How many customers do you have ? Are you counting those customers who are simply on the books or are you counting those customers who actively contribute to the company’s revenue. Not every customer represents a meaningful relationship, a reality rarely reflected in the numbers companies report. Below I make the case for defining active and non active customers. The discussion around active state drives internal alignment, provides a common language and comes with set of metrics which are helpful in driving the company forward.
The number of active customers is going to be lower than the total customer base. So introducing an active state initially feels like loosing. However, the active state does not take anything away, no one is loosing customers. It is just a more diligent way of looking at the customer base.
How to define an active state
There is no magic formula for the “right” active definition, but the main ingredients are twofold; activity and time. An active state, is a binary state defined by a minimum amount of activity over a period of time. Activity could be transactions, product use or a combination of both. So an example would be a customer who has made at least 100 revenue in the last 90 days, or a customer how made at least 3 transactions in the last 30 days.
Companies can draw on their data teams, look at distributions and run some scenarios what the active vs non active split will look like using various definitions. Setting a too wide definition will render the active state meaningless, setting it too narrow will make metrics very volatile. But in the end, it’s a judgement call. What feels right, reasonable and defendable is probably more important than anything else.
When I was working with Nike as a consultant, on in the beginnings of Nike-plus (2004/2005). Nike figured out that if they could get people to do at least 5 runs within the first weeks after singing up, the chances of these customers becoming “addicted” to the platform would increase dramatically. So understanding the barriers and drivers of doing 5 runs became their main priority, and their main definition of active.
The active state provides a useful view on the dynamics in your customer base , the simple diagram below illustrates type of metrics that can be derived from the active state.
stateDiagram-v2
direction TB
A:First Time Customers
AB:Active Customer Base
AC: Inactive Customer Base
state "Active Customers" as B
state "Inactive Customers" as C
state "Silent Churn" as E
state "Overt Churn" as F
state "Expansion" as G
state "Retraction" as H
state "Persist" as P
state convert <<choice>>
state AB{ B
B --> G
B --> H
B --> P
}
state AC {
C --> E
C --> F
}
[*] --> A
A --> convert
AB --> AC: Deactivation
AC --> AB: Activation
convert --> AC: First Time DeActivation Rate
convert --> AB: First Time Activation Rate
Acquisition and the active state
An active state will hurt your numbers. Everyone likes to report increasing acquisition numbers, but what does it really mean if you newly found customer are not becoming active? Active customer is defined along the lines of activity in a certain period of time, it is evident that not every customer becomes active from the moment they sign up or do their first transaction. A part of your newly onboarded customer will be inactive (First Time DeActivation Rate). And that is fine, because it will trigger the right questions. What is the first time activation rate? What is the activation rate per onboarding cohort ? What is the activation duration (dif between sign up and moment of activation)? These numbers carry more clarity and can be understood throughout the business, much more so than defining the customer relationship based on a contract, sign up or single transaction.
Activity Dynamics
Time and activity components means that customers can flip /flop between active and inactive states. New customers can become active, but old relationships can also be resurrected. Understanding the dynamics and drivers helps to provide a source of action. The various state changes over time provide a high level view of the journey a customer has over the lifetime of its relationship. Businesses like HelloFresh, where subscriptions can be paused and reactivated, have the active state build in their business model. Segmenting the customer base along state journey (active- inactive etc), can be a helpful way to review what is going on. Certain patterns may arise which help clarify how customer are using or not using your product or service.
Churn and Active State
Churn traditionally refers to customers ending their use of a service. Inactive state tend to precede churn, customers may not actively use a service even if they haven’t formally disengaged. The inactive state is a mixture of customers with varying activity levels and customer tenure ( remember newly onboarded customers may also be considered inactive). Again the key benefit here is that it become very natural to start asking the right questions. What is the silent churn rate? What is the overt churn rate? What is the reactivation rate? What is the reactivation duration? Customer leave without saying goodbye, implementing in activity state helps to understand the dynamics of this pre-stage to churn.
Advantages of implementing the active state
Incorporating the active state into business metrics offers several benefits:
- Clarity: Customer base numbers based solely on contracts, sign ups etc can be inflated and misleading. The active state provides a more accurate representation of the revenue-generating customer base.
- Locus of the problem: The simple implementation of a binary metrics, makes it natural to start asking and ansewiring the right questions about your customer base.
- Additive: The active state does not replace existing metrics like churn; rather, it enhances them and provides more details, which makes taking action easier.
- Internal alignment: Determining the threshold for the active state may spark debate, but it encourages a company-wide alignment on customer engagement goals. Targets like reducing churn may be muddled if customers are already inactive, whereas the active state provides a clear and shared objective: getting customers into an active state and keeping them there.
- External alignment: The active state provides as easy to communicate with external stakeholders how things are going.
A Note of Caution and next steps
It is important to recognize that the active state is a diagnostic tool; it does not address the underlying reasons for customer (in)activity. Active state can help define the locus of an opportunity or challenge, that’s it. The hard work of understanding the why is still ahead of you.
The active state offers a more meaningful gauge of customer engagement than simple contract counts or churn rates alone. If you go around your company and ask, how many active customers do we have, would you get the same answer ? Understanding and implementing the active state metric is crucial for a deeper comprehension of a business’s core operations which can be shared througout the company.