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.

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.

Are CSMs Taking a Critical Process for Granted?

It’s time to view relationship-building from a new perspective 

Studies have shown that people switch vendors for three reasons:¹ 
1. Expectations for quality and value go unmet
2. Customers lack personal attachment to the supplier 
3. It’s easy to switch  

When all three factors are present, churn results. Factor 3 above depends on product complexity, cost to change, and competitive pressures. Customer Success teams address the first factor, building value through software usage, answering questions, and demonstrating the benefits promised during the sales cycle. But the second factor, building personal attachment, rarely gets the attention it deserves, yet it’s a major driver affecting churn.  

Now wait a minute! Everyone agrees that building customer relationships is important. It’s intuitively obvious that better customer relationships lead to greater retention and loyalty. After all, people prefer to do business with people they know, like, and trust. But many companies take relationship-building for granted. They believe it happens on its own—simply hire friendly front-line employees, give customers what they need, and better relationships will somehow result. But if relationships are so important, why leave them to chance? Is there a better way? 

Relationship is a process

Psychologists say relationships have a beginning, middle, and sometimes an end.² Think about how you became friends with someone. You met, discovered you had a common background and shared interests, and you found each other likeable. Something “clicked.” You connected because the person showed empathy and realness, and you immediately felt comfortable with them. After subsequent contacts, your relationship deepened through mutual connection, caring, confiding, and trust. You found you were helping each other achieve goals and deal with daily frustrations. You maintained your relationship through periodic social get-togethers or by enjoying common interests. If you’re fortunate, this person is still in your life. But as you know, friendships can lull when the other person gets busy, goes through life changes, or moves away. Friendships can also abruptly dissolve due to a “falling out.” 

Imagine if all your business relationships could be close friendships. Most will never be, but all relationships follow the same pattern of initiation, maintenance and dissolution. Relationships, like all processes, occur in a sequence of steps, and outcomes obey the laws of cause and effect. The strength and quality of the relationship that develops depends on a number of factors, some of which can be controlled and others cannot. For example, people can't change their basic nature and few will ever become best friends. However, it is possible to become more likeable. Since some relationship factors are controllable, influencing them improves relationships. 

Relationship factors

Subconscious social signals lie at the heart of our relationships. David Rock, founder of the NeuroLeadership Institute, distilled neuroscientific research and social evolutionary theory into a simple model to describe the reflexive behaviors all humans share.³ His SCARF model outlines the core psychological drivers hardwired into our subconscious:

• Status—how we perceive our importance relative to others
• Certainty—our ability to predict the future
• Autonomy—our sense of mastery and control over events
• Relatedness—our connection and sense of safety with others
• Fairness—our perception of equitable exchanges 

These factors influence relationships positively or negatively. For example, consumers who call technical support complain when technicians make them feel stupid. The customer subliminally perceives the interaction as a status threat. In extreme cases, the conversation provokes anger and causes customers to terminate their contracts. “You’re not treating me like a valued customer!” they exclaim. Most of the time provocations are unintentional and subtle, but even minor comments at the wrong time can leave lasting impressions. 

Conversely, SCARF techniques can promote positive encounters that lead to stronger attachments. For example, a Customer Success Manager begins an onboarding call saying, 

“I saw on your LinkedIn profile that you’re from Chicago.” 

“That’s right. I grew up on the South Side, 120th and Pulaski,” the customer says.

“No kidding!” the CSM exclaims. “I’m from Orland Park!”

The CSM is building relatedness right from the start, sending a subliminal signal that she’s a friend, not a foe. After the small talk, she says she will help him get his account set up and it will take only fifteen minutes. This creates a sense of certainty in the customer’s mind. By proactively sending these and other signals, the CSM produces warmer, friendlier interactions.

In a similar manner, CSM leaders should look closely at how interactions occur throughout the customer lifecycle. They can do this by mapping the experience from the customer’s perspective and by identifying the customer’s practical (effective) and emotional (affective) needs at each step. Then, executives can close performance gaps by implementing process improvements and measuring the impact on customer churn. Often simple changes in the right places can make significant improvements through training, website revisions, and e-mail edits. 

SaaS companies tend to take the process of building relationships for granted. Like all processes, however, those better designed and managed produce better results. CSMs should be more mindful, both in what they do and how it impacts the customer’s brain. Proactively and systematically creating the conditions for friendly attachment leads to stronger relationships and reduces 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. Gremlera, D. and Brown, S. (1996) Service Loyalty: Its Nature, Importance, and Implications, University of Idaho and Arizona State University, USA
2. Blieszner, R. and Roberto, K. A. (2003). Friendship across the lifespan: Reciprocity in individual and relational development.  Also in F. R. Lang and K. L. Fingerman (Eds.), Growing together: Personal relationships across the lifespan (pp. 159-182). Cambridge, U.K.: Cambridge University Press.
3. Rock, D. (2012) “SCARF: a brain-based model for collaborating with and influencing others.” Neuroleadership Journal

Cohort Analysis Done Right

Use a p-chart to properly monitor shifts in customer churn

Let's say you run a Customer Success team and your manager asks you to perform cohort analysis in order to better understand customer churn behaviors. Your customers renew on a monthly basis, and you’re interested in measuring their initial fallout rate. Using data collected over the past year, you count the number of users who canceled their subscriptions after the first 30 days and divide that number by the total number of new users during each month.¹  Your Excel spreadsheet table is shown below:

You then plot the data:

The results concern you. Although the data points vary somewhat, it appears your 30-day churn rate has been increasing all year! Using the trend line function in Excel confirms it—the first month’s churn rate has grown from about 2.2% to 3.2%!!

You share this information with your boss and she’s not happy. Clearly your Customer Success team is not doing the job. She expects immediate improvement. Or else. 

Simple, obvious... and wrong

But hold on a minute—you’ve made a serious mistake. You haven’t managed your team poorly. You’ve analyzed your data improperly!

Your error has to do with statistical sampling. Randomness occurs in all data, and experimenters must be careful to separate the “signal” from the “noise.” Statisticians warn of two types of experimental error: 

• Type 1: False Positive—a result is determined when in fact there’s only randomness 
• Type 2: False Negative—randomness is determined when in fact there’s a valid result

Without using the proper statistical methods, people can easily jump to the wrong conclusions. Overly simplified, standard tools in Excel make the situation worse. As a result, managers tend to over-react, seeing a problem that isn’t there and making changes that can do more harm than good.² Managers can also under-react, missing the cues to make changes when it’s time to do so. Most businesspeople lack a strong analytical background, so statistical errors are quite common, often leading to disastrous consequences.   

Using the p-chart

Fortunately, manufacturers have been using powerful statistical methods for years, and these practices can easily be applied in software companies. Lean Six Sigma, a quality improvement method, incorporates a broad range of tools that ensure teams properly analyze data and reach valid conclusions. You can use these techniques to your advantage. 

The control chart is a handy Lean Six Sigma tool helping managers avoid Type 1 and Type 2 errors. Control charts are used to determine if a process is in a state of statistical control, i.e., if the observed variation is due to randomness and not any particular cause. There are many different types of control charts depending on the type of data involved, but all follow the same basic structure. The p-chart (or proportion chart) uses the binomial distribution. It is the most appropriate control chart to use in this example because there are only two possibilities (the customer cancels or renews) and results are expressed as percentages.³  

The control charting procedure is as follows:

1. Determine rational subgroups. A rational subgroup is a homogeneous set of data that provides a representative sample, such as a batch of parts manufactured during a shift. Many SaaS companies define their subgroups as monthly “cohorts,” the set of new customers who sign up for software during a given month. Usually there’s nothing different about a customer who subscribes in January versus one who subscribes in February, and for the purposes of evaluating churn, it’s more accurate to use sequential, fixed sample sizes instead of varying sample sizes.⁴  In order to calculate the mean with reasonable accuracy, statisticians recommend using around 25 subgroups. In this case, we’ll choose fixed sample sizes with 168 customers in each of 24 subgroups (4032 customers/24 subgroups = 168 sample customers/subgroup).⁵  Below is your new sample set:

2. Plot the dots. As you can see, the shape looks a little different, but it still appears there’s some trending in the data. 

3. Calculate and apply the center line and control limits. 

• Compute p-bar (or average proportion) for the data set. In this example, 114 out of 4,032 customers churned after the first 30 days, a p-bar of 2.8% (114/4032). Draw this line on the chart. 
• Calculate the upper process control limit, UCL. This line shows the mean plus three standard deviations. The line is important because the probability of finding a data point more than three standard deviations away from the mean by chance is less than 1%. The UCL calculation for a p-chart is:

UCL = p-bar + 3 * Square Root {p-bar * (1 – p-bar) / n}

where n is the fixed subgroup sample size

In this example, UCL = 0.028 + 3*SQRT {0.028*(1-0.028)/168} = 0.0662 = 6.6%. Add this line to the chart.⁶  

4. Interpret the results. As you can see, most data points fall in the vicinity of p-bar and none exceed the upper process control limit, UCL. This is your first indication that observed variation is likely due to randomness and not any special causes or shifts in your process. For good measure, add lines at +/-1 and +/-2 standard deviations (probabilities of data points in these ranges 68% and 95% respectively) and add them to the chart. Mark zones “C” between the centerline and 1 standard deviation, “B” between 1 and 2 standard deviations, and “A” between 2 and 3 standard deviations from the mean as shown below.

Then apply three additional statistical tests to rule out any possibility that something is amiss:⁷ 

• Nine points in a row in Zone C or beyond on one side of the center line?—NO 
• Six points in a row steadily increasing or steadily decreasing?—NO 
• Fourteen points in a row alternating up and down?—NO 

Congratulations, you can breathe a sigh of relief! You’ve correctly established that despite appearances, there’s no trending in the data, contradicting what you originally thought. You explain to your boss that nothing has changed and results are due exclusively to randomness. The data shows that your onboarding process is in a state of statistical control and will routinely produce 30-day churn averaging about 2.8%. What’s more, you can accurately predict that 2/3 of the time future churn will be measured between 1.5% and 4%, 1/3 of the time less than 1.5% or over 5%, and only on rare occasions will it ever exceed 6.6%.  

Next steps 

You can continue to add new data points and monitor process stability using the limits you calculated above and by applying the same interpretation procedure. If any of the four statistical test results are positive, take immediate action and determine the underlying cause. You can use p-control charts to investigate customer defections at other periods of time, such as subscriptions after 60 days, 90 days, or upon annual renewal. Several Lean Six Sigma statistical packages are commercially available online (many of which are SaaS), making control charting much easier. 

Once your Customer Success process is stable, it’s possible to systematically improve it. Although keeping things under control is always your first priority, making things better is your end goal. In my next blog, I’ll describe how Lean Six Sigma methods can be used to help you improve customer retention.

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

Notes:

1. Technically, calculating ratios when denominators vary causes an “average of the average” problem in which comparing percentages between periods introduces significant measurement error. This discussion was deleted for brevity. 
2. Human over-reaction to Type 1 errors is a fascinating subject, one with neurobiological and evolutionary explanations. It’s beyond the scope of this blog, but humans are preconditioned to see patterns and jump to the wrong conclusions, hence the need for robust application of the Scientific Method. 
3. Note that p-control charts can be used with varying sample sizes under certain circumstances (computing average n or using multiple control limits), and that other types of attribute control charts can be used for smaller sample sizes. For simplicity, this discussion was omitted.
4. Homogeneity extends to type of customer, including the market segment and associated value proposition, as described in my previous guest blog. If churn behaviors vary significantly by customer type, you should stratify your data and chart each segment separately.   
5. A rule of thumb is to choose subgroup sample sizes for attribute data such that np>5; in this case, churn is about 3%; n>5/0.03 or n>167
6. Note that in this case, the lower process control limit is negative and can be neglected; this is a “single sided” investigation where the minimum churn is 0.0% and we are interested in detecting a shift upward.
7. Montgomery, D. C. (2005), Introduction to Statistical Quality Control (5 ed.), Hoboken, New Jersey: John Wiley & Sons, ISBN 978-0-471-65631-9, OCLC 56729567