Insightful ways to analyze churn, SaaS Quick Ratio as a growth trajectory, tricks for up-selling & cross-selling
Every business would like to know why their customers cancel and every business wishes they could predict when customers are on the verge of cancelling. Then every business could be proactive in saving and satisfying their customers, right?
Unfortunately, just looking at the churn metric doesn’t offer much information. It certainly doesn’t suggest any strategies for being proactive. But cracking open the metric, going a bit beyond reporting to analytics, will reveal a wealth of information about your customer base, the customer lifecycle and why or when one might cancel.
Go Beyond Customer Count
Measuring churn by the number of customers who cancel is the most basic way — and also the way that yields the least insight. Tracking a crucial part of your business like churn with such a one-dimensional metric is unwise and ultimately leaves you at a great disadvantage because it doesn’t expose any problem areas or reveal opportunities for your business. Getting more advanced with your churn analysis doesn’t have to be complicated, though.
As a first step, you should measure your churn by revenue, not absolute customer count, also known as Revenue Churn. Customers are not all created equal, as far as how much money they each bring to your business. Some are bigger with more users, some are on a premium plan. With that in mind, doesn’t it make sense to measure churn by how much revenue each customer represents, instead? With MRR Churn, you can get the most accurate overview of how much business you are losing. But there is still a way to milk MRR it for even more insight, to get an even clearer (and more raw) picture of your overall churn. If you want to dig a little deeper into best practices, read on about the differences between Net Revenue Churn and Gross Revenue Churn.
Smarter Churn Analysis
Identify trends embedded in churn by going a bit further with your analytics. Once you’ve spotted trends, you can take steps toward targeted solutions. This is a perfect example of working smarter, not harder. No need to try to tend to your whole customer base, if you can find the root of the problem in a certain niche or segment.
Not all churn is created equal. Customers cancel for different reasons and in different ways and it’s helpful to distinguish between these the major differences.
- Active Churn: The customer chooses to cancel your service. There are a multitude of reasons why a customer might cancel, from internal business changes to choosing a competitor to simply not understanding the product. And this segment of churn is likely where you want to focus most of your energy.
- Happy Churn: The customer cancels despite a positive experience with your service. Typically, these users finished using your product for their specific use case, be it a campaign, event, or similar short term project. One way to identify happy churners is to look at what percentage of cancelled accounts reactivate at a later date — or simply to ask your customers why they cancelled.
- Passive Churn: The customer didn’t bother to update their credit card information, they slipped into cancellation. This segment of churn is easy enough to reduce by implementing safeguards around payment so you don’t need to worry about expired or incorrect credit card details and chasing down customers for an update. A second option is to set up a dunning system, by email or SMS or however you communicate with your customers. This proactive outreach to ping users and collect payment is proven to prevent some passive churn.
- Vertical Type: Analyzing churn by vertical is mainly useful for B2B businesses. It could be crucial to understand if your service is satisfying some types of businesses better than others. If churn is high in certain target industries, you’ll want to dig into it. You can investigate what aspects of your product are “not a fit” for that market. Conversely, if you notice churn is very low in key industries, you can double down your sales and marketing efforts there and reap the benefits.
- Plan Type: When you offer various service plans or tiered pricing, it’s worth it to evaluate churn on this point. Customers will cancel out of, or contract from, a service plan when they don’t see the full value. If a certain plan is losing more customers than average, dig into it to figure out why these customers aren’t committed to your service. You may gather information and feedback to inform Customer Success or even Product. Perhaps the features available at that pricing level aren’t used or understood, perhaps the user can’t even find the features that promise to deliver the plan’s value. Whatever the cause, you can design a solution to keep this particular segment of customers on board.
Cohort analysis is a key part of any complete look at churn. The beauty of cohort analysis is that it holds insight into the general nature of your business as well as pinpointed information around specific events or decisions.
An area of broad insight could be customer lifecycle trends. For example, you might notice consistently above-average churn in month 5. So you know that in a customer’s fifth month on board, they are high risk for churn. Equipped with this knowledge, you can confidently focus more customer success effort around months 4 and 5 to prevent cancellations before they happen.
An instance of specific insight could revolve around any business change, such as new pricing plans, a new feature release, etc. With cohort analysis, you can see how this decision impacts churn. Is the cohort of customers who came on board after those changes retaining better or worse than the original, “grandfathered” customer base?
Analyzing churn by marketing channel is an excellent way to reform your strategy at the outset of customer acquisition, rather than focusing on later stages of onboarding and customer experience. Find out if your efforts are effectively treating asymptom — unhappy customers — rather than the illness — a low-quality, off-base marketing channel. Correcting any bad-fit marketing channels sets the stage for higher retention and less strain on the customer success team.
Final Note: If you want to supplement your churn analysis with some old school customer research, there’s a tried-and-true method you could test out: customer exit surveys. Ask customers who recently churned whether they’d be willing to answer some questions about your product, the service, and their decision to cancel. Your response rate might be low, but you’ll gain feedback and insight you wouldn’t have otherwise!
Customer Success Around the Web
- SaaS Quick Ratio: Back in February 2015 at the SaaStr Convention, Social+Capital VC Mamoon Hamid unveiled the SaaS Quick Ratio, which measures a company’s ability to grow reoccurring revenue in spite of churn. Since then it’s been a hot topic, emerging as part of investors’ standard fundraising asks because it is a great litmus test to check on your startup’s revenue growth trajectory. Is your growth as efficient and aerodynamic as possible or are you trying to fly with an ever-widening parachute tailing you? This informative article puts together everything you need to know about this critical metric, how and when it’s helpful to a SaaS business and other important things to consider when using SaaS Quick Ratio. Definitely a must-read for an business that is trying to understand the ratio of the money coming in to the money going out.
- Tricks of the up-selling and cross-selling trade: Turning customers into loyal brand supporters requires the establishment of long-term relationships. In fact, the probability of selling to an existing customer, either through up-selling or cross-selling, is 60-70% versus a 5-20% probability of selling to a new prospect. Up-selling involves offering your client a higher-end version of the product they are already interested in whereas cross-selling is offering additional products that can be beneficial to them. But while both of these scenarios sound like a win-win for the business (more money!) and the customer (more abilities and benefits!), up-selling and cross-selling can be tricky, requiring a delicate balance between being helpful and selling. This read offers a great list of 5 tricks of up-selling and cross-selling that will keep your customers happy and your revenue high.
- Key reasons the wrong customer is your worst nightmare: The warning signs start early. Perhaps your new customer’s expectations of what the product can accomplish don’t mesh with reality or perhaps the economic buyer made the decision to move forward without a clear understanding of their end-users’ needs. But somewhere on the journey from prospect to qualification to customer, there’s been a communication breakdown. Suddenly customer success finds it extremely impractical (if not impossible) to keep the promises their new customer has embraced. Boarding the wrong customer leaves everyone on the team feeling incredibly frustrated, since nothing they do seems to help them achieve their business goals. But the impacts of a wrong customer stretch beyond this frustration, as this interesting read explores. Not sure what a bad-fit customer versus just a stretch customer looks like? We highly recommend checking out this read.
Word to the Wise
This week’s wisdom comes from Samuel Hulick, founder of the site User Onboarding, in a recent episode of the Above & Beyond Podcast where he shares this thoughts and tactics for onboarding customers for maximum retention. Hulick emphasizes that onboarding isn’t just a one-time event and that understanding the lifecycle of your best customers is key to long-term success:
“If you haven’t solved retention, you shouldn’t be focusing on anything else. If you are just dumping more and more people into a really leaky funnel, this is not the best use of resources. And if you are looking at retention as being the holy grail of traction [and growth], then user onboarding really fits into that overall picture because that’s the very first stage where you have an opportunity to retain people. This is not only your first opportunity to retain people but this is also the area where you are losing the most amount of people, the quickest. For both of these reasons, onboarding is a prime opportunity [to ensure retention]. If you do some research into usage statistics, [you’ll find] stats that basically 50% of the people that sign up for a product never even log in a second time. And so looking at that really steep drop-off curve, right from the very beginning, and trying to do something about that can really pay some outside dividends.“