Sunday, June 22, 2014

Lesson #179: Reduce Customer Churn to Accelerate Revenues

Posted By: George Deeb - 6/22/2014

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Customer churn is one of the most important metrics a startup can measure and reduce over time.   Churn is basically the percentage of customers that stop shopping with you in a given period, typically calculated for businesses with recurring monthly revenue streams.  The higher your churn, the poorer job you are doing at retaining your customers.  And, worse yet, instead of getting lower-cost marketing efficiencies from retention marketing to current customers, you are back fishing again in expensive pools of fish for new customer acquisition.

As a benchmark, I would try to keep your monthly churn rate below 2.5% of lost customers per month, since it is unreasonable to assume you will keep 100% of your customers in perpetuity, with a 0% churn.  So, put the tracking in place in your business to measure this key metric, to see how you are performing each month.  And, then optimize it accordingly.  And, why does this matter?  The difference between a 2.5% churn and a 5.0% churn, could be the difference in building a 50% larger business in a five-year period of time.  So, although you may not identify an immediate problem today, it certainly adds up over the years, if left unchecked.

So, what causes churn?  Customers are obviously unhappy with your product or pricing.  So, to reduce churn, you need to be surveying your former customers to figure out why they left.  And, then put a plan in place to address those issues in your current offerings, so current and future customers stick with you, and you can more quickly grow your business with the lower churn rate.

There was a really great blog post on this topic written by David Skok , a serial entrepreneur and VC at Matrix Partners, back in 2012.  It has some great case studies worth re-reading today.  More importantly, he introduces a concept called “negative churn”, which basically means your upselling and cross-selling from retained customers, offsets any revenues lost from customers who cancel services.  I thought that was very good wisdom, as “landing and expanding” with current customers, is obviously a lot easier than trying to drum up new customers from scratch.  And, the difference between a negative and positive 2.5% churn, is building a business that is almost 3x larger in a five-year period of time.

So, it is critical you are always talking to your customers, looking for areas for improvement, especially as it relates to long-term client happiness and retention.  Fix what they don’t like.  And, deepen what they do like.  And, where you can, look for ways of increasing the stickiness of your product or service, making it painful for customers to leave you.  Maybe it’s your data, or analytics, or simple integration with their other systems, or whatever else, that keeps them wanting to drink your Kool-Aid.  

In addition, make sure you are doing everything you can, operationally, to help reduce churn.  This includes structuring longer term contracts to reduce monthly turnover.  And, it means training your call center reps on how best to turnaround a “cancellation call” into a “retention call”.  And, if they are unsuccessful at doing that, at least turn them into focus group managers, to learn why the clients are leaving, so they can pass that information on to the product team.

If your revenues and growth rate and customer satisfaction were not enough impetus for you to fully embrace the importance of lowering your churn rate, I offer one additional reason:  smart investors are keenly focused on these metrics.  If you don’t know your metrics, you will not look smart to your investors.  And, if you do know your metrics, but they are too low, you can kiss your venture capital financing good bye.
For future posts, please follow me on Twitter at: @georgedeeb.

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