SaaS churn reduction Guide
How to deal with churn more effectively and efficiently
There is definitely not a shortage on guides and blog posts about how to reduce churn. But the problem is that they offer a bunch of tactics to treat the symptoms. If you don’t understand the underlying disease you may throw a lot of your resources on fighting the wrong battles.
The SaaS reduction guide is designed to help you in a methodical way to identify and classify churn and deal with it more effectively and efficiently.
Determining customer profitability
Like literally everything else in the world churn is rarely black and white. Well, in theory, all churn is bad and you should try to prevent it from happening. But chances are, that you have this, hopefully rare species, of customer who kept your customer support and success teams busy all day.
It’s quite simple, if the monthly costs of service exceed the monthly payments then churn is a good thing. Actually the longer the customer stays the bigger the debt will become (CAC + monthly negative margins).
Most likely, you only calculate your customer acquisition and service costs on average. That’s useful to get a quick overview but it does not help you to optimize one thing. If you break it down on account level you can create a P&L and evaluate if a customer is profitable or not. That also works for former customers.
Now i get it, calculating these costs exactly is difficult. But if you don’t specifically track these costs you can work with estimates. Certainly, your sales reps know who was hard to get and your customer teams who is/was a pain in the ass.
Speaking of, there is another customer category of churn, the worst of all. The customers that should leave but don’t. That’s what i like to call inverse churn.
These are the customers who generate negative monthly margins by paying little but continuously need a lot of attention. You need to get rid of them. That may sound bad but it will be of mutual benefit. Because there is one simple reason for the ongoing high demand of customer service. Your product is not a good fit for this particular customer.
Obviously, you should not have “the talk” with your customer after only one month. But you should set a time frame for when customers need to generate positive margins. Else, you will continue to loose money. Another possible solution might be to try upselling the customer. This is obviously only viable if a higher tier offers more features that might resolve the customer issues.
The costs of Churn
By eventually adding the costs of recovery, if it applies to a certain former customer, you get the cashflow on account level. And also the costs of churn. Let’s make a list of different segments of churn from bad to worst in terms of costs:
- The customer has repaid the CAC and generates positive monthly margins – you “only” loose future revenues
- The CAC were not repaid but the customer generates positive monthly margins
- The CAC were not repaid and the customer generates negative monthly margins
- The customer has not left and generates negative monthly margins (inverse churn)
would know in advance who will churn? The implications for segments 2 and 3 would be to never spend a dime on acquiring these customers as they leave with a debt. The customers in segments 3 and 4 are costing you a big chunk of money.
What churn really is
We are close to solution framework but before we move on we need to understand churn crystal clear. Churn is not something mysterious that creeps up and suddenly strikes from the shadows.
According to Lincoln Murphy there are only 2 reasons for churn:
- The customer left for reasons that are out of your control. Most importantly going out of business and getting acquired where the new owner brings their tech stack.
- The customer did not get enough value from your product.
At it’s core, the churn that is within your control is a mismatch between the customer expectations and the customer outcomes. A customer that did not get enough value out of the product did so because the expectations were higher.
The churn funnel
If you live in the SaaS world you’ve almost inevitable been exposed to endless talk about sales funnels. But who says you can have funnels for customer acquisition?
So please allow me to introduce: The churn funnel. The churn funnel is a tool to identify and assign churn to the stage in the customer lifecycle where the mismatch between customer expectations and outcomes happens.
How does this funnel work? The churn funnel displays the customer lifecycle where every step down the road churn becomes more costly and solutions less scalable. The churn funnel helps you to do two things: Reduce the costs of churn by eliminating inevitable churn as early as possible and prevent churn that can be prevented. Let’s go into more detail.
High churn rates are foremost a strategical problem. The source of evil are a lack of market segmentation and positioning. If you don’t define who your product is for and the outcomes your customers will get you will both find out the hard way.
And the hard way is customers wasting there time only to figure it out. Worse, it means you may have spent a lot of money on the customer acquisition. The most important, because most effective and efficient way to deal with churn, is to set the right expectations from the beginning.
It will separate customers who are interested in what you are offering from non-buyers and designated churners. Check out my SaaS Positioning Guide to build your narrative.
At the beginning of the next stage, there should be only potential customer left who are interested in the outcome you are offering. But it does not fit for everybody.
It may not be suitable for all kinds of businesses. Maybe it’s an overkill for small or the opposite, it does not cover the needs of larger businesses. Or maybe it does not fit the business processes of specific industries.
Put differently, you need to identify the success potential of a potential customer. A qualified lead meets the requirements (processes, skills, resources etc.) to realize the expected outcomes or you can help them to meet them.
This will be subject of your customer success efforts. But certainly, it requires to be honest with yourself whether you can successfully train and advise a specific customer. The product-fit stage is where potential customers moves from inevitable to avoidable from a churn point of view.
One of the most popular advice on how to prevent churn is to improve the customer onboarding. But what exactly is customer onboarding and how can you do it better?
Unless you are selling a micro SaaS, and even then it’s not carved in stone, your product allows your customer to many different things.
A popular misconception, and the reason for high churn rates at the onboarding stage, is to show the customer every single feature and function. But at this stage the customer wants something different. The customer wants to see first value.
That means your job is to help the customer to see success quickly and swiftly. So you need to find out what the customer wants to do first and provide tailored assistence. It’s a simple logic, a customer who succeeds at the onboarding stage wants more.
If the customer onboarding was the appetizer, the customer now wants the whole delicious menu. Contrary, if a customer does not find long-term success with your product why would they continue to pay for it?
You are in the subscription business and that means you need to continuously deliver value. Ideally, the customer value takes a steep curve upwards beyond the customer onboarding stage.
Customer success is exactly what the words say. It spawns from the full adoption to advising your customers on how to get the most out of it.
Tipp: Move beyond helping your customers achieve excellency with your product. Help them to achieve excellency on their job for which they are using your product.
A simple example: A customer does not succeed with an E-Mail software when the content sucks. That’s why literally every notable vendor in the space writes about how to craft engaging E-mails. Same for CRM vendors and sales techniques. This applies to any kind of software.
Not only does customer success prevent avoidable churn but it also helps you to unlock expansion revenue. Because a customer that gets more and more will soon outgrow the present tier.
Structural versus individual churn
With the help of the churn funnel you can determine at which stage of the customer lifecycle the mismatch between customer expectations and outcomes happend.
It allows you to prevent churn with the right measures at the right time. Unlike sending your customer success team into a hopeless battle to prevent churn from a customer who the product does not fit for. It also helps you to greatly reduce the costs of inevitable churn.
While there is only one reasons of churn and 4 stages where it happens there might be dozens of reason for each. 100 different customers could have 100 different reasons why the depart at the onboarding stage.
How can your resolve the issue? Sticking with the onboarding example a customer in the onboarding stage should have the right expectations and be a good fit for the product.
Despite your best efforts your lead qualification will never be 100% accurate. Because your information about the customer is limited at this stage. You can’t anticipate everything and you will also never achieve 0% churn.
But what you need to achieve is to eliminate structural churn. That’s the part of churn that follows a recurring pattern e.g. customers repeatedly drop out at a specific part in the onboarding process.
Structural churn – the numbers might be a bit different for your business – follow the Pareto- or 80/20- Principle. That means approximately 20% of reasons are responsible for 80% of all churn. Don’t aim for perfection, score the big points instead.
- Profitable churn: Determine the profitability of actual and former customers on account level to separate good from bad and identify inverse churn.
- Avoidable churn: Assign churn to the customer lifecycle stage where it is caused – customer expectations, product fit, onboarding and success to set the right measures at the right point.
- Structural churn: Identify churn that follows a recurring pattern (similar reasons) and focus your limited resources on scoring the big points.