What is Customer churn?
Churn in SaaS is a customer canceling or not renewing their contracts. Churn is inevitable due to many reasons but keeping a track of churn and actively working towards reducing it is key to building a successful subscription-based SaaS business. Customer acquisition costs are high. It is important to reduce churn because companies benefit only when the lifetime value of the Customer is more than the acquisition costs. ROI decreases when the lifetime value is less than the acquisition cost.
What is Customer Churn score or Health score?
Customer churn score or health score is a number that represents the likelihood of a customer churning. Lower the number, the more likely they will churn. The churn score is a percentage value calculated using multiple weighted metrics including number of user logins, touchpoints, billing history, feature usages etc. The score can be as comprehensive as you want to make it and can include all the key parameters that you think are important to gauge the value your Customers are getting from your product. A Customer might churn today but the signs that they are going to churn come months before and that is what the health score tries to identify in advance.
What is the benefit of calculating a churn score or health score?
Customer Success Managers(CSMs) manage several Customers at the same time and all Customers cannot be treated the same. Some Customers would need more hand-holding than others. Churn scores are an easy way to help CSMs focus on the right Customers at the right time. By grouping Customers based on their churn scores, the CSMs can proactively manage Customers who are not getting full value from your product. By helping them get more out of your product, their churn score will improve from poor or average to good. Likewise, there will be upsell opportunities with Customers who are happy with your product and are getting value. These Customers can be managed differently. Without health scores, it will take a lot of effort and time from the CSM to gather data from multiple places and understand the complete picture of the Customer. For example, support desk, usage information, financial history and communications, all need to be looked at to form a complete picture of a Customer. Health scores take all this data into consideration and provide one number to give you a quick view of how the Customer is doing.
How to calculate Churn or Health score:
There are various reasons why Customers churn and it changes from product to product. The first thing to do is to identify the key metrics that have to be tracked and would give your company insights on the value your Customers are getting from your products. Some of the categories and metrics to include in your health score are mentioned below. Please note that each category and metric must be given a weightage because not all metrics will have the same importance. So, when going through this list, identify how important each of these metrics are for your product and give them a weightage such that at the end, when you have included all your metrics, it adds up to a 100%.
This is probably the most important aspect in calculating the customer health score. You can understand your Customers better by understanding how they use your product. Some of the metrics to calculate under usage are:
Depending on your product, define the number of days that you think your users should use your product on an average in a month. This will vary from product to product. SaaS tools like project management, time sheet, etc would see a higher usage whereas products targeted at management for reporting would not be used as much. Active days is an important metric to understand whether your Customers are using your product as your other Customers who get value from it. A lack of active days indicates them not being committed fully into your product and raises a red flag. In such a case, the CSM must engage with the Customer and find out the reasons for them not using the product as regularly as you expect them to.
Most products have more features than the Customers were aiming for. Customers could probably solve some more problems using other features in your product. The more problems Customers solve using your product, the more stickiness they will have. The risk with them using just one or two features is that they can easily move out to some other product which solves the problem they are currently using your product for. The CSMs can identify Customers like these, speak to them and show the other features that your product has to offer. They could also offer to train the users in those features that the Customer doesn’t currently use.
When several licences are bought and many of them are unused, that is indication that adoption has not taken place in the organisation. There might be a reduction in subscription or churn when the adoption is low. CSMs have to work with key sponsors and the key contacts in the organisations to understand why adoption is low and find out ways of improving adoption among users.
Usage Previous month to this month:
“It is good to monitor usage closely on a month-to-month basis. You ideally want to see the usage to remain constant or increase. If you start noticing reduction in usage over a few months, it will be good idea for CSMs to check in and find out whether everything is OK.”
Customer Sentiment category contains a few important metrics to capture directly from the Customer itself. This is direct feedback that you get from the Customer and forms an important part of health score.
Businesses send out CSAT, CES and NPS surveys to their Customers and their users to get feedback on various aspects. Some of these surveys are periodicals, sent every month or a quarter while few others are sent after a transaction. If the scores from these surveys are low or if they reduce over a period, CSMs should step in. They should understand the Customer’s problem and help them with solutions.
Renewals are good indicators that your Customer is happy with your product. Whenever a Customer renews, the health score for that section would increase and focus should be on how to change them into an advocate for your product.
Upsell is again a great indicator that the Customer is seeing value in your product. Upsells would result in onboarding of additional users and access to additional features. CSMs can work with the Customers to train the new users or existing users on new features.
Customer engagement metrics, though similar to Customer Sentiment, is derived from communication or missing communications with the Customers. The key metrics to monitor include:
Percentage of unsolved support tickets vs total number of tickets received during a period is an indication of how well a Customer is supported. If more tickets are left unsolved for a long time, Customers lose interest and will churn. By including the number of tickets raised and the number unsolved tickets to health score, CSMs can be alerted so that they step in and speed up resolution of the tickets.
As part of your strategy to manage Customers, there would be a touch point frequency that would be defined. It’s a good idea to bring this metric into the health score so it is highlighted when the CSM has not been in touch with Customers for some reason.
Not all information can be collected or processed by software. The CSM is the person in your organisation who understands your Customer the best. A health score should include what the CSMs perception of the client and the risks in the relationship.. For example, the key sponsor could be moving out and CSM would know this through the conversations with the Customer. The system or the tool might not indicate or include this in the score calculation. So, there needs to be a way to include CSMs feedback into the system and consider it in the health score.
At the end of the day, the payment history plays a critical role in indicating the health of the Customer relationship. There are two important payment related metrics which must be included when calculating the health score.
An overdue invoice typically shows that the Customer does not put your product at the top of their priority list. This is a big red flag if it happens frequently.
Invalid Credit Card:
For companies which support invoice payment or auto-renewal using saved credit card, having an updated credit card information is very important. CSMs should stay on top of this metric and ensure credit cards that are about to expire are updated promptly.
So, that was a list of metrics that we believe any product company that doesn’t have a strategy yet can start with. There is no limit on what you can include and it will change from business to business. But the key is to think about these various categories mentioned above as a minimum set of metrics to be added to the health score for a balanced approach. These are good indicators of whether your Customer will churn in the near future.