The Ramifications of The Peak-End Rule for SaaS Businesses

In 2015, I was looking into switching up the type of database that I was using for a new project. I had the itch to try something fun and fresh; I somehow came across IBM's Compose database solution. Within a few short minutes of signing up, I had a slick new database up and running. It was that wonderful feeling when you test out something new, expecting things to be a pain, and instead, it just works.

A couple of months later, I converted to a paying customer, scaling up my usage. Then, one day I had a couple of issues that I struggled with, which required contacting support. Naturally, the support experience was awful. When I finally did get through to them, they were about as helpful as wisdom teeth. When I ultimately decided to cancel the service, I got the "don't let the door hit you on the way out" indifference treatment—no attempt at placating me; there was no effort to understand the cause constructively. So, I cancelled the service and found another solution.

Six years later, when I see ads touting IBM products, my first thought is to scoff and think, "Ha! Not a chance!" But I have to ask myself, why such a negative feeling over a tiny experience, years ago, that was decent at the beginning?

In the early 90s, famed psychologist Daniel Kahneman and a team of researchers set up an experiment involving subjects putting their hands in cold water for variations of time. For one round, the participants put a hand in 57°F water for 60 seconds (btw, this doesn't sound all that cold IMO). In another round, the participants put a hand in 57°F water for 60 seconds, then kept it there for another 30 seconds, but the water was warmed to 59°F in that last 30 seconds. After both rounds, the participants were given a choice of which trial to repeat, the 60 seconds or the 90 seconds. Surprisingly, 80% of the participants chose to repeat the longer trial. The broader study, entitled "When More Pain Is Preferred To Less: Adding a Better End," ultimately showed that the way an experience ends could define the entire experience even if the ending was different from what preceded it. This is what is known as the peak-end rule. From Wikipedia: "the peak-end rule is a psychological heuristic in which people judge an experience largely based on how they felt at its peak and at its end, rather than based on the total sum or average of every moment of the experience."

The ramifications of the peak-end rule for subscription businesses are far more profound than most are aware, and there are three primary impacts.

1. The most apparent is that you probably want (most of) your former customers to return in the future. While you have a 20-40% chance of winning back a former customer, you only have a 5-20% chance of converting a prospect. Which makes sense. If you have customer analytics and a proper exit survey, then you'll know why customers decided to leave, what they liked, and what they didn't. Which is in stark contrast to a prospective customer who you know very little about. On top of the increased likelihood of winning back former customers, those reactivated customers spend an average of +11% more the second time around. However, if the last experience a customer has with your business is negative, this is what they are likely to remember the next time you reach out with a reactivation offer.

2. Next, if you make that final experience feel like a trip to the DMV or if you appear indifferent to a customer's concerns, you face the real possibility of the customer posting a negative review about your business. According to one study, it takes 40 positive reviews to offset a single negative review, so the impact of each negative review on future revenue is profound.

3. Finally, when a customer decides to terminate the relationship, much of the time, they just want you to solve their problem. This is to say, what appears as the end might not really be the end. My company's product, RetentionEngine, a no-code cancel flow application, saves an average of 34% of the customers that go through it. These are customers who click to cancel a subscription and end up not cancelling. The cancel request is overcome via the identification of the customer's problems and delivering a personalized solution. Today, most subscription businesses offer a multiple-choice form as an exit survey, where the customer selects a reason for their cancellation, and then the bare minimum is done to try to solve that specific problem. It's an improvement from a few short years ago when customers had to make a phone call to cancel a subscription, but this new method is a low-effort, one-size-fits-all, afterthought of an experience. It's generic, lacks personalization, and certainly doesn't express, "I value you as a customer! What can I do to fix this?"Understanding that most customers are not hell-bent on cancelling, even when they click the cancel button, and resolving their issue instead, is the lowest-lying fruit for increasing the revenue of a subscription business.

We all spend enormous amounts of time and resources focusing on the next customer, and we squander a golden opportunity to generate much more revenue from the customers we already have and those we have had in the past.

If you give Capterra, the software review site a glance, you'll find 362 software tools related to onboarding customers. You will find 0 software tools on Capterra for offboarding or handling customers at the end of their journey.

There is no debating that first impressions are essential but making sure that we treat customers to a grand final experience, understanding the impact of the peak-end rule, is just as crucial for the bottom line, if not more so.

Also published on LinkedIn.