upgrade contracts. (Details on these metrics are provided in a separate section.)
By increasing customer value and predicting risk factors, the customer success teams are directly and regularly involved in the process of expanding revenue for a company. Reducing both customer churn and revenue churn results in higher rates of net dollar retention.
Differences in Stages of the Customer Lifecycle and Timeline
As it may be assumed, based on the much more limited number of transactions with the customer, sales departments typically have a shorter-term range of engagements. Sales are mainly concerned with establishing a relationship with the customer or continuing the connection on the backend of the lifecycle. The relationship begins with the initial sales transaction, or it can be maintained through the upsell or renewal.
Customer success concerns itself with these efforts, but it is mostly focused on developing and nurturing relationships and maximizing lifetime customer value. For this reason, customer success has a longer-term scope of engagements than sales, including far more touchpoints with the customer. This can also be understood as sales concerning itself with new customers and success teams with current customers. In other words, the sales team initiates the early stage of the customer lifecycle. In contrast, customer success enters the lifecycle post-sale, proceeding to engage in a longer rather than temporary relationship with the customer.
Both sales and customer success responsibilities are vital to the growth and maintenance of revenue. Selling is critical for establishing the relationships that customer success management is designated to nourish. In the same way, data and feedback received through accomplished customer success methods can inform sales efforts. Sales indeed contribute more directly to the revenue of an organization. However, customer success teams assist in ensuring that revenue is generated by increasing the value of a customer relationship through the maintenance of long-term and loyal connections.
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