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

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

Software Adoption is a Matter of Habit

Six tips to increase user adoption by capitalizing on human nature

In the SaaS industry, customer retention rates depend heavily on the extent to which customers engage with their product, especially during the early stages. The more they use it, the more value they find in it, which increases the chances that they will continue to subscribe. In fact, data from Scout Analytics indicates that customers who use their new software at least once per week over the first six months of their subscription are about 50 percent less likely to churn.¹ Understanding this well, most Customer Success operations focus their churn reduction efforts on encouraging product usage. However, this approach is insufficient by itself because it overlooks human nature, the most influential factor of all. SaaS companies must change customer habits before product adoption is fully realized.

Creatures of Habit

How many times have you driven to work, but upon arriving, had no memory of the commute that got you there? Clearly, driving is complicated. You get into your vehicle, fasten your seatbelt, apply the brake, start the engine, put the gear selector in reverse, look behind you, back out, turn the wheel, apply the brake, close the garage door, put the car in drive—and that’s just getting out of your driveway. You process thousands of stimuli, decisions, and actions in a typical commute, yet it can all be done without much conscious thought.

How can something so complex become second nature? Our magnificent brains help us simplify life. Because cognition demands so many resources, our subconscious creates habits to increase efficiency. Although the brain accounts for only 2 percent of body weight, it consumes 20 percent of the body’s total energy.² To streamline, the basal ganglia recognizes patterns and creates shorter neural pathways to get the same job done faster and with fewer resources. The brain automatically rewires itself, enabling reflexes to perform tasks that once required more cognitive power. This subconscious rerouting happens all the time. By some estimates, about 40 percent of what we do every day is habitual.³

The Habit Cycle

Habits are made up of four things: a cue, a routine, a reward, and an underlying craving.⁴ A cue is something in the environment that triggers the behavior, the routine is the action, the reward is the positive outcome, and inner cravings are the motivation.

Let’s say you want to start exercising habitually. We’ll assume you want to shave off a few pounds because you don’t like how you look in the mirror. A better self-perception is your underlying craving. Next, to create the new habit, you follow a cue-routine-reward cycle. First, you set up a recurring reminder in your calendar (cue) and then go to the health club every time you schedule it (routine). After the first few workouts you'll start to notice newly toned muscles (reward). It may be difficult to repeat the cue-routine-reward cycle, but if you stay disciplined and patient, your brain rewires itself. Pretty soon, exercising regularly will be automatic. Simple enough.

The problem is that old habits are notoriously stubborn. This is because our brains always take the path of least resistance. Having been more efficiently converted and stored in the subconscious, habits become easier for the brain to recall and execute. Once neurons have been wired together during the learning process, the connections become permanent, so the brain must now expend more energy to substitute a new habit. Conscious repetition causes neural connections to strengthen, forcing the subconscious brain to eventually choose the new wiring over the old. If repetition is lacking, the brain simply defaults to the old reflexes. That’s why reinforcement is so important for creating habits and why change is so difficult. The more entrenched our behaviors, the harder and more frequently our brains must work to replace them.

Making Product Usage Habitual

You should view software adoption within the context of changing habits. Upon subscribing to your service, customers are essentially trying to replace one behavior with another, such as using your online database rather than an Excel spreadsheet to track their information. Your customers’ brains are wired to repeat their former behaviors, so the key to success is to be patient and vigilant, while smoothing their path to change. The following six tips can help:

1. Promote the Motivation—People ultimately change their behaviors because they are inspired to do so. In cases where a department head makes the software purchase decision, it is likely that many users won’t feel personally connected to the motivation behind it. Be sure to repeatedly reinforce your benefits with all users. Cultivate their desire to adopt new habits, such as explaining how the new software saves them significant time and effort.

2. Chunk Large Processes into Small Cue-Routine-Reward Cycles—Any process can be reduced to a series of repeatable steps, and stringing together smaller routines allows the brain to learn, adapt, and reuse skills more efficiently. Running a new financial system is a daunting task, but “paying a bill,” “reconciling a bank statement,” and “running a month-end report” are more accessible and easier for the brain to make into habit.

3. Implement Recurring Cues—Recall that every habit needs a sensory cue to initiate the autonomic behavior. You can provide simple triggers through e-mail reminders with embedded links to start transactions. For example, Facebook and LinkedIn constantly send updates to revisit their website and reconnect with friends, family, and business associates. If you identify and map the routines involved in using your product, you can associate a cue to enact each step.

4. Reward Frequently— Don’t leave progressive adoption to chance.  It is essential to track, display, and reward it at every turn. Recognize customer successes via web pages or e-mails when new users accomplish milestones. Note their “moments of proof,” drawing attention to the improvements that using your software yields. Be sure to recognize both initial and repeat successes to promote habit formation.

5. Leverage the Support of Others— Rewiring the brain is difficult and takes conscious effort. Use your cohort’s shared experiences to encourage fellow users. Whenever possible, train people in groups and let them interact. Just like Alcoholics Anonymous and Weight Watchers, social groups provide a safe environment and unmatched support for people undergoing changes in habit. User groups also increase perceived value and builds affective bonds between the company and its customers, which further reduces churn.

6. Be Mindful—Above all, be patient. Experts estimate a new habit can take from 22 to 60 days to form, depending on complexity, entrenched current behaviors, level of motivation and reinforcement frequency, and even the age of people involved. It’s a process that requires intense focus in the beginning, and typically includes false starts and frustrations along the way. Once the habit is established, however, it tends to stay for the long haul.

Software adoption is about changing habits. To maximize usage and minimize churn, your SaaS company should look a step beyond software features, focusing more on the human beings who use the product and the new habits their brains are attempting to form with it.

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. Scout by ServiceSource blog. 
2. Swaminathan, N. (2008) “Why does the brain need so much power?” Scientific American.
3. Duhigg, C. (2012) The Power of Habit: Why We Do What We Do in Life and in Business. Random House, New York. ISBN 978-0-679-60385-6
4. Ibid.

Is Your Customer Success Team a QA Department in Disguise?

A revolutionary change may be at hand.

Many Customer Success teams work with customers to help them learn and deploy new software in order to increase usage and build relationships at a critical time in the customer lifecycle. Others perform an important account management role, providing ongoing support and generating renewals. Often, however, CSM teams fill their days responding to customer complaints or being pressured to push upgrades to compensate for high churn. If CSMs spend most of their time mending frayed relationships or engaging in retention heroics, managers should be concerned—perhaps the Customer Success function is really there because the company lacks successful customers. 

Sound familiar?  Take heart. This situation is reminiscent of the transformation that occurred in manufacturing Quality Assurance departments not long ago. The important lessons they learned can help you lead your SaaS organization out of the problem-solving dark ages and into a problem-prevention renaissance. 

Learning from the Quality Movement

Reeling from tough economic times in the late 1970’s, Americans needed answers. Japanese brands Sony and Panasonic had decimated the American consumer electronics industry, while Toyota, Honda, and Nissan were busy thumping the Big Three auto makers. The Japanese produced significantly higher quality, lower cost goods, and consumers everywhere snapped them up. From the Rust Belt to Silicon Valley, the once-dominant American manufacturing industry was in crisis. 

Then in 1980, NBC News ran a program entitled, “If Japan can… why can’t we?” The show revealed how the quality improvement methods we taught the Japanese after World War II helped them beat us at our own game. Dr. W. Edwards Deming’s work with the Japanese challenged conventional notions that high quality must come at a high cost. Their global success proved that high quality meant far less waste and rework, lower costs, more reliable products, and happier customers. 

American industry got the message. After losing its way during the post-war boom, it was time for a new start. Led by Motorola, Alcoa, Ford, and many others, manufacturing rebounded by rediscovering quality methods, revamping operations, and regaining lost market share. Today, defects are no longer measured in percentages but in parts per million. It’s all due to a fundamental shift—manufacturers now achieve high quality not through inspection and remediation but by designing it into products and processes in the first place. Gone are large “test and fix” Quality Assurance operations, thanks to robust product designs, high capability production lines, and responsive supply chains. The modern, lean Quality function no longer requires scores of repair technicians but a select few quality consultants working upstream to ensure improvement never ends. 

Enlightenment in Customer Success

Just as manufacturing defects crippled manufacturing companies, experiential defects now rob SaaS companies of millions in revenue each year. Too often after buying SaaS offerings, customers find features lacking, software difficult to use, information hard to find, and support frustrating and unresponsive. This leads to churn.

When your Customer Success team becomes a de facto “save desk,” it’s behaving just like the Quality Assurance department of old, reacting to problems rather than adding value from the start. Worse, factors affecting churn can appear at multiple points in the process, but these problems get funneled to the Customer Success team in the name of “efficiency.” As a result, the team spends its time solving avertible problems at great expense. 

To remedy the situation, SaaS leaders must shift their focus to prevent churn in the first place:
• Create better products 
• Deliver better services
• Strengthen customer relationships 

To accomplish these goals, it’s critical to address the negatives that make customers leave and the positives that make them loyal. Leaders must dig deeper to uncover the cause-and-effect relationships that lead to better results. Doing so eliminates frustrations, saves time and money, and grows revenue through more successful installed-base sales campaigns. Given relatively low barriers to entry and increasingly crowded markets, companies that keep and grow hard-won market share will be the survivors when SaaS markets inevitably shake out most of the competition. 

Joining the Renaissance

The spark that ignites change is close at hand. Now more than ever, SaaS executives and investors understand the financial consequences of customer churn, emphasizing continuous improvement and analyzing customer use patterns and satisfaction data to drive software revisions. Executives are also beginning to look beyond the technology and to the people using it, placing greater importance on the overall customer experience. They see that the art of up-selling, cross-selling, and referral selling begins with a clean canvas of happy customers. As helpful visualization and predictive analytics technologies arrive on the market and teams adopt time-tested process improvement disciplines, your SaaS company can build customer loyalty that transcends software development and involves all aspects of the business.  

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

Customer Loyalty Problem Solving

A three-level model helps focus improvement efforts. 

Customer retention is critical for companies with business models that rely on recurring revenue. The “leaky bucket” that is customer defection robs 

companies of precious revenue and profit. In cloud computing, cutting customer churn in half over the typical customer life cycle doubles company cash flow and gross margin.¹ Even a small churn reduction pays off in the long term when millions of dollars in revenue are in play.

Obviously, improving customer loyalty is the key, but how? Where should managers start? I propose a simple, three-level model to concentrate on the customer benefits that lead to loyalty: Implicit, Explicit, and Experiential.

Implicit Benefits

Customers take certain things for granted, such as reliable wireless phone service, accurate bank statements, and bug-free software. People assume basic attributes come with the service, and when companies fail to deliver on these minimum expectations, customers have little patience. Chronic problems providing what quality expert Dr. Noriaki Kano calls “must-be” quality² leads to customer defections in every industry. In Software-as-a-Service (SaaS) companies, churn can lead to the loss of half of a firm’s customer base during each renewal cycle.

This is why managers must make delivering the fundamentals a company’s first priority. In cloud computing, that means system uptime, secure data, error-free code, and basic product support. SaaS executives must get and maintain control of their technology development and operations processes or prepare for a rapid demise.

Explicit Benefits

Companies promise things during the sales cycle. When deciding between competitive options, customers evaluate each company’s “value proposition” and choose the best option. If promises don’t materialize, customer expectations go unmet. For example, a SaaS company may state that their software creates a certain type of report, but the customer later discovers it can’t. Customers may not return if the issue is severe and the dissatisfaction high enough. If a competitor offers comparable benefits, and changing providers is simple and cheap, potential for churn grows.

Marketing masters Michael Lanning and Lynn Phillips say companies should make strong value propositions their strategic foundation.³  First, managers must choose a winning value proposition, one that focuses sharply on a target market and offers a compelling alternative. Second, executives must deliver the chosen value proposition by translating it into design requirements, bringing it to market, and then providing it in day-to-day operations. Finally, the company must communicate the value proposition clearly and consistently in marketing, sales, and customer service. When promise-making and promise-keeping are in close alignment, customer expectations are reliably met and churn is reduced. An effective strategic management system ensures value propositions aren’t empty promises.

Cloud computing companies competitive in delivering Explicit and Implicit benefits will typically retain 80-85% of their customers from one renewal cycle to the next. But to raise performance to world-class levels of 95% or higher, companies must become proficient delivering a third type of benefit.

Experiential Benefits

Customers prefer to do business with people they know, like, and trust. How a company does business is as important to customers as the product or service they receive from them. When customers have lackluster experiences, churn increases. Just one unhelpful tech support interaction can end a business relationship, especially when the customer feels ignored, devalued, or unfairly treated. On the other hand, service companies that form strong relationship bonds enjoy significantly higher customer loyalty.⁴

Customer Experience Management (or Customer Journey Management) is a technique used to analyze and improve customer interactions. Managers collect data on myriad customer “touch points” (website visits, phone calls, e-mails, blog entries, social media, etc.) and plot each interaction against time. Patterns emerge where gaps and problems exist, and managers can use process improvement techniques, such as Lean Six Sigma, to resolve them.

While addressing functional gaps is the first place to start, research suggests a more mindful approach is the secret to achieving the highest levels of customer loyalty. Underlying all human

relationships are reflexive responses to subtle, social cues that can have a profound effect on conscious feelings and decisions.⁵ For example, our subconscious mind is sensitive to certainty, the ability to predict the future. When a Customer Success Manager begins an onboarding call by saying, “We’ll have you up and rolling in just fifteen minutes,” she provides subliminal assurances to the customer, producing a rewarding dopamine burst in his brain. If additional, beneficial cues accumulate during the call, the brain assigns a positive marker to the memory.⁶  Later, the brain reactivates the marker as it recalls the experience, allowing subliminal emotions to “weigh in” on the evaluation. When companies understand and proactively manage simple social cues through employee training, refined user experience (UX) design and other means, the resulting positive interactions lead to richly satisfying relationships and more loyal customers.

Loyalty troubleshooting is easier when managers focus on Implicit, Explicit, and Experiential benefits. When customer turnover is high, executives should attend to the basics. When it’s moderate, the priority becomes clearly articulating and consistently delivering competitive distinction. And when managers strive for world-class loyalty, being mindful of the customer experience is the path to success.

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. Skok, David (2013). “SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters,” For Entrepreneurs blog
2. Adapted from Noriaki Kano, Nobuhiku Seraku, Fumio Takahashi, Shinichi Tsuji (April 1984). "Attractive Quality and Must-Be Quality" (in Japanese). Journal of the Japanese Society for Quality Control 14 (2): 39–48. ISSN 0386-8230. 
3. Lanning, M. and Phillips, L. “Building Market-Focused Organizations,” (Gemini Consulting White Paper, 1992).
4. Gremlera, D. and Brown, S. (1996) “Service Loyalty: Its Nature, Importance, and Implications,” University of Idaho and Arizona State University, USA
5. Rock, D. “SCARF: a brain-based model for collaborating with and influencing others,” NeuroLeadership Journal.
6. Damasio, A. R. (1996) “The somatic marker hypothesis and the possible functions of the prefrontal cortex,” Philosophical Transactions of the Royal Society B, 351, 1413-1420. 

Tech Check: Is Facial Recognition the Next Frontier?

Affectiva, an MIT-linked SaaS startup, uses technology to observe and analyze physical responses to determine emotional states. Positioned for media testing, Affectiva’s Affdex product uses webcams and facial recognition technology to test advertising spots for large clients. Gone are expensive and inconvenient test labs agencies use to evaluate TV ads—participants just watch from their computers while Affdex records their reactions. The company uses sophisticated algorithms to interpret expressions and head movements, ascertaining emotions and their level of intensity in real-time.

Sounds like Madison Avenue marketing hooey, right? It turns out greater emotional response leads to better business results, and the science backs it up. In a 6-week case study, AOL used Affective technology to test a new online media advertising format (IAB portrait) versus traditional online advertising formats. The results were impressive in how the audience reacted:

·         Portrait format attracted attention 35 percent faster than competing formats, created 81 percent more attention, and 95 percent more fixation time

·         Live media metrics showed interaction rates rose 4.5x – 7x

·         Facial recognition analysis showed Portrait format lowered negative emotions by almost 40 percent, with less user frustration, and fewer frowns

And in business results:

·         Users indicated they would visit the Brand site/Facebook Fan page 49 percent more often

·         Users indicated they would recommend the brand or product 46 percent more often

·         Purchase intent rose 263 percent

What does this have to do with cloud computing? Researchers have proven emotions are a primary driver in customer loyalty and retention, so new emotional response measurement approaches may be critically important. Many cloud computing companies already collect information on what customers think (via satisfaction surveys), what they say (via text analysis on social media sites), and how they behave (via application monitoring tools), so understanding how they feel may not be far away. All of these attributes, especially used in combination, can create powerful customer churn prediction models. When lowering churn even a few percentage points dramatically increases customer lifetime value and per-customer profitability, understanding and addressing the causes of churn depends on good measurements.

A practical application may be using Affdex as a training tool with willing new customers enabling their webcams during the onboarding process. Imagine recording new customer orientation sessions with Customer Success Managers to provide feedback on how to improve their critical first customer interactions (see “What Starts Right, Stays Right”). Managers and staff could then optimize customer engagement and ensure they begin the relationship on a very positive note.

What Starts Right, Stays Right

More cloud computing organizations are “onboarding,” implementing processes to ensure customers experience a smooth transition to their technology product or managed services right after the sale. Managers intuitively recognize the need to begin new customer relationships on a positive note.

Their instincts are well-founded. Research shows creating and maintaining positive customer experiences, especially at the very beginning, pays dividends. Ruth Bolton studied customer satisfaction and churn in the cellular phone industry¹ and found:

·         Negative experiences in the beginning are a major factor in short-term customer exits

·         The longer people have satisfactory experiences, the less likely they are to churn

·         Customers who have many months of positive experiences weigh cumulative satisfaction more heavily than any occasional, negative experiences that occur later

Researcher Ho Huy Tuu confirmed that specific factors affect the satisfaction–loyalty relationship in a combined and interactive way: ²

·         Involvement: an individual’s long-term evaluation of importance and significance consuming a product

·         Ambivalence: an individual’s emotions towards consuming a product (Tuu proved ambivalence was negatively correlated, i.e. Caring is the factor in satisfaction)

·         Knowledge: a person’s evaluation of their familiarity, expertise performing a task, and consumption of a product in a specific transaction

·         Certainty: the consumer’s confidence evaluating their satisfaction with a product

Tuu also verified that actively mitigating customer’s perception of risk is essential. Fear, he demonstrated, trumps positive loyalty gained from high satisfaction.

What’s more, along with Svein Ottar Olsen,³ Tuu confirmed the effects between satisfaction and loyalty are nonlinear—at high levels, small increases in satisfaction have a disproportionate impact on customer loyalty. That means there’s no point of “diminishing returns” when it comes to continuous improvement; above certain levels, loyalty impact from customer satisfaction multiplies. They suggested offering ‘delight’ or ‘exceeding expectations’ explains these nonlinear loyalty behavior effects.  

Research shows cloud computing companies are on the right track; onboarding is indeed an important strategy for reducing customer churn. An effective process engages the customer, increases their knowledge, and gives customers reasons to care about the product and the people behind it. Orientation should not simply be a “data dump” of technologies and product features—feelings matter! Companies should pay close attention to allaying customer fears, such as emphasizing data security, privacy, system reliability, and responsive support. To put the customer experience into orbit, companies should surprise customers, showing them extra benefits in exceptionally positive, personal interactions. First impressions linger, and maintaining and improving service increases customer certainty, reducing the potential for customer churn down the road.  

Footnotes:

1.       Bolton, Ruth. “A Dynamic Model of the Duration of the Customers’ Relationship with a Continuous Service Provider: The Role of Satisfaction.” Marketing Science, Volume 17, No. 1, 1998

2.       Tuu, Ho Huy. “Moderators in the Relationship between Satisfaction and Loyalty of Vietnamese Fish Product Consumers,” a thesis for the degree of philosophiae doctor, University of Tromsø, February 2011.

3.       Tuu, Ho Huy, and  Olsen, Svein Ottar. “Nonlinear Effects between Satisfaction and Loyalty: An Empirical Study of Different Conceptual Relationships,” Journal of Targeting, Measurement and Analysis for Marketing Vol. 18, 3/4, 239–251. 2010 Macmillan Publishers Ltd. 0967-3237