Churn is one of the core metrics of any (SaaS) business. It represents a paying customer that will not return. You can calculate churn in a variety of different ways, either by accounts, users, or even dollars. Churn is also inevitable. A certain amount of churn is to be expected, but anything above that becomes a strategic problem. Not only because they represent lost long-term revenue, but because they're often a symptom of a larger problem.
It's easy to think churn is a one-dimensional problem and you should invest in a Customer Success Manager (CSM) to cajole, threaten or sweet talk who threatens to leave. But it's not that simple, churn is often a symptom and finding out what the root cause is can help you better understand what (if anything) you can/should do about it.
Let's discuss churn in terms of the common customer acquisition funnel.
- Customer is unaware of your product and you introduce them to its existence
- Customer is interested in your product and would like to consider purchasing/installing/using it
- Customer is starting to use your product
- Customer has used your product for a while (defined as multiple billing cycles)
This is a very simplified customer journey, where they interact with marketing (1), sales (2), customer success/sales engineers/solutions engineers/onboarding specialist (3), and then account manager/customer success/sales again/product managers (4). The reason we segment them like this is because someone could churn out of your funnel at each of these points, but more importantly, some might make it further along than they should.
This is an important concept, because most people assume that marketing is trying to maximize the amount of leads they gather, sales is trying to maximize the amount of closed deals, etc. and often that is the case when those respective departments are incentivized incorrectly. The goal of your funnel is to maximize the correct amount of leads and to not progress those that don't meet your desired criteria.
Rephrasing this in terms of churn brings us to the following:
If someone buys your product/service but has the wrong expectations going in about what it does, you have failed to position it correctly. April Dunford has a great talk on positioning (and a book) that I highly recommend on the topic. This expectation setting should be part of your marketing process to qualify the leads they pass on to sales. Doing this as early as possible helps save manhours later, because the more obvious it is, the more potential customers can self-qualify themselves. If not, it will fall on sales to do this work for them and that will prevent them from spending time on customers with a higher success potential.
If a qualified lead is in conversation with your sales department and they can't establish that the product is the right fit, they will churn. While it may seem to make financial sense to let them buy and then churn later, rather than disqualify them from buying, this is short-term thinking that will hurt your brand, reputation and sales in the long run. Sales is about making sure the product/service will be able to provide value, and that this will happen now. This is important, sometimes sales will need to nurture a lead before they are ready to buy or able to make optimal use of the product. You only get one chance to make a good first impression and you don't want the customer to come to the conclusion that they can't benefit from the product, because they weren't ready yet. Hold off on the sale for a few months to have a happy customer for life. Another way to look at this is that close-rate is not a great metric for a sales team to be evaluated by, unless it's weighted by how ideal a customer the lead was. If they don't have potential to be a happy long-term customer, you don't want to sell to them.
This brings us to the customers that have highest success potential with your product/service. This is where you should aim to have zero churn. If a customer can't get up and running with your product fast enough, that is something you have full control over. If your product needs hands-on training before use, if your customers need integration help, or any other manner of situation that increases time to value for the customer, you should be doing everything in your power to lower the friction to zero. This is where self knowledge of your product and customers is crucial. In-product signs and onboarding is helpful but sometimes you need a higher touch approach. Offering a CSM or consultant to help can become a standard part of your offering. Keep all this in mind when looking at customer acquisition cost, lifetime value, and other metrics for success.
Finally, churn after usage. This is the type of churn most people talk about. You'd like this to be as close to zero as possible, but there are situations where this is unavoidable. Circumstances change for customers, your product evolves and they could potentially no longer be a good match for success. This is where regular contact with your customers or establishing an exit interview or feedback collection is paramount. If the users at a customer fall under new management or get new responsibilities, they may no longer be a good fit. However, this could be a sliding scale, it is possible that your product no longer provides enough value at the current price point (for temporary or permanent reasons), in which case it may be worth it to have some flexibility on pricing to maintain the relationship long-term.
Churn is a company-wide problem, that isn't to say everyone is responsible for minimizing it at all costs, but everyone could potentially have a hand in it. Talking to customers is the only sure fire way to determine what the reason for churn is and thus where the 'fix' needs to be applied. While in an ideal world you would have a perfect funnel set up, reality is never perfect. Sometimes you will err on the side of more leads than fewer, sometimes you will over promise and under deliver in sales, that is all a part of tweaking your funnel and customer acquisition pipeline. Make no mistake, it will require constant tweaking.