Labcast: Stop Fueling High Churn Rates and Start Focusing on Customer Engagement

Struggling with high churn rates? It might be time to pump up your customer engagement.

Customer retention is a common struggle for expansion SaaS companies and often times, it’s simply the nature of the expansion beast. However, that doesn’t mean you should give up on customer engagement.
In this week’s Labcast, Lincoln Murphy identifies why you might be falling into high churn rates and offers tips and tactics for retaining high-quality customers.

Key Takeaways

•  What is churn? It’s the amount of customers and in turn, revenue, you lose within a timeframe. [0:50]
• Customer quality over quantity: It’s natural for an expansion company to have a high churn rate at first. Focus on what you can control: Retaining high-quality customers. [2:10]
• Engagement is key. Often times, a high churn rate is the result of poor customer engagement. [6:30]
• Develop a customer success map. Successful engagement varies from company to company. Sit down and pinpoint what success means to your customer. [15:00]
• The seeds of churn are often planted early. Mismanaging expectations during the sales process leads to a high churn rate later on. [9:15]
• Keep the conversation going. Even an unsatisfied customer can offer valuable insight into your product and service. [11:20]

“If you’re just sort of product-centric and function-centric, you’re not going to really take into consideration how an actual type of user out there, at an actual company, would come into the product. You might be, almost developing in a vacuum”

Listen Here:

Labcast 111_ Lincoln Murphy on How to Manage SaaS Churn

Transcript:

Kevin Cain: Hello, and welcome to this edition of Labcast. I’m Kevin Cain, and this week I’m joined by Lincoln Murphy, a conversion rate optimization expert who also runs a very successful blog called “Sixteen Ventures.” Lincoln joins me today to talk about SaaS churn rates. Hey, Lincoln, thanks so much for joining me today on Labcast. How’s it going?
Lincoln Murphy: Oh, it’s going great. I’m excited to talk to you about this churn.
Kevin: Yes, so why don’t we start with a really easy question and can you just define for our listeners what SaaS churn actually is?
Lincoln: Yes, I mean, the way that I look at it is, I mean, at its core churn is the number of customers that leave, or the amount of revenue that leaves.
See, right there is kind of the problem. People don’t really look at churn the same way across the board.
It’s the number of customers that leave in some timeframe, or it’s the amount of revenue that you lose in some timeframe. It could be months, a year, it could be on a cohort basis, which is a whole different discussion. To answer your question, churn is what you perceive it to be in your organization.
Kevin: Presumably, if you’re an expansion, say, SaaS company, you’re almost invariably going to have some level of churn. It seems like it’d be hard to avoid. Is there a certain churn rate which is acceptable, or a milestone that you would hit where you realize that you have a problem?
Lincoln: It’s interesting; I was just at an event last week about customer success, and there was a panel of VCs. It came out that, really, VCs looking at, again, sort of expansion stage, B2B enterprise SaaS companies are looking at 95% annual retention customer-wise, and they’re looking at 110% retention revenue wise.
That was an interesting metric to throw out there, and what that means is that they don’t really care if you lose customers during the year, but they want you to actually grow revenue.
This is a thing I’ve talked about before, David Skok has talked about. It’s expansion revenue. Negative churn is another way of looking at it. It’s this idea that customers can leave, but as long as your revenue is going up you’re probably going to be okay, because those customers that were churning out aren’t necessarily the high value customers that you really want at the end of the day.
Now do those metrics sort of apply to line of business, or departmental, or SNB SaaS applications? I would say probably not. Do they apply to B2C? Probably not.
Now that doesn’t mean that you shouldn’t still shoot for a low customer churn, or a high retention, again; however, a glass half full, half empty kind of thing, or that you shouldn’t shoot for expansion revenue?
It just means that those benchmarks are put out there by companies that are investing in B2B enterprise type SaaS plays that are still . . . they’re more akin to enterprise software plays of the olden days.
They’re still multi-year contracts or things like that, big dollar deals. These might not apply to the $20.00 a month line of business apps that maybe a lot of your listeners are building.
Kevin: Right, so it sort of sounds like there’s a certain part of rationalization around those in a sort of PR spin that you try to make something that maybe isn’t good look better than it really is by taking a different slice at it.
Lincoln: Yes. I mean, there was that book, “How to Lie With Statistics“,
Or something like that, right? I mean, the bottom line is just make sure that you and all the other stakeholders within your organization, whether that’s investors, your employees, or your leadership, or your wife as you’re sitting at home going over this stuff with her; make sure you’re all sort of on the same page, right?
That you’re looking at the same metrics at the same timeframe so that you’re doing that apples to apples comparison. To sort of continue with the question that you asked before, is there a benchmark, is there something that you should look for?
I like to say it like this, anything that you’re in control of should in certain terms of churn should be as low as possible, or again, retention if you want to look at it that way, should be as high as possible.
What I mean is that there’s going to be market specific things.
There are going to be things that are going on in your world, maybe if you’re a B2C company you’re doing games, things like that, you probably are going to have short customer lifetimes.
You’re going to have high churn, high turnover, you know, that’s just what you have to deal with. What you have to say is, “Okay, that’s the way the market is, but I’m going to do everything in my power to take the things that are in my power and make those as positive as possible”
I don’t like to just take these ideas that, ‘ particular market has a high churn rate’, and say, “Well then, that’s okay, that my company has a high churn rate with our customers.” I say,
“Okay, we take that input from the market, and we do whatever we can to keep that churn rate as low as possible, whatever you’re in control of.”
The VCs will like to say, “Death and divorce are really the only two reasons why churn’s acceptable.” If your customer’s company goes out of business, or if they get acquired, those are really the only two reasons why churn is acceptable.
I say that’s a great way to look at it. What it really should say is just anything that is out of your control is sort of “acceptable,” and then we should be doing everything we can with the stuff that we do have control over.
Kevin: Two questions out of that, one is sort of going back to what you had said earlier. I’m curious to know, there are these industry-type causes it sounds like that are responsible for churns, so maybe it’s the nature of the business that you’re into to a certain extent.
What are some of the other causes that are really responsible for those that companies should be worrying about and trying to fix?
Lincoln: Yes, so most of what I look for is engagement with your customer. If there’s a lack of engagement I can almost guarantee that’s the reason for whatever your churn rate is. Generally, you have to understand that companies that come to me generally have an issue with churn.
I see companies with just incredibly unacceptable churn rates. We can almost always pinpoint that to, you know, some level of a lack of engagement.
Now engagement is a funny metric, and if you want to look at it that way, because it doesn’t really mean anything across the board. It really varies company to company.
The way I sort of look at it is it’s when somebody’s getting value from your offering. So again, it’s a little bit, “what does that actually mean?” It depends on what you’re offering is, and it depends on your customers.
It’s something we have to sort of figure out by knowing your customers, knowing your product, and saying “Okay, this is what we think engagement would be for them.” Then we can sort of measure that.
The great thing about SaaS is that you can actually have some level of visibility into what people are doing within your application, so you can sort of start to tie that engagement to actual activity within the product.
It’s activity. It’s also, things like, take an email marketing product. If people are sending a lot of emails and they’re getting a lot of unsubscribes and they’re getting a lot of bounces and they’re not getting a lot of click-throughs and not getting a very high open rate, that could start to lead to some level of disengagement, right, because you’re not having that positive experience.
Kevin: Sure.
Lincoln: You, as the vendor, need to kind of figure out, “How do we fix that, what can we do?” I’ve said things on my blog in Sixteen Ventures.com, if you send out a report that says, “Here are your results from this campaign” or whatever, maybe include a link in there that says, and this is how to fix it.
This is how to get better results, right? It’s little things like that. A lack of engagement can be both just people aren’t using your product or they stopped using it.
It can be that they’re just not getting the results that they should be getting. Engagement is basically where people are getting value from your product.
When somebody says, “Hey, I have a really high churn rate”, we’ll start digging through the data and we’ll see that people either aren’t getting started using the product. It’s sort of an on-boarding that’s in early stage engagement issue.
Or, just over time, they start to lose that engagement with the customer and basically it’s the customers stop getting value.
Usually it’s an engagement issue. On the flip side, and I say this all the time, the seeds of churn are planted early, and what I mean by that is like, literally, even during the sales process you could be selling people a bill of goods that you can’t deliver, right?
One company I worked with was sort of a “done for you” email marketing product. They would write the copy for you, and do all this other stuff. They basically said, “We send an email; you make money.” Right?
That was in the very early days, and it turns out that they weren’t able to deliver on that. People were leaving because they weren’t getting what was promised to them.
If you’re mismanaging expectations in the sales process you could be causing people to leave; maybe not immediately, but three months down the line, and six months down the line they’re not getting the value that you promised them, and they’re going to leave.
When I look for these triggers of churn, companies are often surprised when I start saying, okay, let’s go through your sales process. It’s like, “Well, wait, churn is an end of life issue with a customer.”
That’s not the reality. The reality is it can be started, those seeds could be planted at any point, and often are planted very early.
Kevin: You know, another thing that you mentioned in your blog is sort of the importance of attracting better customers. You had said previously, that you may see a high turnover rate initially, a high churn rate, because you don’t necessarily have the best customers.
How do you attract better customers, and does it mean that when you’re a new company and starting out it is okay to have a certain amount of churn?
Lincoln: Yes, I think for very early-stage companies churn is hard to say whether or not that’s a metric you should really even be worried about. I mean, if you have a high churn rate at first, it’s probably indicative of a lot of the similar things that we’ve talked about. It could also mean that your product isn’t complete.
I encourage anybody in the early stages, you know, to do customer development, always talking to your customers. When somebody leaves in the early stages, you probably don’t have a million users all leaving.
You could probably pick up the phone and call somebody, or probably send an email, and just say, “Hey, what happened? Why did you leave?” In the early stages that’s what I would suggest doing.
Never stop talking to your customers, even when they leave. People, if you give them permission, are often very willing to tell you what’s going on, especially if it was a paying customer who left.
That’s why I also encourage you in the early days to start charging money for your product, assuming you’re not going down this other type of path of premium and trying to build a massive audience, free audience, and you let somebody else monetize it.
If you’re just going out there, just going out there to build a product and build a predictable revenue stream, then I suggest charging quickly, because the type of feedback you get from paying customers is so very different from that of free or beta or whatever.
Somebody who’s been paying you for a few months, and then just decides to stop paying you, man, if you give them permission they’re probably going to give you some amazing feedback.
It also means putting your ego aside, right, and saying, I’m willing to do this for the betterment of the venture here, to go listen to why we failed a customer.
The main thing is that in the early days churn, again, may or may not be that big of a deal to really worry about. Certainly after you reach product market fit, you know, that’s a great way of saying, “Okay, we’ve gotten to a point where our customers like us.”
Sean Ellis says, “40% of your customers would be upset if your product went away.” I just tweeted on Twitter, my handle is @Lincolnmurphy. I just said, “Unplug your product, unplug your service for 20 minutes on Monday morning and you’ll know whether or not you’ve reached product market fit”
Don’t probably do that, but it’s one of those things where if you get to a point where a large portion of your customers would say, “Yes, we’d be upset if your product went away”, then you’ve gotten to that point where you’ve reached product market fit.
That’s probably also the point where you can start, where churn really starts to matter. You’ve reached a maturity level where you’re attracting customers, you know, because of your efforts, not in spite of your efforts.
You have a product that has at least a minimum feature set and functionality that isn’t just [NVP], isn’t just the minimum viable product to go to market and start getting feedback. It’s a real product now, and you’re at a point where you can start sort of stepping on the gas and growing.
This is also where churn is going to start to affect whether or not you grow fast enough, right, because it’s harder to . . . you can be attracting customers in the front door, but again, you know, if a lot of them are falling out the back door it’s going to be hard to really grow at any predictable level.
Kevin: Are there any other tactics that you would recommend for dealing with churn once you get past that early stage and you are an expansion stage company? You’re really growing and you don’t have that same sort of ability to email the individual customer and necessarily get the deeper dive on why they’ve left you?
Lincoln: Sure. Again, engagement. Knowing your customer, knowing what value, how they’re going to actually get value from your product, knowing what engagement looks like for them.
I sit down with my clients and we’ll do a customer success map. What that means is very simple, what does success mean to the customer? How are they going to be successful with our product, and what does that look like at the various stages of the customer lifetime?
It’s very simple to say when they first come in for the free trial, they need to do this, this, and this. Then they will realize value from our product and they’ll probably convert.
I say that’s simple. Most companies, at least the ones I’ve worked with or even interacted with, still aren’t even doing that. It’s easy to do that for the free trial. It’s easy to do that let’s say to map out what it’s going to be like in the first few months as a customer.
Few companies really sort of take that and say, “What is our customer going to need to continue to realize value after they’ve been a customer for 6 months, for 12 months, for 24 months?”
If you sit down with your business plan, or you sit down with your investors or whoever, and you say, our estimated customer lifetime is going to be three years, then you’d better have some idea of what it’s going to look like from a customer perspective when they’re using your product going into month 36 or 37. Right?
Kevin: Sure.
Lincoln: The most companies, especially, obviously in the early stage that haven’t gotten there yet, don’t really know what that looks like. I would say companies that have been around long enough to have customers stay even three years still don’t know why those customers have stayed for three years.
Tactics, you know, even though you might not be able to talk to every customer, maybe you can still continue to talk to some customers. Right? This is where I go back to sort of who is your ideal customer?
That’s the blog that we put up on OpenView Venture Partner’s blog, that you guys sort of reposted for me. It was basically this question of, Who is your ideal customer? Right? That’s such an important question.
I think a lot of times it’s a little bit off putting, because it’s sort of like, “Well, wait a minute. I don’t have just one ideal customer. I don’t want to miss out on any opportunities.” The reason I say it like that, “who’s your ideal customer,” is because out of everybody that you could possibly serve with your offering, there is probably one that is really ideal.
It doesn’t mean that you’re not going to serve or even go after, you know, explicitly three or four other types of customers; it just means that there is probably one that would really benefit from your offering where the sale cycle is going to be, maybe shorter, maybe going to have less interaction, require less interaction with your support team.
They’re going to be more profitable, right? Whatever the criteria is for your ideal customer, there is probably one that really is out there.
The reason that I’m so adamant about figuring that out is because, especially at first, it’s going to allow you to focus. You know, right now if you’re in the early stage company you’re probably more focused on your product, more focused sort of inward, and if you can focus on a customer it’s going to help you with a lot of things, including this customer success map.
If you’re just sort of product-centric, function-centric, you’re not going to really take into consideration how an actual type of user out there, at an actual company, you know, would come into the product.
You might be, almost developing in a vacuum, and of course, that goes against everything that we know to be the appropriate way. But it’s so . . . I don’t know, that’s just the way we as humans have a tendency to want to not go out and get the right feedback, or not interact with our customers, not ask the hard questions, those kinds of things.
Knowing your customer is absolutely critical because it doesn’t just sort of help you market your product or help you advertise it or whatever, or write good inbound marketing copy. It really drives the overall, should drive the overall product design.
I’m a big proponent of . . . if you go back to what marketing is, right, it includes product. With SaaS, I mean, I think the product, the service, really, I still say product, but it’s really a service, you know, is as much a part of the sales and marketing process a an ad creative that you might put out there. It’s all sort of comingled together, or should be, and your product should work to not only sell itself, should be designed to get people to, you know, get onboard, become engaged.
Become so invested that converting to a paying customer is just a no brainer. And then it should work to keep them invested and keep them engaged. Knowing your customer, going back, some of the tactics that you could use, all stem from knowing your customer.
This could be things like, you know, really enabling them at the appropriate time to share within their organization, but again, you know, social capital within, especially within a B2B environment is very precious, you have to make sure you ask them to share at the right time and do it in the right way.
This isn’t like import your outlook contact list. This is, you know, sort of being creative and thinking about it from the customer perspective. When would it make sense for them to share? And once they do that, then you can start sort of building that internal veracity within an organization.
Or maybe it’s, and this is one of those ideas that’s been around forever, but you know, more and more SaaS companies are starting to realize how important this is. Creating certification programs, things outside of the app, right?
It’s like, if you can create certified users within your organization, that gets your product even more engrained into the culture of your customer, so that you know, if your product champion leaves, which often can be a big trigger for churn, you have other people within the organization that are also invested in your product and are more likely to stay.
By the way, when this certified person from Company A leaves and goes to company B, do you think that certified person with your product is also going to try to bring your product into that new company? Most likely, right? There’s a little bit of viral expansion that isn’t, sort of push a button and share with your friends.
Kevin: I really appreciate that explanation, Lincoln, and I appreciate you being with me today here on Labcast. You had mentioned your Twitter handle and your blog. Are there any other ways that people can get in touch with you?
Lincoln: Those are the main ways. SixteenVentures. com, that’s where I post all sorts of stuff. It’s kind of like therapy for me. Twitter, @Lincolnmurphy, those are the main ways. All my other contact information is available on those channels.
Kevin: Great, thanks again for being with me today, Lincoln. I really appreciate your time, and look forward to talking with you again soon.
Lincoln: Absolutely. Take care.

Do you agree with Lincoln? How big of a role does customer engagement play in customer retention?

Photo by: Boegh