Customer Success – A methodology to Drive Retention and Mitigate Churn

Screen Shot 2015-11-30 at 12.11.32 PM

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.



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 🙂