How to Win the Game of Trust

Evidence suggests trust forms a barrier to churn

A competitor just introduced a new product that delivers significantly higher performance. Do you worry your customers will jump ship? If they trust you, there’s little to fear. A new study using collaborative games demonstrates people value trust far more than performance when choosing partners.  

New research

Scientists at the University of Maryland recently conducted an experiment to see how feelings of trust guide decisions.¹  Test subjects first played an investment game in which they could keep or invest $10 with three other players. Participants learned by playing the game that one (benevolent) always returned slightly more than the player invested, another (greedy) never returned any investment, and a third (exploitative) returned slightly more than invested in first two rounds and then returned nothing. 

Then researchers asked participants to play a second game, a team version of Battleship. Subjects would choose one of the three partners from the previous game to play with them. Scientists told participants that during the game, all players would select their targets at the same time, shots would be revealed simultaneously and shot sources kept hidden, so no player knew who shot at which target or which board. At the end of the game, winners would split a $50 prize. Subjects saw a chart indicating that some partners were significantly more skilled than others. Faced with the challenge of maximizing their winnings, players had to choose either a better player or one they trusted. 

The scientists discovered that people were nearly eight times more likely to choose a poorly performing but trustworthy partner than an untrustworthy but highly capable one. It was as if skill didn’t matter at all; people’s subjective evaluation of trustworthiness far outweighed their objective evaluation of skill. The “halo effect,” in which one’s initial impressions of another’s character significantly influences later assessments of that person,²  was clearly in evidence.

The game of business

This experiment suggests trust may inhibit customer churn in the event a competitor introduces a game-changing product. People are increasingly skeptical of marketing claims,³  so given a choice of maintaining a trusting relationship or believing a sales pitch and taking a chance on an unknown supplier, customers are far more likely to stay than switch. There are limits, of course. According to prospect theory, customers seriously consider alternatives when promised benefits exceed 2:1,⁴  and high churn may indicate things are worse than they appear. But high levels of trust can buy companies precious time to catch up. When companies enjoy a base of trusting customers, simply sharing product roadmaps and allaying concerns about timelines may be all that’s needed to keep them from switching.

Conversely, the experiment shows just how detrimental betrayal can be. When companies use deceptive marketing practices, treat customers unfairly, or fail to keep promises, customers learn the company can’t be trusted and look elsewhere. This conclusion supports other research that suggests trust moderates customer loyalty. 

Winning trust

People don’t immediately trust each other—they learn to trust over a series of experiences. It’s a process, and like all other processes, relationships can be continuously improved. Therefore companies can design and implement processes that increase customer attachment and lead to higher levels of trust. 

Customer journey mapping is a handy tool for improving processes. First, managers determine the sequence of events that makes up the customer experience, from becoming aware of the company’s offering to purchasing, implementing, using, and eventually renewing or canceling the subscription. Managers then critique each touch point along the journey, looking to remedy frustrating or inefficient steps. When managers include mindful customer experience techniques in the mapping process, they uncover hidden opportunities to strengthen customer bonds along the way. They learn that managing five critical moments in the customer experience makes all the difference. As a result, companies systematically increase trust and customer loyalty. 

Intense competition and fleeting technology advantages characterize the subscription economy, so executive should expect times when their offerings lag competitors.  If companies make it difficult for rivals to dislodge their customers during these times, the countermeasures protect the company’s sustainability over the long run. Strengthening customer relationships then becomes a high stakes game, one companies don’t want to lose. Taking a systematic approach to building trust can separate the winners from the losers. 

Sources:

1. Buntain, C. and Golbeck, J. (2014). Trust transfer between contexts.
2. Thorndike, E.L.: A constant error in psychological ratings. Journal of Applied Psychology 4, 25–29 (1920).
3. Friestad, M. and Wright, P. (1994). The persuasion knowledge model: how people cope with persuasion attempts. Journal of Consumer Research, vol. 21, No. 1, June 1994.
4. Tversky A., and Kahneman, D. (1992). Advances in prospect theory—cumulative representation of uncertainty. Journal of Risk Uncertainty, 5, 297-323

Why Trust Matters for Customer Success

Software usage is just one driver in customer loyalty

A widespread belief shared by Customer Success professionals is that promoting software use early after the sale leads to less churn. It makes sense. But usage is just one factor leading to customer retention. Studies show building trust is equally important for retaining customers and growing revenue. To generate high loyalty and more business, SaaS leaders must pay as much attention to affective processes as they do effective ones. 

Usage: the good and the bad

We’ve all had the experience of canceling an unwanted magazine subscription. Perhaps we signed up impulsively after reading a good article on a plane, or subscribed as part of a fundraiser to help a favorite charity. We thought it was a good idea at the time, but eventually the magazines stacked up—we didn’t have the time or the interest to actually read them. Eventually when the envelope asking us to renew came in the mail, we just tossed it. Since we didn’t use the subscription, it had no value to us. 

The same applies in software subscriptions. If customers invest in new applications but don’t use them, it’s hard to justify the ongoing expense. That’s why SaaS companies pay so much attention to user adoption. Customer Success teams spend much of their time onboarding new customers and helping them achieve early results. It pays off. Data from Scout Analytics by ServiceSource suggests that customers who use their new software at least once per week over the first six months are about 50 percent less likely to churn.¹ 

But high usage doesn’t necessarily equate to high retention. In the wireless industry, for example, heavy users are more likely to churn.² Why? Experts cite poor service quality (dropped calls in particular), price sensitivity due to high monthly bills, and preference for more advanced capabilities they find somewhere else. Similarly in the SaaS business, “power users” tend to be the most valuable but come with a downside. They’re the first to notice company “warts”—software bugs, system downtime, or poor customer service—and may be the first to leave.

Factor ignored?

SaaS companies frequently overlook an important loyalty dimension: trust. Researchers define it as the confidence business partners have in the reliability and integrity of each other.³ Studies in technology markets show that high trust leads to affective commitment; in other words, people are inclined to stick with a supplier because they want to, not because they have to.⁴ The lower the trust, the more customers revert to calculative commitment, considering other alternatives and spending time weighing product costs and benefits vs. the competition. Relationship factors are therefore as essential as product attributes and market variables when it comes to loyalty. Companies increasing trust increase loyalty.  

Despite the numerous shortcomings of Net Promoter Scores (NPS®),⁵ its fundamental question, “How likely are you to recommend our product to a friend or colleague?” offers a practical example of how we view trust. Recommending a vendor to a friend or colleague, for any of us, is a risky proposition. Our trust in the supplier’s ability to satisfy must greatly exceed the chance of impairing an important relationship. 

Brain trust

Neuroscientists say we learn to trust people in much the same way we learn about everything else. A part of the brain called the striatum specializes in social decision making, detecting and evaluating levels of fairness, cooperation, and reciprocity. Social learning begins with a bias, or cognitive “anchor,” which is surprisingly sensitive to what people say about others.⁶ As we learn about people, we compare situational outcomes against our expectations and subconsciously adjust our mental anchors along the way. Through experience, feelings of certainty and fairness acquired from multiple interactions then grow into a generalized sense of trust, a bias which in turn influences our future decisions. 

Our evolutionary biology explains why we developed the need for trust. Humans became the most successful species on earth primarily because of our ability to cooperate and learn from each other. But not all people work towards mutual interest. We subliminally perceive social deviations as threats, which in turn activate the ancient “fight or flight” mechanism in our reptilian brain. Low trust means high risk, prompting us to avoid the situation in the future.  

How to build trust

Software companies can grow trust in a number of ways. When organizations carefully and consistently set and meet expectations, it creates harmony in their customers’ minds. When things go wrong, leaders taking responsibility, communicating frequently, and quickly resolving problems build confidence. And when administering policies, treating customers fairly helps, too. Since a customer’s trust perception is strongly influenced by what others say, companies must guard their reputations with the same vigilance as their intellectual property. SaaS executives should be especially concerned when they see low NPS scores, indicating trust is low and further investigation is warranted.

Customer Success teams play a critical role as well. They can create more mindful customer experiences that systematically build trust in addition to early usage. The trick is to examine the customer’s journey and design processes that satisfy a customer’s effective and affective needs. For example, besides helping customers learn new software, CSMs can sow the seeds of trust by simply making a personal connection during an onboarding call. Doing so increases a sense of relatedness which quells the customer’s natural, subconscious threat response when encountering new people. Customer Success teams that skillfully manage five critical moments in the customer experience create conditions for strong, trusting relationships to form. Lower churn and greater revenue from up-selling and referrals result. 

SaaS companies must create and deliver value to be successful, but their loyalty efforts must extend beyond increasing software usage. It starts by understanding human nature and the factors that ultimately drive renewal decisions. Deliberately and systematically influencing these factors in turn makes SaaS subscription businesses thrive. 

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.
Net Promoter Score (NPS) is a registered trademark of Fred Reichheld, Bain & Company, and Satmetrix

Sources:

1. http://research.scoutanalytics.com/churn/the-data-behind-adoption-and-retention-in-the-customer-journey/ 
2. Ahn, J.H., Han, S.P., Lee, Y.S.: Customer churn analysis: Churn determinants and mediation effects of partial defection in the Korean mobile telecommunications service industry. Telecommunications Policy 30 (2006) 552–568
3. Morgan, R. M., and Hunt, S. D.: The Commitment-Trust Theory of Relationship Marketing. Journal of Marketing 58, 20–38 (1994).
4. Ruyter, K., Moorman, L., Lemmink, J.: Antecedents of Commitment and Trust in Customer–Supplier Relationships in High Technology Markets. Industrial Marketing Management 30, 271–286 (2001)
5. Sauro, J.: Should The Net Promoter Score Go? 5 Common Criticisms Examined. Measuring U. July 22, 2014 https://www.measuringu.com/blog/nps-go.php 
6. Fareri, D., Chang, L., Delgado, M.: Effects of direct social experience on trust decisions and neural reward circuitry. Frontiers in Neuroscience, 16 October 2012

The Seven Systems of CSM Excellence

Universal practices instill high performance

What makes some companies like Intel, Southwest, and Ritz-Carlton perennial performers? Is their secret charismatic leaders? Good timing? Grand vision? No. High performance isn’t about what organizations do, but how they do it. Customer Success teams can apply the same disciplines used by top-performing companies to dramatically increase results.

Jim Collins, author of Built to Last and Good to Great, says “dynasty” companies (those generating financial returns of at least 10x for 15 years or more) behave very differently than the rest. Unlike typical organizations, top performers are fanatically disciplined, empirically creative, and productively paranoid.¹ Laser-focused and utterly relentless, they eliminate distractions and drive continuous improvement everywhere. Rather than follow industry experts or imitate others, top companies engineer their own breakthroughs using empirical evidence, observation and experimentation. And they remain hyper-vigilant, watching competitors intently and adjusting their strategies to thrive in a constantly shifting landscape.

High performing organizations like the ones Jim Collins describes depend on a set of interconnected, self-reinforcing management systems to instill their unique behaviors. Their management disciplines become embedded in the organization’s “operating system,” creating a culture of excellence in individual work areas and throughout the enterprise.  The management systems they use are universally applicable, so Customer Success leaders can use them to realize similar benefits:

Sensory System

What it does: Methodically collects and interprets customer, market, competitive, regulatory, workforce, and technology trends to continually uncover new opportunities and threats.

Leading practices: Use quantitative and qualitative analysis extensively for market and product definition and performance monitoring. Implement internal and third-party “listening posts” in multiple channels. Increase relevance and salience by interpreting findings according to market segment. Systematically analyze, review and prioritize feedback for company business reviews, product roadmaps, and process improvements. Reduce “blind spots” by periodically challenging underlying assumptions and measurement techniques.

Application in Customer Success: Collect product usage, customer satisfaction, trouble ticket, and contact frequency statistics to generate health scores for specific customers and market segments. Utilize direct customer comments in CRM records and formal customer reviews for product and process deficiencies. Share discoveries via periodic, formal feedback sessions with development, sales, marketing, accounting, and operations leaders.

Planning and Review System

What it does: Inputs information, prioritizes actions, defines objectives, goals, strategies, tactics, and owners, and aligns financial and personnel resources to promote successful execution. Evaluates progress formally and periodically, holding people accountable, adjusting plans, and promoting learning.

Leading practices: Develop strategic (multi-year) plans that articulate long-term vision, objectives and goals, customer and market dynamics, competition, product and service roadmaps, value propositions, value delivery systems, staff development, risks, and financial pro-formas. Link strategic with annual plans and implement through product development and process improvement plans. Coordinate planning and review activities via calendars, and use scenario analysis to detect and quickly respond to environmental “triggers.” Involve all employees to build commitment for action.

Application in Customer Success: Participate in enterprise planning activities, share customer intelligence and help set functional objectives, goals, strategies and tactics. Prioritize, define, implement and track account management and marketing plans along with process improvement projects. Review progress monthly and quarterly.

People System

What it does: Defines jobs, employee knowledge and skill requirements, and facilitates screening, hiring, training, performance feedback, career development and overall organizational change.

Leading practices: Define short-term and long-term staffing and skills requirements as well as succession plans aligned with the strategic plan. Use structured screening, hiring, training, retention, and cultural indoctrination practices. Conduct both formal and informal performance reviews. Interpret quantitative job performance measures in proper statistical context. Collaborate to define and hold employees accountable for development plan execution.

Application in Customer Success: Craft position plans, metrics, knowledge and skill requirements, and development plans for CSMs to build stronger relationships, deliver onboarding, and uncover and advance sales opportunities. Characterize and use personality traits, in addition to education and past experience, to screen new hires. Give regular feedback, formally and informally, and avoid ranking.

Work System

What it does: Describes requirements and designs optimal workflows at a macro and micro level between customers, business partners, suppliers, company departments and work groups.

Leading practices: Map processes to identify critical handoffs, disconnects, metrics, and process improvement opportunities. Periodically redesign processes for enhanced speed, cost effectiveness and increased quality. Protect and develop core competencies to promote strategic advantages. Use partnership management and supply chain management techniques to influence change and improvement with third parties.

Application in Customer Success: Define the customer lifecycle linking onboarding, training, engagement, renewals, upselling and cross-selling activities using phone, e-mail, video, events, webinars, and social media contact as required. Define critical handoffs and feedback loops with sales, customer support, development, and accounting.

Metrics System

What it does: Focuses managers and teams on the critical few cause-and-effect relationships that keep processes under control and promote beneficial end results.

Leading practices: Deploy and manage daily operations across the enterprise via linked, balanced and aligned dashboards. List a critical few leading and lagging indicators in each dashboard to measure key business process performance, especially attributes driving competitive distinction and financial results. Calibrate dashboard signals using customer specifications or statistical process limits. Review periodically, take corrective action, and launch process improvement projects as signals dictate.  Benchmark performance against competitors and “best in class” process references.

Application in Customer Success: Construct dashboards measuring outcomes (renewal rate, new revenue, etc.) and process factors leading to them (conformance to contact schedule, 30-day adoption %, etc.) as appropriate to the defined CSM role. Use a total of ten or fewer metrics, rolling up individual statistics into overall team performance. Set “red,” “yellow,” “green” action limits based on historical performance or goals articulated in the annual plan. Make dashboards visible in work areas, review and discuss performance with team members at least monthly.

Continuous Improvement System

What it does: Manages projects emphasizing customer focus, teamwork, and scientific methods to uncover root causes of problems, driving ongoing improvement in products, services and internal processes.

Leading practices: Execute cross-functional improvement projects using formal methods such as Lean Six Sigma, process simulations, and predictive analytics to maximize results. Choose projects based on financial or strategic impact, including major initiatives linked to annual and strategic plans. Increase effectiveness and customer value and reduce customer dissatisfaction, cycle times, and inefficiencies in all products and processes. In SaaS companies, diminish downstream bug detection, remediation, and customer churn costs through better upstream product definition, software development and validation processes.

Application in Customer Success: Implement formal methods to collect data and analyze processes to determine changes that increase customer retention and revenue and lower the Cost to Serve. Use statistical techniques such as logistic regression to study factors that impact customer churn, such as adoption rate, unresolved trouble tickets, or contact frequency. Design and execute experiments to test new ideas. Participate in company feedback loops to report software bugs and advocate for product and service enhancements.

Leadership System

What it does: Provides strategic direction, prioritizes actions, engages and inspires employees to perform at high levels, learn, and enact changes.

Leading practices: Articulate clearly and broadly communicate company mission, vision, values, goals and strategic plans. Engage the workforce and lead strategic change using formal processes. Model by example, recognize and reward high performance, and develop new leaders throughout the organization. Provide and receive performance feedback.

Application in Customer Success: Define the team’s purpose, goals and values. Understand and align with what motivates individual team members. Recognize and reward performance and hold people accountable. Incorporate leadership effectiveness feedback from superiors and employees in personal development plans.

When Customer Success leaders run their operations using the seven management systems above, their results rival the very best performers. Excellence becomes part of the culture, and customer churn, referrals and revenue relentlessly improve.

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Source:
1. J. Collins, M. T. Hansen, 2011. Great by Choice: Uncertainty, Chaos and Luck—Why Some Thrive Despite Them All. 

Five Critical Moments in the Customer Experience

Manage these situations well and customers will be yours forever. 

Veteran salespeople know sales ultimately don't come from a prospect's logical evaluation of a product's features, advantages and benefits. They know people make decisions based on emotions and then use logic to justify them. What matters is not what the product is but what it does and how buyers feel about it. Time and again, what makes top salespeople successful is their ability to link product benefits with the personal impact they make. 

But closing the sale is just the beginning in recurring revenue businesses. Customers must remain subscribers for years before they become profitable. Like experienced salespeople, Account Managers and Customer Success professionals must go beyond software usage, good NPS® scores or satisfactory customer service to influence what makes customers loyal. They must create personal attachment throughout the subscription experience so their customers continue to renew. 

Essential interactions

SaaS companies can systematically build affective bonds with their customers. It begins with knowing how the subconscious brain works, especially when it comes to subliminal needs for safety and security. When managers are attentive to the process and consistently orchestrate the following five encounters, they reduce fear and create ideal conditions for relationships to flourish. Customers are more than satisfied; they become loyal, raving fans. 

1. Moments of Connection. Humans naturally seek commonality. We engage in small talk, chatting about a bad call while sitting next to a stranger at a ball game or talking about the weather on a conference call with new vendors. When we have things in common, we sense we are among friends. We subconsciously gravitate to people like us because we feel safe with them. 

To create stronger connections, SaaS companies must set aside “zero touch support” and corporate façades and create warm, personal interactions early in their customer relationships. When customers feel they can relate to the people behind the brand, suddenly the company has a face. In the beginning, a friendly encounter with someone who seems familiar alleviates the customer’s subliminal anxiety. When a smart mix of personal and electronic communications follows, the relationship builds over time. 

2. Moments of Power. At times we have all felt powerless and out of control. For example, nothing rattles nerves more than driving in winter and sliding on a patch of ice. That gut-wrenching feeling is a natural defense mechanism that evolved over eons. Our emotional programming helps us avoid situations that put us at risk. In day-to-day life we compensate automatically by attempting to control outcomes, making us feel safer.  

SaaS companies can reduce natural anxiety by encouraging autonomy and choice. For example, customers can feel powerless learning how to use a new product. Customer Success Managers can lower tension using an onboarding process that helps customers quickly practice new skills and build proficiency. When the company allows customers options to choose from, customers also feel empowered. And as the adage goes, knowledge is power. Keeping customers informed is another easy way to soothe the psyche. 

3. Moments of Proof. Our deep hunger for certainty is another natural protection from our evolutionary heritage. Subconsciously we want to know what’s going on and what happens next, once again because it’s safer. We are comforted when things go as we expect and anxious when they don’t. 

SaaS companies can increase certainty in many ways, from demonstrating products to hosting quarterly business reviews to displaying system performance statistics. When the company makes promises and keeps them, expectations are met and customers become more confident. And when SaaS companies also prove that the business and personal outcomes they predicted came to fruition, they erase any remaining doubts in the customer’s mind. 

4. Moments of “Wow!” We cherish times when friends and family surprise us with simple acts of kindness, appreciation and gratitude. These occasions happen infrequently, but when they do, they leave profound impressions. Like all social animals, we reflexively evaluate our status and importance relative to others. Rank ensures we maintain a greater share of resources, which in turn increases chances for our survival. When someone surprises and delights us, we feel special and cared for—we find our prestige is greater than expected. 

Solving a problem meets minimum expectations, but going the extra mile on occasion makes customers feel important and desired. For example, resetting a password is a mundane task for Customer Support. But when a technician also takes a minute to check the customer’s system configuration and makes a change that speeds up system response times, the customer is thrilled. Simple acts of kindness pay substantial dividends. 

5. Moments of Truth. Life occasionally involves crises. When we have no choice but to rely on others, we find ourselves in our most vulnerable psychological state. How others respond when we need them most can make or break a relationship. As they say, when the chips are down, you find out who your friends are. 

In business as in life, stuff happens. Sometimes the ball gets dropped, leaving a customer with mess. Other times, issues are widespread, such as the havoc caused by a major outage or security breach. When SaaS companies use an effective service recovery process, one that restores confidence along with service, customers regain trust. How the company responds reveals character and can quickly turn around a bad situation. 

Product value and quality matters, but how SaaS companies create positive emotional experiences over time ultimately tips the scale when customers consider renewing their software subscriptions. Understanding and responding to customers’ deep psychological needs is the first step to building stronger relationships and creating loyal customers. 

Net Promoter and NPS are registered service marks, and Net Promoter Score and Net Promoter System are service marks, of Bain & Company, Inc., Satmetrix Systems, Inc. and Fred Reichheld.

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Quash the “White Space” with Four Management Tools

You contact a company trying to get a problem solved and you find yourself passed between multiple departments. While people are sympathetic, their response is, “It’s not my job.” Despite multiple voice mails and e-mails, you get nowhere. Your issue has fallen into the company’s “white space,” the cracks between the boxes on the organization chart. 

You’ve probably experienced white space issues inside your own organization, too. People perform departmental tasks smoothly, but there’s friction interacting with other groups. Processes don’t flow. Often things get “thrown over the wall,” there’s lots of finger-pointing, and it’s difficult to get things done.  

Functional silo-ism first rears its ugly head when companies reach about 40 employees. At this threshold, companies must departmentalize to increase technical capabilities and bolster management’s span of control. But priorities slowly begin to shift. Soon pleasing the boss becomes more important than making customers happy. As the firm continues to grow, functional barriers get larger and more entrenched. Left unchecked, departmental relationships can become adversarial, paralyzing new product development, service delivery, customer acquisition, and customer care efforts. 

Four tools that reduce silo-ism 

Progressive companies deploy countermeasures to mitigate the effects of white space behavior. Top organizations combine the four management practices below to substantially diminish internal friction and dramatically increase performance. 

1. Hoshin Kanri

What it is: Developed in the 1960’s at the Bridgestone Tire Company in Japan, hoshin kanri (literally translated “a bright, shiny needle”) is a rigorous, integrated system of planning, implementation, and review that points the way like a compass needle. Caterpillar, 3M, Toyota, Bosch and Danaher and many other leading companies use it. 

How it works: Senior executives collaborate to prioritize common issues, and then decide on a single breakthrough. The objective is then decomposed into a smaller set of strategies, each featuring its own executive owner and performance measure. Leaders cascade the plan throughout the organization, finally defining implementation plans at lower levels. Formal hoshin reviews then roll up progress, allowing executives to eliminate barriers that crop up. The method’s closed-loop system promotes intense focus, relentless execution, and forward momentum. 

Why it works: Unlike the common Management by Objectives (MBO) approach, hoshin aligns the organization around business, not functional, imperatives. Leaders pass these priorities down and reinforce them across the company. As a result, teams work towards enterprise-wide goals that transcend parochial concerns. 

2. Process Mapping

What it is: A time-honored technique used to study workflows, process mapping reveals the “hidden factory” behind service work. Describing the process visually helps teams identify critical handoffs, gaps, rework loops, and queues. After pinpointing improvement areas, teams can then reduce errors, speed cycle times and reduce costs. Value Stream Mapping and Customer Journey Mapping are popular variations of the method.  

How it works: Teams define process suppliers, inputs, outputs, customers, and requirements. Then they brainstorm tasks that must be completed to convert inputs into outputs, typically using Post-it® notes and butcher paper to record the workflow. Along the way, mapping participants identify improvement opportunities. 

Why it works: Mapping allows people to see the systemic nature of business—everything is connected to everything else, and what happens in one area affects all others. People quickly realize that fast, efficient, customer-pleasing workflows trump choppy, disconnected vertical structures. Top organizations assign executives to lead cross-functional, key business processes, holding them accountable for optimizing teamwork across, rather than inside, department boundaries. 

3. Enterprise Dashboards

What it is: The Japanese call an interlinked system of color-coded metrics nichijo kanri, or “daily control.” These displays help people at all levels manage the variables that lead to favorable business outcomes. Each manager’s dashboard typically monitors the key business process he or she oversees using 8-10 essential metrics that describe volume, time, cost, quality or other attributes. 

How it works: Leaders define the critical few measures that really matter by analyzing company processes, economic models, and Value Propositions. They calibrate indicators by determining ranges of acceptable values based on stakeholder requirements, process capabilities and business goals. Managers then collect data act appropriately on the signal: “green” means everything is good, “yellow” means keep an eye on it, and “red” means take immediate action. 

Why it works: With the right metrics, managers and teams focus on the most essential aspects of the job. They keep things under control and prevent downstream chaos. At top companies, executive dashboards reflect measures tied to cross-functional processes. When reward and recognition is tied to systemic improvement, managers and employees have greater incentives to work with other teams for mutual benefit. 

4. Lean Six Sigma

What it is: Lean Six Sigma is the modern integration of two proven methods: lean production and six sigma quality. Lean (a technique pioneered by Toyota in the 1970s) emphasizes speed and helps identify and eliminate wasted time, motion, and raw materials. Six Sigma (a quality method named after an imperceptibly small error rate) aligns processes with customer needs and then reduces defects and excessive variation that causes dissatisfaction. Both have been used for years in manufacturing, and the combined approach is increasingly common in service environments. 

How it works: Teams use formal methods to characterize process performance, estimate financial impact, uncover root causes of problems, design solutions, and implement changes. DMAIC (Define-Measure-Analyze-Improve-Control) or RIE (Rapid Improvement Events) provide teams with structure and statistical tools to effectively manage projects. Since teams make systemic improvements, results tend to be more dramatic and sustainable.

Why it works: Teams are often made of up representatives from all functions involved in the workflow. By working together towards common business goals, team members learn to appreciate the challenges people face in other functional areas. Besides creating more effective and efficient processes, a broader “systems view” and stronger interpersonal bonds between people promotes greater cooperation long after the project is complete. 

White space problems are a natural part of organizational development. All companies deal with it in one way or another. Fortunately, proven tools and techniques can help young companies arrest its impact and promote scalable growth. 

Why SaaS Needs Lean Six Sigma

The cloud computing industry loses about $10B every year due to customer churn, and in response, many executives launch improvement initiatives. They assign Customer Success teams to engage new customers, increase product usage and probe for sales opportunities. Other times, executives hold developers accountable for monitoring online customer behaviors and designing stickier user interfaces. Marketers sometimes get into the act, countering revenue losses through new customer engagement programs or by introducing renewal incentives. 

These isolated activities can incrementally reduce churn, but customer defection is a complex, enterprise-wide problem that requires joint effort. Customers leave when a number of deficiencies in sales, development, marketing, operations, and even accounting combine to frustrate them. Instead of assigning a single function or diluting efforts among multiple groups, SaaS companies should address customer attrition holistically with a disciplined and coordinated Lean Six Sigma approach.

Proven and unified

For decades, manufacturing and service organizations have used quality improvement techniques to satisfy customers, save money and increase revenue. Companies have shown repeatedly that relying on personal perceptions and making snap decisions leads to treating symptoms, not underlying causes. Using formal techniques, practitioners first explore difficulties from the customer’s perspective and then analyze data to uncover and resolve “root causes” of problems. As a result, improvements people make are dramatically better and more sustainable. Studies show that companies proficient in quality improvement practices consistently outperform rivals in growth and profitability by a factor of 2:1.¹

Quality methods have evolved over the years to help teams be even more successful. Modern Lean Six Sigma techniques include rigorous financial analyses to target improvements and demonstrate monetary gains. Lean principles remove wasted time and effort, speeding cycle times in engineering, production, and service operations. But best of all, Lean Six Sigma espouses cross-functional teamwork instead of working independently. Ineffective, inefficient workflows and fumbled handoffs between departments are often the most significant obstacles. When greater customer focus and scientific methods combine with better coordination and cooperation, solutions transcend internal boundaries and deliver maximum impact.

Lean Six Sigma in action

A young firm introduces an app that allows people to capture and annotate photos taken on mobile devices. The software then automatically uploads images and links them with documents the user stores in the cloud. During early trials, the founders discover that the software has widespread appeal, so they introduce the product at a low price point, expecting it to sell in high volume. 

But after several months, the executives discover a problem. Monthly customer churn numbers run far above expectations. Rather than settling for myriad, piecemeal solutions, the executives form a cross-functional Lean Six Sigma team to address the issue from a broader and deeper perspective. The project follows DMAIC, the phased improvement process at the heart of Lean Six Sigma:

Define. The problem is straightforward: 2.2% of users cancel their subscriptions each month, costing the firm $5M annually. The team establishes a goal to significantly reduce this number.

Measure: Despite having extensive data on mobile and website usage patterns, the team realizes that little is actually known about their customer churn. Marketing had originally decided to capture only basic contact information in order to reduce sales “friction” during the sign-up process. As a result, there’s no data classifying behaviors by market segment. In addition, the team finds few customers complete the online exit survey upon cancellation, so the reasons why customers leave are unknown. The team hires a third party to collect the missing information. The vendor uses billing records to e-mail and call a sample of departed customers to ask questions about their experience.  

Analyze: The vendor finds that the company indeed attracts a wide range of customers, but after using Lean Six Sigma’s Pareto analysis, the analyst shows that just a handful of segments account for the majority of churn. Surprisingly, estimators at small auto body shops are the largest defecting group. Challenged with extensive visual inspections and impatient customers during peak times, auto estimators purchase the mobile app hoping to speed their quoting process by quickly capturing images and making shorthand notes for later documentation. But the estimators learn that the time they spend copying photos into their company quoting systems negates the time they save with customers. Getting assistance from the software firm to solve the problem isn’t easy. The company’s limited self-help resources and e-mail-only, 2-day customer response time prompts most estimators to abandon the idea after just a few months. 

The team then examines internal factors. Investigating the technical issues, they learn that the company’s online database can’t exchange data in the formats commonly used by repair quoting systems. Customers buy software online and the firm provides no special attention or information to help estimators in the beginning. The company’s heavily burdened customer support team handles all tickets on a first-come, first-served basis, forcing customers to wait equally long periods for help. When estimators get into trouble, their options are few. It’s no wonder they’re leaving in droves.  

Improve: The team enhances the product and redesigns the process to make estimators more successful. Engineers research the most common exchange formats and discover they can develop an API that automatically imports images into quoting systems without the need for manual intervention. The plan calls for Marketing to add a single question during the sign-up procedure to assign each user to their respective market segment, allowing the company to better track behaviors. The team then proposes hiring a Customer Success Manager to reach out each estimator within a day of their subscription to help integrate the API, ensure the estimator gets the results he or she desires, and create a stronger working relationship. The team advocates “triage” (a Lean Six Sigma technique) in Customer Support to separate the estimators’ trouble tickets and deal with them first. Thanks to the use of simple statistical tools, the team calculates that the improvements will recover about $1.5M in lost revenue. Adding up the cost of implementation, the team finds the expense makes up a small fraction of the segment’s expected customer lifetime value. Management gives the go-ahead and the team coordinates and implements the changes. 

Control: Estimators are delighted with their new experience. Churn drops 82% in the segment and more auto shop estimators join based on strong recommendations from their associates. Overall, the company’s monthly churn drops by 38%, boosting topline annual revenue by $1.9M. What’s more, estimators who left come back, generating another $220K in revenue. Product managers notice new product and service opportunities in the market segment, promising to grow it even further. The Lean Six Sigma team then standardizes the approach and turns its attention to next group of departing customers. They repeat the DMAIC cycle and lower churn even further. 

It’s a better way

Had each SaaS company function done what they naturally do and worked within their own silos, the results would not have been the same. They would have proceeded without an in-depth understanding of their customers’ challenges. Functional leaders would have prioritized their activities around their favorite projects or according to whatever was most pressing at the time. As a result, improvements would have been typically myopic and disjointed, failing to benefit specific customers or deliver clear economic gains. 

Perhaps it’s time for a different strategy. The Lean Six Sigma method encourages SaaS functions to join forces, focus intently on customers, develop comprehensive solutions, and achieve more impressive results. A holistic improvement strategy may be just what the industry needs to retain more customers. 

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Source:
1. Hendricks, K. and Singhal, V. March, 2000. The impact of Total Quality Management (TQM) on financial performance: evidence from quality award winners. DuPree College of Management, Georgia Institute of Technology

Why Customer Defections Mean Things are Worse Than You Think

“A bird in the hand beats two in the bush.”

John Ray's A Hand-book of Proverbs, 1670

Most SaaS executives assume customer churn rises the minute a company loses its competitive edge. Not so. If customers are switching to top rivals in appreciable numbers, executives should be especially nervous—the situation is already much graver than they think. Research suggests customers leave because they’re long dissatisfied and now view the competition is twice as good. Executives must heed the warnings and overcome their own biases if they want to turn things around.

Thinking that doesn’t add up

Strangely, people tend to avoid loss even when they are faced with the possibility of larger gains. Research shows that people require more compensation to give up a possession than they would have been willing to pay to obtain it in the first place.¹ Even when all things are equal, repeated experiments show people subjectively weigh gains much differently than losses.

In 1654, French mathematicians Blaise Pascal and Pierre de Fermat proved that the expected value (EV) of an investment depends on the amount (x) and the probability of its outcome (p):

EV = px

For example, say a coin flip determines you collect $100 for heads and $0 for tails. Since the probability of obtaining heads using a fairly balanced coin over a large number of trials is 50%, the likely payout, on average, is $100 * 50% = $50. As shown by the charts, this relationship is true no matter the amount or the probability used in the calculation. Today many financial decisions are made using Pascal and Fermat’s expected value.

But that's not how most people make decisions. Faced with a choice of receiving $3,000 for sure or taking an 80% chance to win $4,000, most people will keep the money, even though the expected value for taking the risk is greater ($4,000 * 80% = $3,200). Prospect Theory in modern economics asserts that rather than apply logic, people instinctively determine value (V) by weighting differences in probabilities (p) and amounts (x) shown below:

V(x,p) = w(p)v(x)

The clean, linear function reflecting objective reality is suddenly replaced with this subjective, nonlinear aberration:²

Intuitively, the irregular curves hold water. People would rather take a 95% chance losing $100 than pay $85 for sure because amounts “feel” equally painful and 95% probability “feels” less than certain. On the other hand, people will take a 5% chance to win $100 instead of choosing $13 cash because $100 seems a lot more than $13, and 5% seems like a realistic chance.

Scientists also discovered that when they tested 50-50 win-loss scenarios, subjects said the following ratios equally attractive to when compared with receiving nothing:³

In other words, faced with even odds, most people want 2:1 upside before taking a risk. A bird in the hand is indeed worth two in the bush!

Why do we think this way? Most scientists believe it’s a vestige of our human evolution. In prehistoric times, survival probably depended upon playing it safe when we had resources and taking risks when we had none. In the modern age, however, our success depends on scientific and social advances, situations requiring thoughtful reflection instead of impulsive action. But since our complex reasoning evolved relatively recently, it often takes a back seat to our more primitive instincts, even when the consequences aren’t life or death. Despite today’s advances, subconscious emotion, not conscious logic, often rules the day. This explains why regardless of the odds, we continue to buy lottery tickets.

Tip of the iceberg

Evidence shows people are far more likely to stay in a bad situation than pursue a better one. What this means for SaaS companies is that once customers subscribe, they are likely to stay. But when customers switch, it’s very serious. Their actions show they’ve already had enough and customers realize competitors offer significantly greater advantages.

As humans themselves, executives likewise have a choice. They can either look logically at their company’s performance gaps and do something about them, or scoff at their customers’ subjectivity and do nothing at all. Like their customers, executives must overcome their own, natural inclination to preserve the status quo even when things are going south. If they can see the advantages of change and take risks to improve organizational performance faster than their customers get fed up and go elsewhere, churn reduction has a fighting chance. Otherwise, perhaps, companies with more evolved thinking will be the survivors.

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Sources:

1. Kahneman, D., Knetch, J. L., and Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coese theorem. Journal of Political Economics, 98, 1325-1348.
2. Kahneman, D., and Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 4, 263-291
3. Tversky A., and Kahneman, D. (1992). Advances in prospect theory—cumulative representation of uncertainty. Journal of Risk Uncertainty, 5, 297-323

Why a CSM's First Impression Means So Much

“My good opinion once lost is lost forever.” 

― Jane Austen, Pride and Prejudice

Eye contact. A smile. Friendly conversation. We all know first impressions mean a lot when we meet someone new or interview for a job. The same is true when it comes to customer interactions. How things go at the outset makes a big difference in the final outcome. Research offers intriguing insights why getting off on the right foot in the SaaS business is so important for reducing churn and building customer loyalty down the road. 

Most managers, including many prominent Customer Success consultants and authors, assume that all customer interactions have equal importance. Science, however, suggests that some carry far more weight than others. While the ultimate goal may be continuous improvement at every point along the customer journey, managers should start by concentrating on the critical few areas that yield the greatest impact. And the most essential exchanges occur in the very beginning. 

What starts right, stays right

Research from the wireless industry shows that first encounters matter.¹ Investigators studying wireless subscribers hypothesized that customers “anchor” their satisfaction and value perceptions based on their service history, incrementally modifying their beliefs by incorporating new information after each interaction. They found that customers who had many months of positive experiences early in the relationship weighed them more heavily than they did later experiences. But if new customers had early disappointment, they became particularly vulnerable to churn. 

Creating positive outcomes from the beginning yielded significant financial impact. The study found that one in four longer subscriber durations could be attributed to a series of satisfactory experiences. Doing a better job right from the start made a big difference. Simply having agents spend twenty additional minutes helping wireless customers activate and successfully use their phones cost the company $888K more each year, but the revenue increase due to churn prevention was estimated to be a whopping $4.48M. This represented gain of 2% in company profits, or an ROI of about 4:1.

Roots in biology

Neuroscience explains how anchoring works on a cognitive level. Our minds use reward prediction error (RPE) to gain new knowledge and skills because it is the fastest and most efficient learning method.² The brain subconsciously encodes differences between how rewarding something is compared with how rewarding it was expected to be. The brain then recodes expectations after each experience, and with successive cycles, outcomes eventually match expectations. RPE therefore serves as the anchor by which the brain evaluates its next learning experience.  

Learning is a mentally costly and permanent process. The brain consumes a great deal of energy building new circuitry by releasing neurotransmitters, firing millions of neurons, and modifying synaptic weightings. Given the high resource burden it places on the body, the brain is selective about what it learns, and it creates efficiencies by constructing new neural connections upon old ones. As a result, neural architecture has intrinsic latency. Once the mind learns, the underlying neural patterns are difficult to change, which explains why perceptions linger. 

When circumstances are unique, however, our expectations are undefined, and our protective evolutionary biology kicks in. In these cases, RPE is very high, and the brain subconsciously reacts to the increased uncertainty. We perceive novel situations as risky, and our cave man brain releases a neurotransmitter called norepinephrine, a stress hormone that increases attention and concentration and facilitates learning. The amygdala, the part of the brain responsible for encoding and evaluating our emotional responses, is on high alert. Norepinephrine also catalyzes our autonomic “fight or flight” system, readying us for possible action. Just like our primitive ancestors, new situations put us on edge, grab our attention, and sharpen our senses. We’re ready to learn quickly because our survival may depend on it.

Learning is rarely a matter of life and death in the modern world, but our brains are conditioned to respond to new situations in much the same way. Faced with uncertainty, the brain sets the first and most impactful cognitive anchor upon which all subsequent learning is based. Our neurobiology therefore predisposes us to automatically place more importance on first impressions. Subsequent learning then reinforces our initial experiences, and in time our cumulative perceptions evolve into long-term biases. First impressions are meaningful because it’s how our brain works on a fundamental level.   

Getting off on the right foot 

Customer Success Managers face a challenge to make their customers’ journeys optimally productive and enjoyable from the outset. Customers’ tendency to quickly judge the value of the product and the quality of the relationship means onboarding must go smoothly. CSMs should do their homework, researching the customer and their business and reviewing account history during the sales process. During the call, the CSM should take the time to understand and respond to the customer’s cognitive state, both effectively (meeting utility needs) and affectively (meeting emotional needs). When CSMs are mindful of conversations that gratify both conscious and subconscious needs, they not only solve problems but promote the conditions that lead to stronger relationships. If action items must be addressed after the call, prompt follow-up and follow through are critical because the customer is primed to learn if the CSM can be trusted and relied upon.  

As the customer learns to use their new software, they continue to refine their understanding about the nature of the relationship, too. The CSM should check in frequently in the early stages, helping the customer overcome obstacles in a friendly way. In the first few months, customers will not only come to appreciate the value of the product, they will do the same with the CSM and the company they represent, and the positive effects will stick. If the findings in the wireless industry are any guide, the financial outcomes are dramatic.

Contrary to popular belief, science shows not all interactions are created equal—first impressions really matter. Research from another industry and advances in neuroscience confirm the effects and demonstrate the financial impact. For CSMs, doing things right from the beginning sets the stage for stronger relationships and significantly lowers customer churn.

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Sources:

1. Bolton, Ruth N. “A Dynamic Model of the Duration of the Customer’s Relationship with a Continuous Service Provider: The Role of Satisfaction.” Marketing Science, 17 (1), 1998, 45-65.
2. Frank, M., Munakata, Y., Hazy, T., and O'Reilly, R. (2012). Computational Cognitive Neuroscience, Kindle Edition.