In Econsultancy’s Marketing Budgets Report of 2014, they uncovered a bias within organizations toward acquisition marketing at the expense of customer retention. Many organizations are spending more money every year acquiring new customers, but they aren’t focused on keeping the customers they already have.
That methodology seems self-defeating, especially considering what we know about the value of retention. According to the Harvard Review and Bain & Company’s research…
Admittedly, SaaS companies are better at prioritizing retention than other business models. When you charge by the month, it’s easy to see that keeping your friends is better than making new ones.
But even SaaS companies that take retention seriously often make the same mistake: They don’t know who is responsible for customer retention. Often I see these three bad assumptions:
All three of those scenarios result in the same thing: No one is actually worrying about retention.
First, let’s clear one thing up: Retention is the percentage of customers who didn’t churn. But that number doesn’t necessarily include all customers. Many organizations are calculating retention incorrectly.
Month-to-month customers can churn at any time, so technically every month is a renewal. But you might also have customers who have enrolled with custom contracts that don’t obey your outward-facing website terms.
If these customers pay for, say, a year’s worth of service, they can’t churn each month. They shouldn’t be considered in your retention calculation. If you did, your churn rate would seem unnaturally low.
Customers who pay differently and enroll for different intervals likely have different problems and reasons for canceling their service. It’s smart to divide your customers into segments and calculate a retention number for each.
For example, let’s say you have segmented your customers into three groups.
You might find that Group 1 usually churns because of cost (maybe their cash flow is poor), Group 2 usually churns because your software lacks a key feature, and Group 3 usually churns because your product doesn’t integrate with their legacy software.
In this example, you would approach retention for each group in different ways. The only way you could identify a problem specific to that group is to calculate retention for each.
Every person in your organization plays a role in retention in some way. Over time, retained customers drive a majority of your revenue, so it’s a stream that should be protected.
Your product developers have to make a killer product to sell. Your marketing team has to bring in well-fit leads for sales. Your account managers and technical support have to quickly handle customer complaints. Your managers have to put the right people on the right projects. Even your receptionist has to answer the phones politely. All of that is part of producing a quality product (wherein the service you provide is your product).
All of those groups should use internal metrics to measure themselves that support retention. For example, tech support should calculate ticket durations. Marketing should measure lifetime value. Product developers should track the performance of the features they create.
When retention numbers start to fall, everyone in your organization should start looking for ways they can improve whatever manner they contribute to retention. It’s critical, however, that someone be made directly responsible for retention. Someone has to own that number.
Generally, responsibility for retention should come down to the customer success team. In fact, most SaaS businesses build customer success teams because they want someone responsible for that number.
But don’t get me wrong, the customer success team will never be able to achieve the retention number by themselves. There are too many variables to control for one team. After all, customers bail on your product for a number of reasons. If you have a low-touch product with thousands of customers, they often leave without a word of complaint or feedback, so it’s impossible to know why.
Instead of expecting your customer success team to improve retention on their own, you should give them the role of the orchestra conductor. Their job is to organize, monitor and improve the work of any team whose functions can support retention.
Your customer success managers need to actively organize and engage with the sales, product development, customer support, and marketing teams. Like the maestro of an orchestra, your customer success managers can’t play every chair, but they can be responsible for putting the players in the right positions and guiding the song (strategy).
Through interactions with the customer, customer success, account management, sales and marketing teams should be accumulating an encyclopedic amount of information. Customer success has the closest (and most) interactions with the customer, so their data will be heaviest.
Marketing should use the collective knowledge to capture the warmest leads. Sales should use it to sell to the right customers. The goal is to align the marketing funnel and sales cycle to well-fit customers as closely possible.
Account management and customer success should use this information to provide the best service. They should anticipate problems before the customer experiences them, and have solutions ready. They should understand what the customer considers value and drive them toward that point.
Furthermore, the collected information can be used to drive product development. Use it to build and improve features, create and implement experiments, or prioritize workflows.
Customer retention is responsible for a majority of the revenue. On the surface, it seems reasonable to tie a customer success manager’s performance to a commission. This is a mistake.
At its core, customer success is helping customers find value with your product. Retention is the end, not the means. If you tie a commission to the end, they might not use the proper means to get there. They may neglect other duties or become combative with other commission-based employees within your organization. Giving customer success teams a commission is a fantastic way to build silos into your organization, which is definitely not how you want customer success to operate.
Bonuses are problematic, too. Like I said before, retention is everyone’s problem on some level. You can’t give a bonus to a customer success manager if part of the retention is attributed to other high-performing players within the organization.
If you do have a bonus structure in place, I recommend that you set a team goal for the contribution to retention and pay quarterly for the achievement of team goals. Getting the formula right can be tricky, but as long as you’re transparent and willing to tweak it as needed, you shouldn’t have too many challenges.
The most important thing to take away is that customer retention is a broad problem that can only be solved by acutely understanding your customer. Once you uncover why customers are likely to churn, solving it becomes simple.