Churn - a background worry that nags at CXOs and managers while everyone concentrates on the task in front of them. For sales, that’s getting new customers to sign on the line. But for the organization as a whole, leaking customers from the post-sale regions of the buyer journey means sales has to pedal harder, the brand reputation suffers and while you’re pouring revenue in at one end, it’s pouring right out again at the other.
Five years ago, SaaS churn was under 10% annually in 75% of companies. That means a monthly churn rate of around 0.5% - a dollar for every $200 you make. It might be improvable, but it’s a workable figure.
This year, the picture has changed radically. 32% of Saas companies had churn under 5%, 32% in the 5-10% range - and 20% had churn of over 15% annually.
Image Source: Churn Rates by Totango
Even as more data becomes available and buyers become more comfortable and familiar with the SaaS model, churn is actually rising.
Churn? What Churn?
When we talk about churn, it’s like we’re talking about one thing. In fact, churn is at least four things.
1: Customer Churn measures how many customers you lost. It’s:
Total customers, over a period of time
2: Revenue Churn measures how much annual recurring revenue (ARR) your churned customers were worth. It’s:
3: Monthly Sub Churn shows you the rate at which your monthly, as opposed from annual, subscribers are churning. It’s:
Churned monthly subs
Total monthly subs
4: Net Churn measures churn against growth. It’s:
Total churned mrr/arr
Which type of churn you need to measure depends on your size, growth and goals. For most SaaS businesses, it makes sense to monitor at least customer and ARR or MRR churn, depending on your subscription model. It also makes sense to monitor segment churn, the same way you’d monitor segment sales.
Start Measuring Churn
If you don’t measure it you can’t manage it, and churn is a KPI that ties directly to your bottom line. Churn shouldn’t be something in the background that gets five minutes at the end of a meeting. It should be at the same level of priority as new sales. The fastest growing SaaS companies are the ones with the lowest churn rates, and the lower the churn rate, the greater the advantages of the SaaS model.
Across the industry, tracking of existing customer metrics has risen over the last few years. In 2011 only 56% of SaaS companies tracked churn. In 2015 that number was 80%. An uptick, sure, but one that still leaves one SaaS outfit in five not tracking churn!
Tracking churn by itself isn’t enough. If you know the ship is leaking, but you don’t know where the hole is, you have the materials for a Sunday paper think piece but you’re still headed for the bottom of the sea. You need to know why customers churn and how they churn, not just raw numbers.
Groove used careful customer data analysis to slash churn by 71% by identifying ‘red flag metrics’ - metrics associated with customers who typically churned. Then they could move in on customers displaying those metrics before they left.
Where’s Customer Success?
Customer success is a relatively new part of the organization. But it’s the only thing customers are really interested in. And its effects can be felt throughout the buying process.
Poor customer success can have an impact on everything from onboarding to upselling, cross-selling and scaling. They’re all areas where SaaS churn is triggered. And churn can be triggered even earlier in the process as well, in stages of the buyer journey that are usually seen as being owned by marketing. Customer success can affect things here too, though only indirectly.
The biggest fail you’ll usually see in customer success is when they shepherd customers to their first success, give them a high-five and a pat on the back and then turn their attention to the next wave of new customers. While customers don’t need hand-holding throughout their customer lifespan they do need support to succeed all along the way, and every time a customer touches your brand is an opportunity to reduce churn: customer support is supporting customers to succeed.
If your customer success team isn’t watching the numbers and prodding sales, marketing and customer services in the right direction you’re going to see unnecessary churn.
Intercept At-Risk And Churning Customers
Intercepting at-risk and churning customers makes solid sense for two reasons. First, you might be able to keep that customer. Second, their feedback might let you keep the next customer in the same situation.
Customers who talk to about churn fall into two distinct categories: those who look like they might be about to churn, and the ones who are already out the door. Data gathering looks different for each.
At-risk customers can be identified by behavioral data and customer surveys. They should be profiled and scored the same way leads would be.
From here, at-risk customers can be contacted with email, in-app or other messaging and offered additional onboarding, tutorials and assistance unlocking the value of your offering.
Churning customers can be retargeted with email or sales calls, but it’s also profitable asking them straight out why they’re leaving. They’re even more likely than most customers to refuse surveys that seem long or complex. Few, clear questions and a time estimate increase the likelihood that you’ll get usable replies: Netigate has downloadable churn questionnaire templates to start.
Focus On Quality Leads
Most sales managers still reward their reps for having plenty of leads in the funnel. That’s a mismatch that occurs when different departments have mission definitions that don’t fit the whole organization: more leads doesn’t really always mean more good, solid, long-term sales.
Stuff the funnel and you’ll get marginal matches - people who might buy your product, but they don’t really buy into its value. You’ll lose those people at a much higher rate. They won’t get the best out of your product, because it doesn’t fit their needs well. And that’s hurting your reputation too.
Focusing on quality rather than raw numbers allows you to get numbers that are a real guide to future success. If you’re concentrating on highly-qualified leads and actively working to turn them into the best deals, not the most deals, you’ll slash churn without even looking at existing customers, because all your new customers will be great.
They’ll be easier to cross sell and upsell to as well, and when their organizations scale they’ll be a whole lot less likely to start shopping around, and a whole lot more likely to take a meeting with you about your enterprise package.
The sales process for SaaS applications doesn’t end when you get the average 5.4 decision makers who need to OK you, to sign on the line. That would be too easy, right?
Trouble is, the process by which people buy into the value of your offering is even longer. Len Markidan of Groove says there are two vital milestones right at the start of the customer’s relationship with you:
‘1: The moment they sign up for your product, and…
2: The moment they achieve their first “success” with your product.’
Image Source: Customer Engagement vs Time by Len Markidan Groove
Onboarding is the best vaccine against buyer’s remorse, and it’s the best way to ensure that your customers get the crucial ‘first success experience’ with your product.
That’s why onboarding needs to be simple and easy. The aim, says Lincoln Murphy, should be to ‘get your prospective customer using – then invested in – your product and create an experience that moves prospects in that direction.’
To get invested in, they need to be getting value out, so great onboarding isn’t a tutorial on how to use every feature of your product. Its aim should be to get customers to the point where they achieve something that matters to them, as quickly and pleasurably as possible.
When we talked about Groove’s experience with identifying ‘red flag metrics’ earlier, what I didn’t mention was this: Groove’s pre-churn customers were taking way longer to complete standard tasks than the average. Their churn rate was largely attributable to customers who were stuck and had no information on how to move forward using the application.
‘Every time I talk to a low-touch, self-service SaaS company experiencing massive drop-off immediately after sign-up,’ Murphy says, including ‘low Free Trial-to-Paid conversion rates, few customers staying past 90 days post-conversion, etc. it is always an onboarding issue.’
Onboarding is a specific case of a general problem. If customers derive no business value from your product, it’s a loss for them. But if you think there’s a difference between user experience and business value, you’re all kinds of wrong. They’re the same thing, because everyone who works everywhere is strongly influenced by UX. It affects tech adoption, productivity, attitude, revenue, everything.
UX improvements belong to product, sure - but they’re everyone’s problem. Marketers are familiar with the idea of ‘microconversions’ - tiny steps in the direction of purchase, like clicking on a link or joining a mailing list. Inside your application, there are opportunities to sell new and existing customers on the value of your product - or to contribute to a sense of disillusion and bewilderment that they’ll eventually take with them when they become one of your churn stats.
Sell To The Right People
Image Source: Screenshot of Tweet March 2 2014 by Lincoln Murphy
Selling to the right persona is where you stop churn before it starts. Often, in the rush to acquire customers, startups especially wind up acquiring the wrong ones. If that’s the case, figuring out churn by interviewing departing customers has some value - but it’s kind of like figuring out marriage problems by hanging around outside a divorce lawyer’s office with a clipboard. Chances are, the issues began before anyone walked down the aisle. In the same way, customers ‘start churning’ before they buy in many cases.
SDRs eager to stuff funnels, reps eager to ring the bell on a new sale, they’re all busily acquiring poor-fit customers who will inevitably leave when they don’t get their needs met by your offering. It’s not the fault of sales, it’s a company approach. You need to revisit personas, check the data they’re based on and then focus relentlessly on selling to the right customers.
...And The Right Businesses
It’s important to consider business as well as individual buyers. SaaS businesses are defined by their customer size because the selling process is radically different when you’re selling to an enterprise-level organization as against SMBs or other startups. There are different configurations of decision makers, and different implementation, even of a tool that basically does the same thing. SaaS increasingly mirrors a ‘user-tuned’ consumer marketplace, where products are partially user-customized after being basically sold off the shelf. Very large organizations still typically require a bespoke service.
Intercom identifies five basic sizes of SaaS customer ranging from two-guys-and-a-laptop setups to 15,000+ megacorps. The takeaway? One size doesn’t fit all - and mis-selling now is churn tomorrow.
Image Source: Customer Size Dictates Your Sales Strategy by Russ Thau Intercom
There’s another dimension to this. If customers can differ that widely in size, revenue and requirements, they differ in terms of their worth to your business. If you lose 2% customer churn but those 2% are your two biggest, best performing customers, customer churn looks very healthy.
Revenue churn? Not so much. Again, you need to measure both and consider segmenting churn to reflect the different value of different customers.
Churn can sink your business as surely as a hole below the waterline. The opposite, sometimes given the awkward, failure-focused name ‘negative churn,’ has another name: your business. Your business is every customer who didn’t churn. Cutting churn is building your business. It starts with measuring churn, then using the data you have to predict churn based on behavior and segmentation. Then you can leverage that data to pursue the right leads, intercept at-risk customers and watch customer lifetime value, revenue and valuation grow.
Featured Image Source: Unidentified woman with churn near Long Branch, Ont. by W. Braybrooke Bayley Public Domain Wikimedia Commons