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.
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