Are your customers planning a mad dash for the exit? Intronis CEO Rick Faulk sheds light on five early indicators that will help you pinpoint the accounts least likely to renew.
In a perfect world, SaaS businesses would be able to look into a crystal ball to predict churn. That way, rather than having to react to lost revenue as it happened, they could do something to address churn before it ever occurred — either by managing those accounts differently to keep them from canceling or executing a strategy to efficiently replace that lost revenue.
Unfortunately, as SaaS entrepreneurs know all too well, that crystal ball doesn’t exist.
In fact, it’s relatively impossible to predict churn with a high degree of accuracy. After all, customers can change their minds about a product or service for any number of reasons —financial or otherwise — and pinpointing exactly what that reason is before they make a run for the exit is extremely difficult.
5 Early Indicators of Churn
Thankfully, just because you can’t predict churn, doesn’t that mean your only option is to reactively analyze cancellation rates (and the reasons for those cancellations), and build predictive models that paint a somewhat generic picture of churn trends
While analyzing cancellation rates is important, here are several predictive indicators of churn that can help you pinpoint accounts that are less likely to renew:
High churn rate got you down?
1) Product Usage Patterns
Ultimately, if a customer’s usage rate goes down, it’s generally an early indicator that churn is about to happen. For instance, if your SaaS company sells cloud storage and a customer all of a sudden goes from using one terabyte of storage to 500 gigabytes, you should be concerned. Usage indicators will vary (i.e., total users, user log-ins, time spent using the product, etc.), but generally if you notice that a customer’s usage pattern has dropped precipitously, churn is often the next step.
2) Customer Interaction Levels
If a customer goes from an average of eight support calls per month to just one call for the next several months, it’s not usually because your support team has solved their problem. It’s often because product usage or perceived value has gone down, and the customer no longer sees the purpose of calling you to fix their problems. Customer payment patterns could also fall under this umbrella. If you notice that a previously good customer has missed two or three payments in a row, it should raise a red flag.
3) Dramatic Industry Shifts or Trends
While this is not a factor that SaaS companies can easily control, industry trends are often predictors of higher or lower churn rates. For example, if your industry’s price point significantly decreases over time (either due to increased competition or other factors) and your product is all of a sudden priced at the top of the market, higher churn is likely. Similarly, if all of your competitors roll out major product enhancements, and you are unable to keep up with those enhancements, you can expect higher churn.
4) Organizational Changes within an Account
Again, this is not something SaaS companies can control or influence, but it is something that can indicate churn. For instance, if you sell CRM software and the chief marketing officer who signed off on your product leaves the company, it’s worth considering that the new CMO may prefer a different CRM system. It might not be easy to determine if that is indeed the case, but organizational or decision maker turnover is often a very good indicator of potential churn.
5) Business or Economic Model Changes within an Account
Is a particular customer shifting their focus to new market segments or product categories that would remove the need for your product? Has a customer recently closed a new round of financing or begun to hire heavily in sales, marketing, or engineering? All of those things are indicators that the business could be changing its focus or accelerating its growth, both of which can significantly impact the likelihood of churn if your product no longer aligns with their needs.
As you probably noticed, all of those indicators tie back to a common theme: Perceived value.
Whatever the cause, if your product’s perceived value drops in the eyes of the customer, then the chances of that account churning rise significantly. The good news, of course, is that if you pick up on that before it’s too late, you may be able to formulate a strategy to reverse the negative effects and retain customers that may have otherwise been lost.
Tips for Implementing an Early Warning System
Churn may be impossible to predict, but putting systems and processes in place to monitor indicators of churn can help manage and mitigate the impacts of it.
Stay as close to your accounts as possible and make sure that your people — whether it’s sales, marketing, product development, or customer service — understand the need to look out for and document the indicators above.
In addition to churn, what other things should you be tracking?
For instance, if someone in your accounting department notices that a customer hasn’t paid on time for three straight billing cycles, make sure that they know to pass that information on to someone in sales or customer service who can further explore the issue. Similarly, if a sales rep sees on LinkedIn that the decision maker of a particular account has taken a job at a different company, they should assess how that might impact the company’s relationship with that account.
Lastly, it’s important to remember that predictive indicators are only helpful if they stimulate action.
After all, if you saw a weather forecast that called for 12-inches of snow and sub-zero temperatures, you wouldn’t decide to wear shorts and t-shirt into the office anyway, would you? The same is true of predicting churn. These indicators can be helpful tools for mitigating the negative effects, but only if you have the wherewithal to actually do something with the insight they yield.
Photo by: Fe Ilya