Don’t Mix SaaS Free Trial and Churn Metrics

Don’t Mix SaaS Free Trial and Churn MetricsAny metric that’s not acted on is a vanity metric, right? Sure, but that doesn’t cover every situation.

Sometimes we measure things because we’re “supposed to” but honestly don’t know what to do once we have the result (add that to the list of things that are true but few people will admit publicly). It’s only a vanity metric because all we can do is look at it. We sure would like to act.

And then there are times where the metrics that we’re measuring are done with a purpose, we want to – and maybe even have an idea on how we will – act on them; but the metrics are just wrong. And acting on them will be either impossible or fail to have the impact you hope it will.

Which brings me to this question I got from Phil at Corvus Coffee, a subscription coffee startup based out of Denver, CO:

“I’m wondering if you have an opinion on what a churn rate should be while marketing a free trial heavily to grow a new online business compared to when we have a more established subscriber base.”

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SaaS Free Trial Conversion Rate Benchmarks

SaaS Free Trial Conversion Rate BenchmarksI’m frequently asked about SaaS Free Trial Conversion Rate Benchmarks; after being asked for the 97th time – this week – I decided to publish this post.

First, a bit of a disclaimer. Benchmarks are neat… it’s cool to see how you stack up against other companies. Benchmarks are how some executives make decisions and some investors decide if it’s worth the risk. And there are analyst firms that make a ton of money catering to that desire to know how you rate against other companies.

I’m not an analyst… my knowledge comes from my experience working with SaaS companies, those I advise, and through my various connections with VCs and friends in the biz.

And in my experience, I say…

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Churn is a Symptom, Not a Disease

Churn is a Symptom, not a DiseaseChurn is when customers cancel their account, don’t renew their contract, or remain your customer but pay you less; the latter is referred to as “revenue churn” and includes discounts, down sells, etc.

Now, many companies find out about Customer Success when searching for ways to reduce customer or revenue churn, and in the past this was the primary driver for companies to invest in Customer Success; at least initially.

But once churn is taken care of, is that it? Not at all! In fact, once churn is under control, that’s when the possibilities of Customer Success really start to get good.

Unfortunately, many companies never get past that point; they have churn today, they’ll have it tomorrow, and that’s going to be the focus for the foreseeable future.

It doesn’t have to be that way!

If churn is a major issue in your business today – or if you are trying to keep that from being the case – it’s critical to view churn for what it is: a symptom of a deeper, underlying disease.

And that disease is a failure to ensure your customers achieve their Desired Outcome; either because you’re failing to Orchestrate, Operationalize, and Instrument properly once they become a customer… or because you’re acquiring customers without Success Potential in the first place.

Either way, let’s dig into this a bit.

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7 Ways Customer Success drives Company Valuation

7 Ways Customer Success drives Company ValuationI’ve been saying for years that Customer Success is transformative; driving exponential value for both the vendor, as well as the customer. In fact, it’s that value growth for the customer that truly drives the value growth for the vendor. What goes around, comes around.

And while the following is something I’ve shared with clients, workshop attendees, portfolio companies of Venture Capital and Private Equity funds Storm Ventures and Accel-KKR in the United States, NDRC in Ireland, e.Bricks Ventures and Redpoint eventures in Brazil, as well as covering this in my Keynote at the 2016 TSIA Technology Services World event…

… I’ve never really put this out there for public consumption.

Until now.

But first, what do I mean when I say “drives value” for the vendor? How does Customer Success truly affect the company that adopts it as it’s purpose such that it impacts everything they do?

Customer Success drives up the value of your company. How’s that for impact?

In fact, let’s look at 7 ways Customer Success drives the Value of your Company.

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Stretch vs. Bad-Fit Customers

bad-fit-vs-stretch-customersWhat are the characteristics of a Bad-Fit Customer for your business?

It’s great to know who your Ideal Customer is (my Ideal Customer Profile Framework is constantly updated), but it’s much easier – and I say required – to first identify the types of customers that are a bad fit and the characteristics that make that so.

If we want to build a business that’s free from churn and designed to move customers along an Ascension Path, we must acquire customers that have Success Potential. Period.

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Two Ways to Reduce SaaS Cancellations

2 Ways to Reduce SaaS CancellationsFairy Tales have happy endings.

That’s why they’re so popular; even if they include scary moments with monsters and evil blended family members, everything is pulled together nicely at the end when the naive protagonist is magically okay.

In business, the same types of fairy tale exist, with one being that customers cancel their subscription or don’t renew their contract but somehow, magically, those customers are brought back from past the brink and, in the end, their cancellation was reversed, they’re happy, and maybe they even took an upsell on the way back in.

The reality is, that’s not generally how things work; and if you’ve heard about the opportunity in cancellations others may have experienced it, I can guarantee their experience was unique and rare.

Regardless of your humility, transparency, and noble intentions, customers that cancel – and didn’t get acquired or go out of business; the only slightly acceptable reasons for churn – do so because they did not achieve their Desired Outcome through their interactions with your company.

Customers achieving their Desired Outcome through their interactions with your company tend to not churn; that’s why focusing on Customer Success is so important.

Ultimately, this means swooping in after your former customer made a decision to stop doing business with you, – because you didn’t enable them to achieve their Desired Outcome while they were paying you – probably isn’t going to work, and might even irritate ’em on the way out… a little insult to injury for the road.

In this article, I’ll introduce two things that will help reduce cancellations (if you forgot to focus on Customer Success): Cancel Flows and Cancel Intent.

But I’m getting ahead of myself; let me take a step back and start from the beginning…
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The Only Two Reasons Customers Churn

The Only Two Reasons Customers ChurnChurn is the antithesis of growth.

When you lose a customer, in order to grow by one customer, you have to first replace that customer you lost, and then add a new customer.

And when a customer leaves, they take the revenue they were paying you with them (often to a competitor!); but they also take other things, like negative sentiment, your employee’s morale, ammunition for the competition to use against you in future deals, and much more.

You know churn is bad, I don’t have to convince you of that. (Right?)

What’s even worse than having churn is not knowing why your customers churned. That’s why I say you need to know why each customer churned so you ensure no customer ever churns again for those reasons.

But I want to be clear that, whatever reason your customer gives you for why they churned, the details uncovered by your internal tracking, or (ideally) both, it all fits into one of two categories.

Let’s dig in…

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You Have to Know why Your Customers Churn

You Have to Know why Your Customers ChurnWhen customers churn, that’s a problem.

Even if their churn was “unavoidable” it still hurts.

Churn hurts on several levels: from lowering revenue to hurting employee morale.

And churn means something happened to the customer (out of business, acquired, etc.) or – and MUCH more likely – they didn’t achieve their Desired Outcome through their interactions with your company.

In order to avoid churn in the future, we need to learn from the churn that has occurred in the past.

Which means every former customer must have a reason associated with them.

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Pricing Strategy Framework for SaaS Startups

pricing-strategy-framework-for-startupsPricing doesn’t exist in a vacuum and is therefore not something you can tackle on its own.

Pricing is a function of marketing and determines, among other things, your market position. It also indicates – or is ideally derived from – the type of customer you want to do business with.

And of course in SaaS, pricing is tightly coupled to the product itself, which is different from other types of software and non-tech products where the price is decoupled from the product.

Which is why I can’t recall a time where a SaaS company came to me with a “pricing problem” and there wasn’t something else that was going on, too.

In fact, their “pricing problem” often had little to do with the actual “price” – the numbers – and more to do with pretty much everything else (chosen revenue model, customer segmentation, value proposition, marketing strategy, conversion optimization, etc.).

So, when those in an early-stage startup – or those bringing a new product to market within an existing company – ask me for help on pricing, I always say that you won’t get it perfect out of the gate, but you can get it as right as possible.

And then I give them a high-level pricing strategy framework, which I thought I’d document and share with you in this post.

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Qualifying Leads in a SaaS Free Trial

qualifying-leads-in-a-saas-free-trialI got this set of questions on Twitter: “Is there a certain level of activity during the free trial that is likely to predict conversion from free to paid? Also, how do other companies handle Sales vs. Marketing Qualified Leads (SQL vs. MQL) when it comes to Free Trials?”

I thought that was an awesome set of questions because it indicates the person asking is starting to look at their Free Trial as a true sales pipeline; something more people and companies should do.

So I loved the question and I thought my answer was equally awesome (if I do say so myself), so I decided to expand on it a bit and share it with you, too.

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Customer Success and Logical Account Expansion

customer-success-and-logical-account-expansionCustomer Success is a powerful growth driver.

Sure, in the early days when you’re putting out the fires of churn, Customer Success seems less like a growth driver and more like a stop shrinking driver.

But once you move past churn busting – or if you avoid that altogether by being smart about customer acquisition in the first place – Customer Success starts to come into its own as a true driver of growth.

One of the ways Customer Success drives growth is through account expansion or getting existing customers to pay you more over time.

When you can grow revenue from your existing customer base, you could essentially turn off new customer acquisition and not just stay at the same level of revenue, but continue to grow.

Sure, it’s probably a good idea to continue to acquire net new customers, but the impact of account expansion to both the bottom line of a company as well as the valuation (something very important when raising money, going public, or being acquired) is potentially transformative.

But for account expansion – upsells, cross-sells, add-ons, price increases, etc. – to be a consistent and long-term driver of growth, it cannot be arbitrary or expected to occur organically.

Account expansion must be orchestrated, and that starts with applying logic to the process. Let’s explore…

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Reasonable SaaS Free Trial Conversion Rate

Reasonable Free Trial Conversion RateWhat’s a reasonable conversion rate from free trial to a paid customer?

I get some form of this question from time to time and I’ve answered it several times over the years.

Well, I got it again so it’s time to revisit this very simple question.

As with most “simple questions” the question is easy to ask; the answer, however, is anything but easy to give.

But I tried and here’s my response that I thought you’d benefit from, too.

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Acceptable Churn Rate for Small Accounts

acceptable-churn-rate-small-accountsWhat drives a company to focus on Customer Success is changing. In the past, churn (or retention, depending upon how you look at things) was generally the catalyst.

Once churn is under control, the catalyst changes to expansion; driving use, consumption, and revenue within existing accounts.

And these days, startups are building Customer Success into their DNA from the ground up, understanding that an acquire-any-customer-at-all-costs-until-churn-is-a-major-problem go-to-market strategy is the wrong way to do things and are avoiding that unnecessary step in the startup lifecycle.

That said, churn is still a problem for some companies, so when I answered this email about different churn rates across customer segments, I thought I’d share the answer with you, too, so we can all benefit.

Here’s the email…

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Success is Uncomfortable

Customer Success WorkshopI’ve talked before about holding customers accountable and how customer success isn’t about making customers happy.

Sometimes you have to push customers out of their comfort zone and – if you’ll allow me to channel my inner Tony Robbins -progress is rarely made within our comfort zone

That means moving toward success – whether for us or for our customers – is not always comfortable.

In fact, success is often quite uncomfortable.

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The Risk (and Opportunity) in Stealing Customers

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Picture it, São Paulo, Brazil, October 2015.

After one of the sales and customer success workshops I did, a few of us went out for a snack – fried polenta sticks – and to talk shop… and the idea of Success Gaps came up.

In particular, we talked about prospects that experienced Success Gaps with your competitor’s product because “it didn’t do what they needed it to do” and are interested in your product, but your product is – if you’re honest – fairly similar to the other guys.

So is it awesome that they want to switch and you should celebrate that you’re stealing your competitor’s customers… or is it a huge red flag?

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A Foolproof Way to Get Testimonials Without Asking for Them

A Foolproof Way to Get Testimonials Without Asking for ThemPersonally, I’ve always found it difficult to ask for testimonials. It just doesn’t come naturally to me.

In fact, one of the reasons I like doing calls on Clarity is that the platform closes the loop with the client for me, asking for a star rating and optional comments; to me, that part alone is worth 15% of the revenue from those calls. It’s operationalized and I don’t have to think about it.

But that’s just for Clarity calls; outside of that system, I’m back to square one… asking for a testimonial.

And of course, my clients are pretty much in that same boat, too. Some people are better at it than others, but asking for a testimonial is not always the easiest thing to do. It’s especially difficult when you just do it in a haphazard way… which results in doing it even less often and then,… not at all.

That’s why you should operationalize the process. But I’ll be honest, even if you have a strong system in place, if there’s still a human involved – on either end – the process becomes a bit bumpy.

I suppose you could just wait and hope testimonials roll in organically, but that seems like a bad idea.

Luckily I’ve got a foolproof way of getting testimonials.

In fact, the other day I was talking to some folks at a well-known search optimization software vendor about Customer Success at a high level when this very tactical question came up; how to get testimonials.

We were talking about how Customer Success leads to increased customer advocacy – and we know social proof is extremely valuable (if you do it right) – but these high-level discussions get derailed when you’ve run into low-level tactical issues in the past.

Well, like I said I’ve got this great way to get testimonials, but I assumed what I knew about this was what everyone else knew… but I was wrong.

Once I told them how to get testimonials without asking for them, I could sense that perhaps I knew something they didn’t. Perhaps this technique I use all the time with super-awesome results wasn’t as widespread as I thought.

So I decided I would share it with you… but pay close attention; there’s no TL;DR version of this and all the details matter. RT;WT (Read The: Whole Thing).

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Success Milestones and the Path to Desired Outcome

success-milestonesI talk about Success Milestones all the time, not just in the context of Customer Success, but in the context of the overall success of my SaaS clients and the companies I work with through Winning by Design.

The concept of Success Milestones is a relatively simple one to grasp, but the power and the value of this way of thinking are often overlooked or misunderstood. Let’s fix that.

Since I’ve never really defined Success Milestones, what better time to do that than right now.

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Customer Accountability: Pushing Back to Drive Them Forward

customer-accountabilityA little while ago I introduced the concept of the Success Gap and how customers can use your product to the fullest and still not achieve their Desired Outcome.

And as the vendor you can either ignore the phenomenon and let customers fend for themselves and maybe not achieve the desired outcome – at which point they’ll blame you – or you can take the initiative to try to help them with a bridge for that success gap.

You can do that by bringing in experts, providing content, giving discounts on third-party courses, or building those bridges into the product.

But at some point you also need to let the customers know that they are accountable for some portion of the results.

In fact, one of the things we have to do as part of an operationalized Customer Success initiative is to tell the customer what they need to hear – not what they want to hear – so they do the right thing.

Which means we have to be realistic with our customers about what is on their plate – and what is on our plate – and who’s ultimately responsible for the success of the customer.

This is called Customer Accountability and it’s the missing piece in your Customer Success strategy.

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