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Defining your Ideal Customer Requires In-Depth Churn Analysis

The ideal customer is a concept every product company needs to define. And yet too often, we focus on the ideal buyer - that is, the one making the initial purchase. This approach is shortsighted, especially in the subscription economy, where as much as 80% of lifetime value comes after the first year of doing business.

Sure, we need buyers; without them, we wouldn’t have any customers. But our thinking needs to shift from the initial purchase to the whole relationship. And when we do that, we will think much more about which will derive, and provide, value in an ongoing way.

This idea can be difficult for product companies, who have always rewarded the initial sale, and lionized sales people who close business. Any business is good business, if it’s closed business. Right?

Not necessarily. The ideal buyer is often different from the ideal customer.

In our work with product companies, we are looking more and more at customer retention, and its soft underbelly, churn. I recently sat down to talk about this with BizLibrary’s VP of Customer Success, Shannon Kluczny. BizLibrary has very high customer retention rates, but they believe they can do better.

Shannon’s insights really struck me because, as we talked about customer retention and churn, she pointed almost immediately to the question: What is the ideal customer? And furthermore, how many sales do we celebrate that end in the customer cancelling, perhaps because the fit wasn’t right in the first place? Churned customers can be a huge problem, because they often cost you money, especially if they cancel in the first year.

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Shannon began to describe the attributes of the customers she believes have a big effect on retention. Do customers want to grow, or are they treading water? Is our product part of their overall strategy, or are they reacting to a problem that will go away as fast as it arose? Are they looking to garner new relationships, or do they just want to stay within their normal circles? Are they only interested in one goal or one initiative, or are they wide-reaching and interested in the biggest picture possible?

Granted, the ideal customer doesn’t have to be someone only gazing at the forest and ignoring the trees. It’s alright if a customer’s only looking to meet their specific needs or solve an immediate problem. After all, lots of businesses operate by providing a dedicated service – or small group of services – at an exceptional level that exceeds that of their competitors. What they do have to be, however, is a customer who is going to derive value in the long term from their relationship with our company and product.

This is where in-depth churn analysis is invaluable. By studying which customers are successful with your product, and which ones are not, you can learn volumes about how to retain customers, but also about which customers are a good fit in the first place.

Churn analysis forces businesses to ask the questions that are essential to understanding their relationships with other businesses.

When businesses don’t know who their ideal customers are – when businesses are too focussed on sales, and not enough on retaining and creating relationships – that’s when churn analysis needs to be implemented.

Many companies are implementing Customer Success tools, such as Gainsight, to get hard and actionable data about customer usage and relationships, and especially to know when to intervene. These tools produce a health score that should give a read on whether the customer needs attention.

But while data is critical to scale, it’s always subject to interpretation. And, sometimes, we can have a green light on a customer, only to find that customer cancelling their service a short time later. How can we bridge that gap? The data only goes so far.

Shannon told me about a customer scoring model that she’s developed over the past several years to make it easier to figure customers out.

“We have measures in the model that help us, based on what we think makes a good customer,” she said.

Shannon explained that her version of an ideal customer isn’t just someone looking to buy her company’s product. The ideal customer is someone who understands their own needs – who knows what they’re looking for and has done the research to understand the benefits and consequences of their decisions.

We broke down the ideal customer through four distinct statements:

  • They have leaders who are involved in their employees’ work.
  • They look ahead to future possibilities, instead of reacting to changes that they were unable to predict.
  • They set meaningful goals and use analytic metrics to identify potential success markers.
  • They work with hard numbers, but only once they’ve worked on building meaningful relationships to give those numbers context.

In short, Shannon’s ideal customer is someone who understands their place in the market, and who understands how to make sure that their customers also work toward finding their ideal customers.

Of course, this definition is unique to Shannon’s market at BizLibrary, and the team continues to refine this understanding. They know that as they hone in on that definition, sales efficiency and company profit will improve over time.

The same could be true for you: as you discover and define aspects of your ideal customer, you can give your team the courage to say “no” to the outliers and make your time more profitable by working on target.

It might seem like tough love – and it might seem counterintuitive to say “no” to a sale – but it’s necessary, because you’ll only thrive if your building profitable customer relationships for the long term.

You can only really work on your relationships once you know who you are, and we can guide you in the right direction.

Churn analysis isn’t just about bits of data – it’s about very real, very human relationships and stories. It’s about having conversations with individual customers to find out how their needs were met, how their needs weren’t met, and how future customers’ needs can be met.

It’s really all about accepting that we don’t know until we ask. Customers are difficult that way; they don’t always see the world the way we do, the way our sales team does, or even the way customer success does.

The good news is that when you do ask, they’ll tell you.

 

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