How customer service can help lower churn rate in the Cloudby
3rd Sep 2012
Tim Pichard, CSO at NewVoiceMedia, discusses how investing in a customer service strategy with proactive outbound campaigns can help reduce churn.
A Cloud business model can be broken down into three broad areas:
- Spend money upfront to build your platform, service or product
- Sign up customers who repay your investment over many years
- Try not to lose more customers than you bring on
Over time, the relationship between these three dynamics determines how fast your business grows or shrinks, and whether it makes or loses money.
Consider a simplistic Cloud business that adds on 100 new customers each year. This business also experiences a steady churn rate of 20% each year. As each year progresses, and the business continues to add 100 new customers, the total number of customers continue to increase taking with it the real amount of churn.
In the 10th year, 87 customers will churn, approaching the 100 new customers being added to the business. The new customer and churned customer lines continue to converge until ultimately the business stops moving forward with the number of customers churning equalling those being signed.
There are two ways Cloud businesses can break out of this stagnation:
- Increase the number of new customers at an ever increasing rate
- Reduce the amount of churn to the lowest possible level
Let’s look at the numbers. If we do nothing and churn continues at 20% then in Year 10, our business will have 446 customers. If we choose to focus on 5% annual growth in our customer acquisition rate by hiring new sales teams and investing more heavily in demand generation then in year 10 we will have increased this to 609 customers in total.
However, if we decide instead to invest in customer service and put our energies into reducing our churn rate by just 1.5% annually, in year 10 we will have 614 customers.
Why is this important?
For any Cloud business with limited cash, decisions around focus and priorities are critical to their eventual success or failure. Knowing that a 5% annual growth in customer acquisition delivers almost the same number of eventual customers as a 1.5% annual decrease in churn rate you need to ask the question 'Which of these goals could I achieve for the least cost?'
New customers come with a relatively high cost of acquisition, requiring marketing campaigns, sales people and commissions and implementation costs. Churn reduction, however, can be achieved for much less - a well trained and motivated contact centre running proactive outbound campaigns to ensure customers are happy and fully supported.
Ironically, your focus on delivering an amazing customer experience brings a host of additional benefits, including positive brand association, supporting your pricing levels, and word of mouth advertising. Ultimately you might experience that 5% uplift in new customers anyway!
Of course things aren’t as simplistic as this in any business. Your strategy will include a mixture of both signing more new customers, and losing less of your existing base. But before you spend your next $1m on ramping up your sales numbers, remember you could achieve the same result for a lot less by looking after the ones you already have.
If your business is experiencing a relatively low rate of churn (below 5%) then although the model works in the same way, the relative effect of decreasing churn is much less, and you should therefore focus more of your efforts on increasing your new customer wins.
Read more from Tim Pichard
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