- Measuring the leading indicators of customer churn enables early detection and quick action to save customers.
- Even small reductions in customer attrition lead to significant improvements in revenue, customer lifetime value, referrals and company valuation.
- A 2% increase in customer retention has the same effect as decreasing costs by 10% (source: Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy.) Or from another perspective, a 5% reduction in customer attrition can increase profits by 5-95 percent (source: Bain & Company.)
Customer retention can be increased by identifying the specific reasons customers defect, creating methods which measure these leading indicators and using the indicators to produce a customer attrition prediction report.
Customer churn prediction models identify customers who are likely to defect. The models analyze historical data of former customers that have defected. When they find similar data patterns with existing customers, they highlight those customers as at risk.
Detecting signs of at-risk behavior allows you to take action before customers defect.
Flight Risk Factors
Research results shared in the report, Customer Service Excellence; What Best-in-Class Customer Service Leaders Do Differently Than Their Peers, identified four categories of customer churn leading indicators.
The indicators differ by industry, so I've extracted many of the most common flight risks across industries for this post.
Poor Value Realization
Product or service value realization is the most influential customer retention factor among B2B industries and a top factor in B2C industries. It's a simple realization. If your customer gets value from your product or service, he continues to use it and generally expands utilization via renewal and the purchase of additional products and services. If the customer doesn't realize value, the relationship is over.
Here are some of the primary factors and leading indicators that negatively impact value realization.
- Poor onboarding endorses buyer's remorse, delays value realization and puts any product or service at risk. Customers that defect quickly quite often are not able to figure out how to use the product for their needs. An effective on-boarding process can remedy this situation.
- Poor quality. If the product or service becomes unreliable it's a goner. When it comes to quality, an ounce of prevention is better than a pound of cure. Up front quality assurance and testing is a significantly lesser investment than the cost to fix products after they have been released to the market.
- Declining utilization. Product downsizing is an unambiguous leading indicator of attrition. When customers notify vendors that they may decrease their use of certain features or drop to a lesser product or product tier the likelihood of customer departure is amplified. Feature and service attrition or reduced spend suggests the customer believes the cost is greater than the value. Many product companies can proactively track utilization using telemetry, IoT or in-app activity measurement.
- Poor customer fit. Sometimes customers don't realize value because the company's products or services were not intended for them. When companies sell outside their target market or Ideal Customer Profile (ICP) they incur a misfit, invest additional resources in customers that will likely never be successful and divert resources from core customers who will be. Non-fit customers consume the most company resources until they inevitably churn.
Customer attrition leading indicators include measurements for each of the above scenarios as well as customers with low or stagnate Customer Lifetime Value (CLV), customers that complain about the lack of product expansion or innovation, or customers that inquire about contract modifications or discounts.
Poor Customer Support
Customer Service is often the last line of defense to prevent customer defections.
To be effective, Customer Service Representatives (CSRs) or agents must know what to listen for and how to resolve customer problems.
Actively listening and digging into to customer complaints, rather than attempting to bypass or ignore them, can surface what's really behind the complaint and allow the company to treat the root cause and not the symptom. Customer complaints are quite often the tips of the icebergs and you won't know what's below the waterline unless you investigate.
Customer service cases by themselves are not necessarily a bad sign. They show the customer wants the product to work and is making an investment to make it happen. Help them.
When customer cases focus on overly basic questions, they suggest the product or service has not yet been fully adopted. Failing to get them on board will render the product low value and put it on the chopping block. Similarly, when complaints or cases repeat or are not satisfactorily resolved they become terminal.
Beyond active listening and proactive diagnosis, CSRs must be able to record, report and resolve problems in a complete and timely manner. They should also have a formal integration with R&D or product development for product-related customer issues. Customer support is responsible for the defect diagnosis, and offering workarounds for interim operation, while product development is responsible for root cause remediation.
Leading indicators in this category include upward trends or spikes in customer complaints, repeat customer cases or cases not successfully resolved, and low customer satisfaction (CSAT) scores following customer service cases.
Negative Customer Sentiment
Poor customer sentiment is like a cancer. It often goes undetected and it spreads unless and until its diagnosed and treated.
Leading indicators of customer attrition in this category include the following:
- Low CSAT scores or customers who are unwilling to respond to CSAT surveys.
- Low Net Promoter Scores (NPS) or failure to respond to NPS surveys. Companies should have defined improvement processes for customers scored as neutrals and detractors. Automated escalations should be created for low or declining scores.
- Low customer engagement is almost always a leading indicator of attrition. The Account Engagement Score (AES) is the most used metric for this measure. The CRM software system is the application to track, score and escalate low or poor customer engagement.
- Social listening is especially effective in measuring customer sentiment. Most customers will not tell you when they are upset or why they are upset. However, many will post their experience on social media sites to vent or collaborate with peers. Using social listening tools to automatically harvest these posts can help save customer relationships that would otherwise disappear without saying a word.
- Tracking digital footprints is another method to identify silent customers at risk. When customers visit company webpage topics such as how to receive a refund, process an RMA, initiate a service cancellation or an article on how to download their data, those online behaviors should be tracked and escalated for action.
- Decreased recurring spend (RFM) is a clear and indicative at-risk sign.
- Other signs that may be considered include customers who don't respond to offers, unsubscribe from your newsletters or other emails, or who incur increased A/R aging or DSO (Days Sales Outstanding) for receivables.
Poor Customer Relationship
A healthy customer relationship can go a long way in staving off customer defection.
In fact, the two most influential ways, many would say the only two ways, to sell or keep a customer are to have the best solution or the best relationship.
Customer relationships are the back stop to frustrating customer experiences. Even when incurring poor customer support, the Customer Service Excellence research found that customers are 3X less likely to leave a vendor where a meaningful customer relationship exists. Customer relationships are not a substitute for failing customer experiences, but they do afford the business additional time to make things right.
Leading indicators of customer turnover in this category include the following:
- Poor customer relationship. The strength of your business relationship can be objectively measured in your CRM system. This score considers your account engagement and the breadth of your relationship. When companies maintain too few relationships, they put themselves at risk when those roles change jobs or leave the company. When companies fail to achieve any meaningful customer relationships, they deliver a feeling of perceived indifference, which is the death nail of relationships.
- Another factor somewhat outside of your control, but should be used to highlight at-risk customers, is customer org changes. When a key stakeholder or customer champion departs the company even a solid customer relationship can become in jeopardy. You can use third party social media tools such as LinkedIn to be alerted of key client job or title changes.
- Other indicators to include in your customer churn early warning system include AES, Account Health Scores, product breadth (the breadth of products procured by client), client advocacy score (based on referrals and public (social) commenting) and customer org changes including company downsizing, acquisition, divestiture or new ownership.
There are also lagging indicators, such as increased average customer support cost, post-customer online sentiment analysis (negative word of mouth) and revenue leakage. While these metrics should be measured, they take a back seat to leading indicators.
Finally, it's also important to know that not all customers can or should be saved. As Harvard Business Review points out, it's critical to measure customer profitability and know when not to save unprofitable customers.