If you are a business with a subscription model, the key metric you will need to have your eye on is – customer churn. Churn is one metric that pulls no punches in telling you how your business is doing, it is the hard fact indicator on whether your customers love your product/service or not.
What is customer churn?
Customer churn refers to the percentage of customers who stopped using your product/service during a given time period.
Customer churn rate = number of customers lost during a time period (month or quarter or annual) / number of customers you had at the beginning of that time period (month or quarter or annual).
Here’s an interesting chart to explore it further:
If you lose 5% of your paying subscription customers each month, you are looking at a close to 50% annual customer churn rate! To visualize this in a different way, let’s look at a graph of a company with 5% monthly churn vs. 10% monthly churn, that adds 100 customers per month.
After just one year you are looking at a ~30% divergence in customers and revenues!
Now more than ever companies are realizing the vital importance of customer retention. It’s your foundation, and if that foundation is strong, your growth will become exponential.
But if your customer churn is through the roof, no amount of ad spend or marketing dollars can save you.
Setting up the process to reduce customer churn
1. Track and tackle churn by stage
Early stage (0-3 months):
Early stage customer churn is based around product adoption. People who churn here are typically unable to get set-up and aren’t using the tool or are using only a small part of it.
To combat early stage churn you need to look closely at the user experience. Make sure you have relevant training guides, 1:1 support and there aren’t UI confusions that are throwing people off. Poll cancellations and see where people were getting stuck. Consider hiring some outside testers to run through the onboarding process with a set of fresh eyes.
Middle stage (3-12 months)
Next, you have middle stage customer churn. Typically this is due to a lack of business impact from the software or service. To combat this stage of churn you need to make sure you are checking in with customers and making sure they are seeing progress towards their goals.
Many companies stop paying attention to customers unless they directly raise issues after the first few months. This is a mistake. Instead, invest in getting a pulse on how your customers are doing throughout the first year and middle stages.
Late stage (12 months or later)
Finally you have late stage customer churn. This occurs because people found a better alternative, they didn’t see the software/service scaling with them, they got burnt out or they experienced a series of bugs or issues that made them upset.
To avoid this churn, make sure you are always focused on upgrading your accounts and growing them. Accounts that are upgrading aren’t churning, consider what additional value you can add to all customers, celebrate their loyalty.
When customers cross a year, or two years or three years, continually let them know how much you appreciate them, a personal gesture here works wonders.
Reduce churn by building and optimizing engagement
Customers who are active in your social communities and who are active on the software are less likely to churn. So when a new sign-up rolls through, start with engagement right away. Send them a personal video email or schedule them on a 1:1 Zoom call and get that human touch established right off the bat.
Then, invite them to join the Facebook community, ask them questions about their business and their goals. The more you get the customer sharing, the better off you will be. With each customer you have the opportunity to go beyond just selling them a product and produce a relationship, if you do this, if you invest the time to get human with them, when they run into snags they will be less likely to just jump ship.
Focus on leading indicators, not lagging indicators
There are certain metrics, like Monthly Active Users (MAU) and Net Promoter Score (NPS) that are early predictors of things to come. MAU and NPS are examples of leading indicators, because they diagnose problems months before they come to fruition. For example, if your customers aren’t using the software (MAU % is low), then they are set to churn and revenue will take a hit when they do.
If you want to tackle churn, you need to get ahead of the game, so look each week at how people are using the software and when you see low usage, reach out to these people and try and help.
Focus on annual contracts (double edged sword)
This one is pretty simple, if you lock a customer in for 12 months it is going to help improve retention in some way. I think annual contracts make a lot of sense and provide stability for businesses. Many businesses, from Hubspot to Infusionsoft have talked about how they cut churn specifically through this focus. That being said, it can also mask or delay problems.
If your NPS is very low (i.e. your customers aren’t happy) then shifting to annuals could lock people who are unhappy into paying for a service they don’t want, which can explode into a PR nightmare. So it makes more sense to focus on addressing the underlying core issue for these customers and ensure they are happy to be using your product.
Focus on niche specific collateral
If you sell a software/service that works with many different industries it is imperative that you develop training guides, manuals and assets for the individual industries. Think about the customer experience, the more you can leverage exactly what other similar businesses have done and seen success with, the better off you will be in solving their problems.
Specifically, try to set up onboarding emails that are tailored to the industry of the new customer. Try and build a “Getting started for [insert industry]” guide that you give to companies based on their industry. Have support reps who welcome new customers with a personal video saying, “Hello, I am one of the experts here on the team for B2B marketers, I would love to hop on a call”.
That way you get them engaging more with the team, which will improve retention and they feel more confident in meeting with the team because they have the sense that the team member will be able to support their specific needs.
Aligning compensation plan to churn goals can be key
Sales people will follow the guide rails of their comp plans. If they get paid just for closing business, they will seek to close anyone and everyone and that can potentially spike churn. At Hubspot, sales reps were initially paid after accounts crossed thirty days. If you look at retention rates for the first 90 days they are incredible and then after month five they spike up directly after!
That was obviously not what Hubspot wanted, so they had to retool their compensation structure (which is detailed in the article linked above). The moral of the story is that you need to give both sales and CS (Customer Success) a clear incentive to retain customers and have it built in to their compensation.
Churn is a challenging problem that constantly is changing. You might have a technical bug that causes high churn one month. Another month a competitor could aggressively bid on your keywords. Another month your customers are struggling to onboard with your new UI you just released. There is never a one size fits all approach.
But using some of the methods above, you can start to isolate where you are running into problems (early vs. late stage for instance) and what you need to do to keep these businesses onboard.
Be human, be authentic, go above and beyond and always remember.
Automate processes but not relationships.