How Customer Churn Is Killing Your Business

The old saying goes that it’s 10 times easier to keep an existing customer than it is to get a new one. Many people think that means to focus more on getting new customers than maintaining your existing customers.

Reality check: That kind of thinking is killing your business right now.

Software as a Service (SaaS) subscription services are a relatively new kind of business model. According to Wikipedia, the acronym allegedly first appeared in an article called “Strategic Backgrounder: Software As A Service,” internally published in February 2001. Ten years later, SaaS sales overall reached $10 billion and have doubled to over $20 billion just five years after that.

Many aspects of a SaaS business model grow linearly. If you add a new customer, it creates a linear growth in your revenue. For example, if you make $100,000/year from 100 customers and add just 1 more customer, you expect to be making $101,000/year from that new customer.

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However, there are a couple special key metrics that affect your revenue growth exponentially. That is, if you can improve one of these key metrics, your revenue-growth-per-customer will look more like this:

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The two magical key metrics to exponential growth are churn and upselling (expansion). The reason upselling has such an effect is that not only do you increase the recurring revenue, but upsold customers are less likely to churn and more likely to stay on your service longer. That double-whammy gives it the exponential kicker

We will talk about up-selling more on this blog, but today I wanted to focus on the importance of churn. Churn happens when customers downgrade or cancel their service with you. It’s the bastard kissing cousin to upselling, because it has a exponential-whammy NEGATIVE effect.

What causes the exponential decay is the inverse effect of churn on the customer lifetime.

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The size of your cohorts drops exponentially with churn. This exponential decay is what makes churn such an important key metric to watch. The smaller your churn on a linear basis, the longer your customer lifetime will be on an exponential basis.

I can’t emphasize this enough, so I will state it another way. If you focus your time on adding 1 customer, you will be adding LINEARLY to your recurring revenue. If you focus your time on reducing churn by 1%, you will be adding EXPONENTIALLY to your recurring revenue.

Why? Because when you reduce churn, all your existing customers AND your future customers will be paying you for more time tomorrow than they were paying you today. It’s future found money.

So what can you do to reduce churn and exponentially grow your customer lifetime value? Let’s explore a few ideas here and please leave comments below with more ideas you have found.

Fantastic Customer Support

If there is one area that most companies neglect more than any other, it is customer support. The fastest way to cause a customer to drop off your service and churn is to respond slowly and ineffectively to their cries for help.

Many of the best small businesses out there make it a practice to have everyone at the company participate in customer support, not just to make building the product better, but to ensure that tickets are responded to as quickly as possible.

Cultivating Loyalty

So you built a great product and you have great customer support. Sometimes that’s just not enough. People live busy lives and need gentle reminders to recommend your service to others. But blasting people an email just asking them to tweet something for you isn’t going to cut it. You need to earn their loyalty, it is never to be taken for granted.

Using the Net Promoter System is a highly effective way to measure and grow loyalty amongst your customers. Promoters who respond with a 9 or 10 (those who are very likely to recommend your service to a friend or colleague), will be naturally inclined to do so if you give them a gentle nudge to actually do so.

The churn bonus there is that if someone actually does recommend your service to a friend, they are psychologically going to be much less likely to cancel your service. It is a positive re-enforcement technique to reduce churn. In addition, customers referred to a brand by a trusted friend or colleague tend to have a higher lifetime value (LTV) and less price sensitivity.

On the other end of the spectrum, your detractors who respond with a score between 0-6 have a very high propensity to churn in a short period (usually less than 90 days). NPS provides powerful predictive analytics allowing you to be far more proactive in managing churn which can radically alter growth. Most companies optimize for churn at the point of cancellation which is a losing battle.

Give Away Free Stuff

Another great way to keep people excited about your service is to over-deliver. One great example of this is Fool.com, the stock advising service. With a long track-record and highly profitable financial newsletter service, the people who run Fool.com have mastered the art of creating fans. They do this by nurturing their customer base at every level of commitment from their free newsletter up to their all-inclusive premium service which can cost $7,499/year.

Fool.com has the basic freebies like a free newsletter and free previews to their more expensive newsletters. But as you climb up the ranks, you are consistently given freebies. For example, their Fool Pro service sends you a hardcover book about investing every few months. Getting these unexpected presents in the mail helps build and reinforce relationships.

In that spirit, I would like to offer you some free stuff. If you have never tried running a Net Promoter Score program before, I’d like to offer you a free no credit card necessary invitation to send out 25 NPS surveys per month to see how easy it is to use it as a tool for cultivating loyalty and learning more than ever from your customers. If you have more than 25 customers, you can use our “drip” feature to limit the monthly sends to 25 and automatically rotate between different segments of your user base.

Focus your attention on reducing customer churn and your business will thrive for it.

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Chad Keck

As a product lead and executive for numerous successful ventures (Rackspace, HP Cloud, AppFog), Chad founded Promoter.io to help bring the actionable insights provided by Net Promoter to all businesses. He is a native Texan with a passion for helping other entrepreneurs.

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  • http://www.aboutrosshall.co.uk/ Ross Hall

    I’m quite surprised at how many businesses spend so much bringing new customers in the door, yet invest little on keeping them there. This is particularly true in startups and young companies that chase growth at the expense of longer term reputation and profitability.

    Whilst the suggestions in the article are good, I would also suggest considering a “Customer Retention Strategy”. It’s inevitable that some customers will decide to end the relationship, so the CRS should look at activities designed to win them back. There are various techniques that can be applied to this, from discounting to changing the service the customer receives, from eMail to picking up the phone. A “test and learn” approach can quickly reduce churn, albeit with the expense of having to resell the business.

    As important to winning the customer back is gathering valuable intelligence on WHY they’ve decided to leave. Needless to say this can feed service design and improvement work, particularly if there are recurring themes that need to be addressed.

    It needs some thought and care to get right, although something can be up and running fairly quickly, even if its just an hour a day given to hitting the phones.

  • http://GrowMap.com Gail Gardner

    I’ve seen this as a top-down issue in more businesses than I care to mention. They are too focused on organic search traffic and one-off sales. No matter how much I encourage them to do the little things that turn those one-time buyers into loyal repeat customers who will send them referrals, they don’t want to hear it. Often they say they don’t get repeat buyers so they won’t focus on that. That is WHY they don’t get repeat buyers!

    I ask them who their buyers are. They don’t know because they’re not involved in shipping. I try to get them to use live chat; they don’t want to be bothered with actually talking to customers. It is a minor miracle they have a business left at all when their organic traffic drops.

    One other warning for businesses. Be careful how you treat influencers who are writing about you. What you say reveals your real intentions towards your customers. If you care about them, bloggers and influencers will be recommending you for years to come after one interaction.

    If all you care about is the bottom line or getting your company acquired as soon as possible so you can cash out with the big bucks – typically dooming your customer base to a steady decline in support or sudden loss of your platform altogether – don’t expect us to want to use your solution or recommend you to others.

    I just read a post about huge increases in tips because the server offered the patrons mints. Can you imagine the ROI? https://growthhackers.com/the-3-psychological-triggers-that-matter-to-happy-customers/ I found that on GrowthHackers – the same place I saw this post.

    I still remember ecampus even though I have the hardest time remembering names. I haven’t ordered from them in probably 8 years (because I haven’t needed what they sell). But I still remember and recommend them because they always tucked a little surprise in with my order. Once it was a t-shirt; another time a pen.

    How much does a pen cost compared to the additional orders I placed or all these years of recommending them and using them as an example of how to be memorable and make your buyers loyal?

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