Why you can’t offset churn with upsells, techniques for better understanding your customers, avoiding CS getting stuck in a vacuum
Today we are going to explore one of the biggest – and yet least talked about – misconceptions around Customer Success: that you can effectively offset churn with upsells.
This misconception starts with basic math; if you lose X dollars when a customer cancels their subscription (or decides to stay but pays you less because of discounts or downsells) you need to replace those X dollars before your business can start to grow. And there are two main methods of offsetting churned revenue: 1) acquiring net new customers or 2) getting your existing customers to expand their relationship with you and pay you more.
But as many businesses have discovered, method #1 – acquiring new customers to offset dollars lost – is a difficult and often losing proposition. At the very least, this approach creates a longer payback period for Customer Acquisition Cost (if you’re not sure why CAC is a key metric to track, we recommend reading this post and this post). At the much worse, this approach cultivates negative market sentiments from so many unhappy, churned customers. But no worries, it’s on to method #2, getting existing customers to buy more! Problem solved, right?
Not so much. As Customer Success thought leader Lincoln Murphy explains in this excellent post, using existing customers to offset your churn doesn’t work either. We strongly recommend reading the entire post but here is an outline of Murphy’s well-reasoned argument to get you started:
- Expansion is part of the customer’s success: Upsells and cross-sells happen because a customer is successful; in other words, account expansion is part of a customer’s path towards success. But if churn is what occurs when a customer is not successful, then expansion is not possible when a customer is not successful. As Murphy clearly puts it: “You can’t use upsells to offset churn because churn is caused by the very thing that prevents upsells from happening.” So if you expect your Customer Success to be more than just making customers happy – meaning you expect your Customer Success to be a Growth Engine via upselling and cross-selling – you absolutely must have a baseline focus on the customer’s success. This expectation also requires you to accept that fact that…
- Offsetting is NOT growth: An important metric to track is your Net Revenue Retention (NRR), or the revenue that remains at the end of a timeframe, net of any upsells and churn. If your NRR is less than 100%, your business is shrinking. But as Murphy points out, an NRR of 100% doesn’t mean that you’re growing, it means you are stagnant and “if that status quo is due to expansion ‘offsetting’ revenue churn just to break even, that’s likely a really bad sign.” But really important to recognize is that an NRR of greater than 100% – which means you are making more from expansion than any churn – might make it seem like things are good but…
- Math and reality are different: Because, again, you can’t use upsells to offset churn because churn is caused by the very thing that prevents upsells from happening. As Murphy explains, “If you are acquiring customers without Success Potential and/or not doing what is necessary to ensure your customers that have Success Potential are unlocking such potential, then you are not creating the conditions necessary for expansion. You’ve created – by choice or by accident – an environment and experience that are not congruent with the customer’s success; so how can you realistically expect enough customers to buy more or invite you into other parts of their company to offset the damage that’s being done by the customers you’ve failed?” While Murphy acknowledges that there are invariably edge cases of businesses that have managed to offset their churn with upsells, the reality is that most of the time, without worrying about outliers, this is not going to work: “You simply cannot achieve the revenue expansion necessary to offset revenue churn – in a scalable, repeatable way – when you’re not working to ensure your customers are successful since expansion is PART of the customer’s success.” So he suggests that you…
- Focus on getting rid of churn so you have nothing to offset: While it may seem obvious that churn does not have to exist, many businesses have simply accepted churn as a reality, which is how they arrive at developing plans (like upselling) to offset that churn. Instead, Murphy suggests getting back to the heart of the problem and working to get reduce and eliminate your churn: “When you don’t have churn, you don’t have to offset the lost revenue; all of your expansion revenue just adds to the top line and improves your margins. It’s true that it costs less to get revenue from existing customers than from net new customers, but this only works if you create the conditions for Customer Success. And ultimately, this focus on the customer’s success directly increases the value of your company.”
Customer Success Around the Web
- Techniques to help you truly understand your customers: Optimizing the customer experience is a great way to get new customers; it is also one of the best ways to foster customer loyalty. Despite this, leaders across organizations, including Customer Success and Marketing, often end up neglecting the customer before and after the sale. The biggest barrier to addressing this issue is usually a lack of a deep understanding of the customer in the first place. Having a comprehensive understanding of your customers is key to achieving core business goals, whether you’re trying to build (or optimize) the customer experience, create more engaging content or increase sales. This thoughtful post outlines five techniques – leveraging both qualitative and quantitative data – that will help you better understand your customers. It also dives into tools and mindsets you’ll need in order to get started.
- Avoiding CS getting stuck in a vacuum: Customer Success teams cannot succeed if they are operating in a vacuum. But what does that mean and how do you make sure that your Customer Success team never enters into that “vacuum”? This clever post offers a short recipe to follow – add strong relationships with key stakeholders, to one part strong alignment, and a dash of immediate wins – that will help set up any Customer Success Manager for success in your organization. Check out the full read for details and advice on each “ingredient” and to learn how to adapt these goals to the specifics of your organization.
- How to hire the head of CS for a start-up: Managing churn is a complicated problem because everyone in the company can impact it. To materially reduce churn, a company must appoint someone who has the data access and the mandate within the organization to search for and identify causes of churn and the influence to enact change. This person is often the first cross-functional hire for a startup, the first person whose job is exclusively to work with all the different teams – and they are often called the head of Customer Success. But how you go about finding the right person for this complex job and how should this individual tackle this challenge once they join? This interesting post seeks to answer those critical questions through the experiences and advice of Monica Adractas, “Churn Czar” at Box (gotta love that title, right?!). A good read for anyone who is exploring how the head of CS ought to pursue their role and also the right background for a person to succeed in this role.
Word to the Wise
This week’s wisdom comes from Paul Ferguson, a Customer Success Pro who helps companies create and adopt effective CS strategies and practices. In his post, “‘Get Out if You Can!’, My Customer Success Journey”, Ferguson admits that 18 months ago, he feared his leap of faith into the world of Customer Success was a mistake. He heard lots of harsh criticism of the CS space, everything from “its a fad” to “its a weak concept” to “its not tangible” to his favorite, “Get out if you can. You’ll be unemployed in 6 months!” But Ferguson believed in the CS space, hung in and in this post he shares the three most important things he has learned during his own Customer Success journey:
- It’s real and it’s growing now.
- It’s not just “Tech Talk”.
- Investors love it.
We encourage you to check out the full read and read his insights in full (they are all great), but Ferguson’s closing quote is the smart questioning we want to highlight this week, particularly for any of our readers who are still debating how and when they will really invest in Customer Success at their own companies:
“If Customer Success is just a fad, then why are some of the most successful businesses in the world running or growing Customer Success teams today? Why are more people looking to get in to Customer Success? If you are business thinking about Customer Success, it’s vital you act now. If you want to wait and see, that’s fine – IF you’re confident your sector will wait for you. One of the investors I met at Pulse London summed it up nicely “If you’re classic sell/deploy/support or if you sell perpetual licenses here’s the thing: Every month, month, every quarter, every renewal date you have to fight for your business. Is that predictable?“