When you’re trying to get a start-up off the ground, churn rate is one of the most important determinants of your future growth. No matter how good you are at acquiring new customers, if you can’t hold onto your existing customers at a good rate, your business will flounder.
While a high churn rate in and of itself is not a death knell, Tom Tunguz writes that SaaS companies that experience high churn rates will have to expend greater capital in order to overcome it. After all, it’s much less expensive to keep the customers you already have rather than spend money acquiring new ones. Happy customers are also effective ambassadors for your brand. It’s clearly in the best interests of your company to monitor and minimize churn.
Here’s how to do it in six steps.
Step One: Define Your Goals
There is no single optimal churn rate. Where you set your goal will depend on your business’ needs. Additionally, companies may define churn in several different ways. In order to effectively track churn—and improve it—you will need to clearly define KPIs.
There are several things to keep in mind when defining churn rate:
- How does a customer count as churned? While most companies use cancellation rates, some count customers who are dormant (i.e. don’t use the product) as churned.
- How do you express your churn rate? Typically, churn rate is indicated with a percentage: Churned customers/Total customers. But it’s also possible to define churn rate in terms of whole numbers of revenue or customers lost.
- Over what period of time will churn rate be calculated? Usually, it is advantageous to keep track of multiple churn rates: churn per month, per year, etc.
Once you know your current performance, you can clearly define reasonable goals for improvement. You can also set different goals for different market segments.
Step Two: Diagnose the Causes of High Churn Rate
Figuring out the causes of your churn rate is crucial in understanding why customers churn. According to SaaS consultant Lincoln Murphy, there are two essential reasons why customers leave. First, something happened to the customer to prompt cancellation, such as no longer being able to make payments. But the more common reason is that the customer failed to achieve the desired outcome with your product.
If it’s the latter issue, you’ll need to figure out what your customers want from your product or service and why they aren’t currently achieving it.
The easiest way to do this is to talk with them directly. Customer satisfaction surveys are one way to accomplish this – however, a lot of customers will not fill out lengthy surveys, so keep your surveys confined to ten well-chosen questions or fewer.
It is also important to provide other opportunities for customers to contact you. KISSMetrics and other companies include a feedback bar within their product, with success.
Asking cancelling customers to provide feedback upon cancellation is a great way to learn more about the causes for churn. While some customers will leave because they simply aren’t a good fit for your product, if you’re consistently receiving the same criticism you need to pay attention.
Quantitative metrics are also useful for determining the causes of churn. Chances are that customers who churn exhibit certain patterns of behavior when using your website or product. As KISSMetrics points out, identifying red flag metrics can help companies identify customers at risk of churning before they cancel.
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Step Three: Re-design Your Customer Journey
Now that you have a better idea of what your customers want and why they’re not achieving their desired outcomes, you can make changes to improve your product. You might have discovered that in order to give customers what they want, you need to add new features to the product.
In other cases, you won’t need to reinvent the wheel, but should focus your energies on making your product more user-friendly. There are lots of small tweaks that can significantly improve customer experiences.
Customer education and the onboarding process may also need to be improved. Many companies have achieved success by improving the customer education process and providing customers with additional lines of communication to support services.
Step Four: Implement the Changes You Need
Make sure that everyone at your company, from designers to customer service representatives, is aware of the changes that are going to be implemented and what they need to do.
As you go through the process of adding new features, be sure to let your customers know about them and how they can use them effectively. Consult with customers to make sure that everything is working. Feature bloat can actually be a cause of customer attrition if you’re not careful about implementation.
Step Five: Communicate New Changes to Customers
Once changes have been made, you need to let your customers know. First, develop a communication plan to inform current customers of they changes they’ll be experiencing. Second, you need to develop a sales plan for your customer success managers to help re-sell previously churned customers.
A successful communication plan has the potential to prevent current customers from churning while simultaneously bringing back former business.
Step Six: Monitor Progress
You’ve analyzed the potential causes of customer churn and have taken steps to address them. Now you need to use monitoring to see if your efforts have borne fruit. If they have, great! If you’re still not seeing the progress you want, you’ll need to go back to previous steps to identify areas where you’re falling short.
Founder & CEO of CloserIQ. Previously Sales Strategy & Management @ZocDoc, Head of Analytics @PayPerks and Trading Strategist @Bridgewater Associates. MIT Bachelor’s & Master’s in Computer Science. CFA Charterholder.