Subscription business models rely on the long-term relationship between a business and a customer. Yet the health of this relationship is often revealed at the time of subscription renewal, which may be too late for your team to do anything about it. If the customer is happy and feels they are receiving fair value, they will continue the relationship. If not, they will churn or, in other words, they will leave your business.
Minimizing churn is key to your growth. In fact, in some industries, such as financial services, a 5% increase in customer retention produces more than a 25% increase in profit (Bain and Company).
The solution to avoiding churn is not trivial — but not rocket science either. Companies must gain a better understanding of customers’ propensity to churn well before the renewal anniversary. How? By leveraging customer data insights to develop a health score.
Understanding Customer Health Scores
A subscription business health score acts as a prediction tool for the likelihood of future customer actions — such as the likelihood of subscription renewal versus churn. This is not based on ESP but rather driven by data to which your company should have access.
Beyond subscription renewals, health scores can also help your company identify customers that are good candidates for expansion discussions, such as up-selling and cross-selling. Not every business is the same, though. And these expansion discussions require more sophisticated insights and strategy more common with Cloud-native companies that have advanced tracking capabilities. While it is important to identify what to push next in the customer journey — it is more important to do so at the correct time.
In addition to predicting outcomes, health scores should be used to help anticipate and reshape possible negative outcomes. Customer success teams can leverage this information to proactively reach out, offer relevant assistance and suggest new capabilities that proactively aid with adoption hurdles. In SaaS solutions, it is not uncommon for the product management and marketing teams to include built-in automated support such as emails that offer assistance, education or demos.
How to Compile and Create Health Scores
Likely your business is already collecting and tracking a number of customer data points. For many companies, these health scores are made available via dashboards built internally or through third-party software solutions. These dashboards provide sales professionals, support teams and customer success managers quick access at the time of customer engagement, whether it be positive or negative.
Not everything is indicative of customer health, though, and some elements are more important to keep tabs on than others. The must-have five elements Mereo recommends tracking, each with its own specific weight, add up to an overall customer health status.
- Financial Health: Is the customer financially healthy?
- Contractual Health: How long have they been a customer? How much have they spent with you over the years?
- Relationship Status: Has your customer indicated happiness or displeasure through satisfaction surveys? Is there a known champion that has been there and always promoted your solutions?
- Adoption: Is your customer using your solution? This is easier to track for cloud solutions and quite difficult for on-premise term solutions.
- Interactions: Is your customer engaged in a current sales process, or have they reached out to customer support recently? How often have they had to open a case?
But keep in mind, these are just some of the common elements used by companies across many industries. This is not an exhaustive list, and each element does not tell a definitive story. Each unique subscription business requires its own unique customer health score criteria.
Customer Clues Beyond Health Scores
We can use the health score as a starting place and an indicator of how the subscription renewal might transpire. However, there are additional indicators that your renewal may not go well, such as:
- What did the discounting look like for the last deal? Is there going to be a big price increase that they are not expecting?
- Do you know how broadly the solution has been deployed? Are they adopting and using but not realizing the full value?
- How critical is your solution to your customer’s day-to-day operations? The more critical, the more likely they are realizing value.
- Is there a current upgrade or separate sales cycle underway?
The takeaway here is to use a data-driven approach (quantitative) and augment it with a little discovery work across your systems, counterparts and customers (qualitative).
Subscription Business in Action
See the power of a subscription model in practice. Learn how Mereo principals supported Ariba to ramp up revenue by transitioning to a subscription-based model.