Customer Success – A methodology to Drive Retention and Mitigate Churn

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In several courses that I am doing in this semester – most of them related to marketing field – Marketing Strategy, Data Driven Marketing, Consumer Behavior and one of my favorite – Design thinking, there is one underlying theme – “Customer”. It should not be surprising because in today’s world customers have lot of power in their hand and businesses make money by delighting their customers.

The way companies sell enterprise software products over the years have undergone significant changes. One such change is Software as a Service (SaaS). In such business models, the service providers generate revenue through subscriptions. It is very different from traditional models, where service providers used to just charge upfront for the services and then go through installation. A subscription model gives customers flexibility to terminate their subscription if they are not satisfied. This has made companies to improve their customer support and constantly innovate to provide best services so that they can avoid customers switching to their competitors. In order to track growth and performance, companies keep track of several metrics which measure subscriber growth, revenue generation and long term value of its customers.

There are few metrics that are key in SaaS or subscription based business models:

  1. Monthly Recurring Revenue (MRR)
  2. Average Revenue Per User (ARPU)
  3. Churn Rate (R)
  4. Customer Acquisition Cost (CAC)
  5. Customer Lifetime Value (CLV)

Although we can use a complex formula to come up with the CLV using the growth and discount rate, much simpler back of the envelope calculations are useful in determining upper limit on acquisition cost and where if any improvements can be made. A simple formula to calculate the CLV would be :

CLV = ( M × MRR ) ⁄ R

where, M = Percentage Margin

We can clearly see that Monthly Recurring Revenue (MRR) and Churn Rate (R) drives the Customer Lifetime Value (CLV), assuming Percentage Margin (M) does not change a lot. But what is more important is that compared to MRR, churn rate has significant impact on CLV even with minor fluctuations. To help get my point across, let’s use a hypothetical company example. Let’s say the company has 100 customers at the beginning of last month and on average monthly revenue per customer is $400. The data shows that 3 of the customers cancelled subscription in the last month. Therefore with the MRR = $400, R = 3% and M = 70% (assumed), the lifetime value of a customer would be:

CLV = (70% x $400) / 3% = $9,333

If someone asks you, how long customers are staying with the firm, thenScreen Shot 2015-11-29 at 6.42.23 PM with the above churn rate you can say 33 months (using 1/3%). Now, to measure CLV’s sensitivity to churn rate, let’s just change the churn rate by only 0.2%. We see that if the churn rate decreases from 3% to 2.8%, the CLV jumps to $10,000 from $9,333, which is an increase of $667. If we were to use the MRR lever to have the similar jump in CLV, keeping others constant then the MRR should increase from $400 to $429, a change of around 7%. Clearly, this shows that churn rate is much powerful lever to move CLV.

This help us prove that customer retention is very important to build a sustainable business. That is where the idea of “Customer Success” comes into the picture. It is important to acquire new customers, but what is even more important and often neglected is to retain customers. Especially in startups when the focus is on acquiring more and more customers, the company can drive more value and avoid need to raise more capital by making sure that they are able to retain as many customers as possible. Companies have realized the importance of post-sale relationship with customers and have started focusing on customer success. I looked for “customer success” on Google Trends just to find out the level of interest on this topic.Screen Shot 2015-11-29 at 7.09.14 PM.png

From the above chart, we can see that in the last one year there has been a surge of more than 40%. This shows that people are increasingly looking for “Customer Success” as an approach to drive retention and mitigate churn. Many companies these days have customer success managers (CSM) and all the way up they have Chief Customer Officer. Customer Success Manager’s job is to establish an enduring relationship of the company with the customer. Note that they come into picture post-sales. CSM must be proactively reaching out to customer when they find that customer’s product adoption is decreasing, which could mean that they are at a risk of churn. On the other hand, if CSM finds out that the customer seems to be engaged and really  happy with the product, they could try to up-sell, which will increase the MRR.

Any business grows in four ways – Acquisition, Retention, Up-sell, Cross-Sell. In the early stage, companies mostly focus on acquisition, but hopefully through the argument I made above I was able to make a point that retention is equally important if not more. This new wave of “Customer Success” is step towards addressing churn and creating more happy customers.

 

Design Thinking Workshop & Open IDEO Challenge

Last week, I along with my team from Design Thinking class organized a workshop to introduce students to Design Thinking and also have them participate in the Open IDEO’s “The Higher Ed Challenge”.

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The details of the challenge could be found on the Open IDEO website.

Screen Shot 2015-11-29 at 2.38.41 PM.pngDesign Thinking is a five steps process with significant effort going in the “Empathize”, “Define” and “Test” steps, but due to the limited time we had to conduct this workshop and also since we were already given the problem by Open IDEO, we focused on “Ideate” and “Prototype” steps.  We gave students around 20 minutes to brainstorm ideas for solving the given problems. In order to help students brainstorm Screen Shot 2015-11-29 at 2.57.02 PM.pngin a productive manner, we showed them a demo brainstorm process for “how to improve our school cafeteria”. We wanted them to have constructive brainstorming not destructive. We shared 7 rules to facilitate collaborative brainstorming.

Then we asked them to vote on the idea they would like to prototype. For prototyping, we brought all sorts of art and craft stuff. We gave them 30Team4 minutes to build a prototype. They could draw, cut/paste, build mock ups – anything that could help get the idea across. We had four teams with 4-5 members. Each team came up with very creative and thoughtful solutions. We also made videos of students describing their ideas. Finally, we uploaded the ideas along with their description, pictures and videos to the Open IDEO website.

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Everybody had a lot of fun working with students from different schools at Cornell. We also enjoyed sharing our learning from the Design Thinking course. I think teaching makes you even better learner as it forces you understand the concepts and ideas to their depth, so that when someone ask you questions, you are well prepared and confident. I would like to thank our instructor for this course – Tracy Brandenburg, teammates and participating students to make it a memorable experience.

 

Design Thinking Class #3 & #4

As a preparation for this class, we were supposed to interview an Airbnb host in Ithaca. My team interviewed a superhost. A superhost is someone who has excellent track record in hosting guests with 5-star reviews. superhostImageThrough the interviews we tried to understand how the host uses Airbnb to show his listings and what does he look for while approving a reservation request from a guest. The superhost shared several examples of the guest profiles that he has rejected in the past and also highlighted few reservations request that he approved instantaneously.

We also looked from a guest’s point of view to get a sense of the on-boarding and reservation process. We went outside the class to find someone who has never used Airbnb and help her setup an Airbnb profile. We walked her step by step through the process to understand what she was thinking while filling up information – what made her uncomfortable in sharing any specific information and what sections were not very clear in their purpose. One important observation from this exercise was that users generally try to share as little information as possible about themselves. We think this is probably the biggest obstacle in building trust and safety between guests and hosts. From our interviews, we have found both guests and hosts complaining about profiles and listings that look sketchy because users do not share enough information to better understand them and build trust.

IMG_0297After interviewing several hosts and guests, we decided to select one whose problem we would like to solve. My team selected the superhost we interviewed. First step was to define the problem statement. In defining the problem we had to think about the root cause because sometimes what we see are just symptoms. After finalizing the problem statement, the next step was to brainstorm solutions.

Brainstorming process has certain nuances. First, each person in the team takes a minute to write down an idea and announce it with pasting the sticky note on the wall with their idea. No one is supposed to criticize other person’s solution. Once all have posted an idea, team members build on top of the idea they like. For example – you don’t say “I don’t like that”, instead say something like “That’s great – may be we could also…”. You have to be constructive not destructive. If the team has multiple solutions, then they vote to determine which idea they would use to build the prototype.

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Image Courtesy of Design Thinking at Cornell

Finally, the team does rapid prototyping using anything – art and craft material, cardboard, paper, etc. May be in a more professional set up such as at your job you might build prototype using some tools and technologies, but in the classroom the aim is to help others get some idea about the solution that the team is proposing. The teams also play roles to enact the problem and solution to show how it will look like in the real world. For my course this semester, each team build a prototype and we made a video of teams acting out the solutions using their prototypes. It was a very fun and learning experience.

 

Design Thinking Class #2

For the second class, we had a guest professor from Cornell Tech: Dr. Marc Brudzinski. The focus of the class was to “listen with your eyes”. He organized three activities:

  1. For this class, we were asked to bring photographs of things we carry everyday, spaces or things that we care about, and something that makes us happy. During the class professor asked us to stick those pictures on the wall. Then your team members would try to guess what those pictures mean; basically try to understand  people through their interests, habits and things they value. One person said that his team members were able to point out certain things about him that were true but he never himself has consciously thought about it. I think this activity was a great exercise to use your vision to interpret things and you will be surprised how much you can guess correctly because picture speaks a thousand words.
  2. For the second activity, the professor first showed us a hack that someone has put in a park to create a sitting place. It was a park, but did not have any place to sit. Using that as an example, the professor then asked us to go outside the classroom and look around the University for any hacks or workarounds that people have created or anything that you find interesting such as people using a rock as a sitting platform near a water stream, a painting to cover up a broken window or a chain fence to lock a bicycle. We took the pictures of all such things and emailed to professor. We all came back after 20 minutes and went through the pictures that teams have sent to the professor. We tried to interpret what people were trying to achieve in those pictures. I think I idea behind the exercise was to pay attention to the way people interact with their environment because many times they do not explicitly say what their paint points are, but you could discover an important problem through your observations and find a great opportunity to create products and solutions.
  3. The third activity was to learn how to interview someone. The professor first showed us an example of a bad way and a good way to do an interview using a mock interview with one of the student. As part of the activity, we were supposed to go outside the class and find someone who has used Airbnb. In the process have one person ask questions, another take notes and others observe the body language of the person being interviewed to get subtle understanding of the person feelings when they booked and stayed at an Airbnb listing. He said the interview should be like a conversation, where the other person feel comfortable in sharing his or her experience. The questions should be open-ended and not the ones that have “yes” or “no” answer. A great way to interview is to ask the person to recall the last time they used Airbnb and what  their experience was like. Then ask questions with an intrigue to show that you are interested in learning more.The professor shared an important thing about whom should we select to interview. He said usually the people who are on the extreme ends provide good insight; I mean person who either had a great experience or a horrible one. Finally, everybody went with their teams and interviewed an Airbnb guest. It took us some time to find a person who has used Airbnb. I was surprised not many students have used Airbnb or may be I was unlucky that day. We managed to find someone when only 10 minutes were left before we were supposed to be back in class. But we were able to ask questions and learn about her experience using the methodologies that professor shared in class.

Overall, it was a very useful class and I very much enjoyed learning by doing.

Starbucks App’s Order & Pay Feature Has Great Potential

IMG_0296Last week I saw a leaflet at the Starbucks store that I usually go to. It had an advertisement of “Order & Pay” from your iPhone app and pick up in-store. I have been hearing about this service for last couple of months, but I think it took some time for it to come to Ithaca Starbucks stores. When I thought about this service, two questions came to my mind:

  • Would I have to provide the time by when I can come and pick up the coffee?
  • Or Would the app tell me the pick up time?

These are two different use cases. The first use case looks like the traditional way of booking a cab, when you provide the cab a time to pick you up. The second one is more like an Uber, when you need the cab right now, so the closest one would take your order and provide you a time estimate of its arrival. Assuming that people don’t really plan to have coffee and decide in the instant, and also since there are usually many Starbucks and other coffee shops, the second use case seems to be most probable.

Anyways, I decided to use the “order & pay” the next day when I was half a mile away from Starbucks. When you go to the ordering section of the app, it displays tiles with images of your previous orders, so you can instantly place an order. It also has a browse search bar, where you can go through different types of coffee, other drinks and even food items. It has the default size of Grande for the drinks, but you can change that. After you select the item, on the next screen it tells you the estimated time to pick up from the closest open store, which BTW you can change in case you want to drive to a different location. It also displays your drive time to that store. Finally, you can place the order.

But I have one concern here. The pick-up estimate time is usually in a range, for example 3-8 minutes. Now, if it will take me 10 minutes to reach the shop and the coffee is prepared in the next 3 minutes, then by the time I reach, my coffee might not be as hot as I wanted. It would have been great if they could take into account my arrival time to prepare coffee so that it is as fresh as ordered on the spot. Now, I know many people don’t really care if the coffee’s temperature has dropped slightly, but wouldn’t the experience would be awesome if they could achieve that precise level of timing. I think they are very much capable of actually doing that with the amount of data they are capturing.

Starbucks boasts of 16 million active users on Starbucks’ mobile app, which is probably way higher than any other company’s mobile app in Food and Beverage industry. Also as per the information on one of the TechCrunch post, 20% of all transactions happen through mobile payments and they handle around 9 million mobile transactions every week. So, the estimates for pick-up that they come up with are not random or someone in that particular store enters that value. These estimates are probably the output of analysis of tonnes of data collected from the transactions about the customer traffic in stores during any specific time of the day. I think Starbucks today has tremendous strategic advantage by making serious investments in mobile payments 4-5 years ago. I was looking at the SUBWAY mobile ordering system. They have fixed pick up time of 15 minutes from the time of checkout. You can clearly see that Starbucks will become more and more smarter each day with the amount of data they are collecting about store traffic and customer’s buying behavior. And may be one day they would be so smart that they would finish preparing my coffee just in time as I enter the store🙂

Design Thinking Class #1

We are being taught Design thinking by Tracy Brandenburg, who is an anthropologist and Design Thinking enthusiast. She learned the IDEO method of problem solving from Stanford d.school, where she now also serve as a coach. She is very free-spirited and loves having fun with Design Thinking. When I applied to the course, I was put on a wait list, as apparently Design Thinking is a very popular course open to all graduate students at Cornell University. Luckily I got off the wait list and I am very happy to be part of this experience.

To kickoff the course, we were given the challenge to design the gift-giving experience for a partner. The partner was another student in the class sitting next to you. The whole activity was very fast paced with 9 different tasks, during which you interview your partner multiple times to understand their gift giving process – what your partner tries to achieve when they are gifting someone, what kind of emotions are they going through during that experience – essentially you try to get insights and understand your partner’s thought process. The objective is to gain empathy. At the end of activity, you build a solution for your partner and then get feedback on whether it works for them or do they have any feedback to improve it. A crash course using the same gift giving activity can be found on the Stanford d.school website.

I think the essence of the activity was rapid prototyping. The tasks were time bound ranging from 3 to 5 minutes. And then in the end you have to come up with a tangible solution. I think they are trying to teach you a process in which you quickly think about a solution, after understanding user needs. Then rapidly come up with a prototype, get feedback and improve it. An important learning for any entrepreneur here is the idea of “fail-fast”. Because the process is so fast, you can quickly come up with a new solution if the previous one fails.

Near the end of class, we were assigned a team of 4-5 students. Students are from different graduates programs such as MBA, Engineering, Architecture, Labor Relations, etc. People from different background and professional fields usually have different approach to a problem, which enriches the Design Thinking process. I am looking forward to working with my team in coming weeks on some an exciting project.

My Initial Understanding of Design Thinking

I just started a course in Design Thinking as an elective for this semester. I have been hearing about Design Thinking for some time now, but over my summer internship somebody recommended to do some course as he thinks it is very useful for a product manager role. I thought I would write down what I think Design Thinking is at the beginning of my course. Then in December when the course ends, I will come back and see how my thinking about Design Thinking has changed. So, here is what I think:

Design thinking is not just about making pretty products. I would say that comes near the end of the process.

  • Firstly, better understand the customer need/person who you are solving problem for. Sometimes the person herself doesn’t know a problem exists. You need to go through their experiences to uncover potential pain points
  • Then you go through rapid prototyping and iterations in a team of people with diverse backgrounds, where everyone bring their own perspective and ideas about how to solve the identified problem
  • Lastly, after you have build the prototype, you want to get the feedback from the customer – whether it solves their problem, do they like using it, do they have any recommendation to improve.

I just want to say something about the last point above. In big firms, you would not take a prototype to the customer as such. Firms usually do some kind of A/B testing, where they would embed certain metrics to monitor user behavior. This provides customer insights and feedback on what features customer like/dislike and where the engagement is coming from. Many times firms also use focus group studies to get initial feedback and prioritize features accordingly.