As Customer Success pros, we worry a great deal about what is an “acceptable” churn rate and whether our own rate falls below the maximum viable standard. At some point in our industry-wide discussion of this critical question, the benchmark of “5% or less monthly churn” got thrown out and it stuck; after all, keeping 95% of your customers seems pretty strong, right?
Not so much.
When you dig into the math, a 5% monthly churn rate means you’re losing roughly HALF of your customers each year, about 46% annually. This means that if you started January with 100 customers you’d have only 54 customers left at the end of December. And if you started with $100 in Monthly Recurring Revenue (MRR), you’d end up with just $54/MRR at the end of December. But ultimately what this really means is that over the course of the year you’d need to acquire 46 customers (or $46/MRR) just to break even. And if you wanted to grow at all, you actually have to work four times as hard; twice as hard just to replace those customers and then some more to add to your overall customer and MRR count. In short, you’d be running really hard but definitely not accomplishing your goals.
To effectively fight churn, it’s important to understand the distinct stages of churn – short, mid and long term – and how they differ from one another. Customers who leave you early into their contract are a sign of a vastly different issue than customers who chose to move on much later into their relationship with you. With the help of a thoughtful post by ProfitWell author Andrew Tate, we’re going to define each of these stages of churn and explore practical approaches to improving your churn-reducing efforts at each stage.
- Short-Term Churn: The short-term period for a product is the first few months after a customer signs up, when they are having their first experiences with the solution. Churn rates are higher during this period because people often sign up for services to just test them; they want to find out what they do and do not like and ultimately determine if the product delivers the core value they were expecting. During this period, the product needs to give the customer an “a-ha” moment, where they experience their first real value. Without this moment, a customer is extremely likely to churn – and fast.
- How to Improve It: As Tate astutely points out, improving short-term churn can have an enormous impact on your churn rates throughout the rest of the customer lifetime. Quickly showing your customers real value means that they are more likely to keep going, allowing them to experience additional benefits from deeper features. But how do you go about fighting short-term churn? Tate explains that, “For SaaS companies, this comes down to finding the right people to use your product and then showing them the core value as quickly as possible. Early stage churn could be a sign you need to look at your sales funnel to see if you’re selling to the right customers. You could be over-promising and selling to customers that aren’t a good fit for your product. These customers churn out and have a negative experience, leading to less referrals.”
- Mid-Term Churn: The mid-term period for a product begins once a customer is actively using the solution; at this point they are likely to be enjoying the product on some level and have experienced some value. During this stage, the key is to keep customers interacting; you want them to develop habits around your core value and the service should ideally an important part of their life.
- How to Improve It: Tate puts it pretty bluntly: “The best way to [decrease mid-term churn] is to improve the overall quality of your service. You can refine current features, adding small changes or making them easier to understand. This means that customers will continue to find that core value. You can add extra features, but everything should revolve around the value you originally offered to your customer and boosting that.” He also points out that the classic ways of acknowledging/appreciating your customers are still really effective. Fixing bugs and improving your customer service make your product easier to use and will mean your customers are happier to continue to use your service.
- Long-Term Churn: The long-term period for a product is when the customer has an established history with your solution and company. If you master long-term retention with your service then you’ll be showing a real core value to your product for users for extended periods of time.
- How to Improve It: The key to improving your long-term churn is to upgrade your accounts, as this means that customers are investing further into your product and looking to get more core value from the service. Tate also suggests trying to reactivate your dormant accounts by re-introducing them to the core value: “This works well if you have taken the time to improve your service around the core value and you can show them improvements that will get the interested and involved in the product again.”
Customer Success Around the Web
- Ways to build a customer’s perspective journey map: All customer success professionals have an idea in their minds about what the ideal customer journey map looks like. It’s easy to get caught up in the traditional picture of customer experience and how a customer is expected to interact with a brand but, as more Customer Success leaders are finding out, the traditional route doesn’t always cut it any more. Today’s brands expect the same level of engagement and personalization as individual consumers. This means that Customer Success teams may have to rework traditional customer journey maps with an added element of the customer perspective. This post dives into how to create a customer journey map that outlines every touch point a customer has with a brand and corresponds these interactions to a particular department. Such a map can help organizations understand who exactly is responsible for particular customer interactions and can help departments determine which Customer Success metrics are most pertinent to track.
- Unexpected reasons why CS helps you scale: What is the role of non-scalable activities in driving Customer Success? How can we transform these types of actions into greater success for our entire customer base? How can we transform Potential Value in the form of future up-sells and qualified referrals from prospects (hypothetical guesswork), into Consistent Value in the form of higher revenue from existing customers who are close to being Ideal? This post explores some unexpected ways that CS can help a business scale, including practical steps a business can take to get started.
- Ask yourself these questions before asking customers one: Net Promoter Score is used in over two-thirds of fortune 1000 companies today. It’s one of the most important metrics to be tracked by Customer Success teams, Product teams and for executives looking to raise capital. With so much hype around the metric and the ease of execution of the survey, many companies are giving NPS surveys to customers without thinking through a strategy that will deliver actionable insights for their business. While the system itself is simple, the approach should be thoughtful. It’s important to consider both how customers will be prompted with NPS as well as how you will react to the data. This post offers a set of important questions that every business must ask and answer before launching a NPS strategy.
Word to the Wise
This week’s wisdom comes a recent post by Kissmetrics about how Netflix has maintained a low churn rate by keep their customers engaged and watching. With over 90 million customers watching a combined 125 million hours of television and movies everyday, there’s no doubt that Netflix has changed the way we watch our favorite shows. It has also become a prime force in our daily lives – integrating into everything from mobile devices to our language and culture. And with a relatively low 9% churn rate (lower than any other subscription streaming service), one has to wonder – how does a service like this continue to keep their customers engaged in both the short and long term? How do they succeed when others fall short?
We definitely recommend checking out the full read for all the details on how Netflix accomplishes this awesome feat but Kissmetric’s insight into how Netflix leverages usage data really caught our attention:
“Netflix has its finger on the pulse of what users are watching. And they’re not just skimming the surface, either. They look at things like how many users watched a particular episode, how many users watched an entire series and how much of a gap was there between when the user watched one episode and the next. But that’s not all. They’re also gathering data on when you pause, rewind or fast-forward, what day you watch, what date and time you watch, what zip code you’re watching from, what device(s) you use to watch which media, the ratings you give and the searches you conduct, your browsing and scrolling habits and even the data within the movies and shows themselves. Netflix knows when the credits roll – but it’s also speculated that they’re monitoring things like the volume, movie/show setting, colors and so on. All of this information is not just collected, but also acted upon. Some might even say that Netflix took a huge gamble ($100 million to be exact) in purchasing the exclusive rights to House of Cards but they did so with a concrete hypothesis – that a large portion of its customers streamed “The Social Network,” directed by David Fincher from beginning to end. House of Cards is also directed by David Fincher. What’s more, they also noticed that films with Kevin Spacey tended to do well, as well as the original British version of House of Cards. But Netflix didn’t just settle on one trailer to introduce users to House of Cards. Spacey fans saw trailers that exclusively featured him. Women who watched Thelma and Louise saw trailers featuring the female protagonists of House of Cards and big time film buffs saw trailers that reflected Mr. Fincher’s finest directing moments. All of these points intersected in a way that practically lit up a path to customer engagement and retention. And all of them were made possible thanks to insights delivered by big data.“