Tackling customer churn
Startups often neglect customer retention until churn becomes a severe problem. Successful early-stage startups tend to grow quickly, and growth hides churn. But churn is usually a big problem for startups before they notice it. Churn can seriously hamper growth at all startup stages, and when a startup grows without managing customer retention, it turns into a leaky bucket. Eventually, no matter how much you sell, churn will drag you down.
It takes time to profit from new customers
It’s expensive for B2B SaaS companies to acquire new customers. Many scaling companies spend more to acquire each new customer than their average customer pays them in a year. This upfront sales and marketing cost means it can take over a year to earn back the money you spent acquiring each new customer.
The longer your CAC Payback Period (i.e., the number of months it takes for a customer to pay you as much as you paid to acquire them), the more risk there is that some customers will churn before they’ve paid you back. A company struggling to profit from new sales does not yet have a scalable sales model.
- Measure their CAC Payback Period and aim to keep this under twelve months.
- Startups with a high CAC Payback Period might need to rightsize their sales efforts or increase their prices.
- Startups with a low CAC Payback Period might be well-positioned to ramp up their sales and marketing efforts.
- Measure their average time-to-value (the time it takes for the customer to receive their promised value from the product, i.e., onboarding time).
- It’s always better to deliver value sooner.
- Customers yet to receive value from a product are most likely to churn.
- Every time a customer receives an invoice for a product they don’t use, the risk of churn increases. Measure and reduce the number of invoices customers receive during their onboarding period.
- Startups with a high CAC Payback Period should strive to deliver value very quickly to maximise the chances of customer retention throughout the payback period.
- Focus on improvements to the early stages of the customer journey. It takes a lot of work to win back a burned customer. Conversely, customers who trust you have more tolerance for future issues.
Keepers are cheaper
Retaining a customer is usually much cheaper than finding a new one. Most scaling SaaS companies spend thousands of dollars to acquire each new customer. Every time a customer unexpectedly churns, your sales target increases to make up for it.
Startups that invest in customer retention achieve scale sooner because, when looked after, SaaS customers are very sticky.
- Check in with customers to understand overall customer satisfaction. You can do this through surveys and 1:1 interactions/meetings. Capture these insights as measurable data.
- Quantify and improve the value each customer receives from the product. Less active customers are more likely to churn.
- Urgently respond to negative feedback and interactions. Follow up immediately when a customer submits a negative NPS/CSAT survey or complains to your team.
- Switch to a proactive customer service model. Most teams simply react to requests and complaints from customers. Excellent customer service teams look for leading indicators that predict dissatisfaction before it happens.
- Identify and manage slightly delayed customer onboarding projects before they spiral out of control.
- Automatically trigger support cases based on software logs and errors.
- Respond to reduced product usage indicators.
- Improve customer utilisation over time. Many customers use only some features of the products they license. Selling new and existing features to existing customers makes you more money and helps them get the most value out of your product, improving customer retention. This advice especially applies to features the customer pays for but has not used.
Startups should also quantify the total cost of customer churn, including the knock-on sales costs incurred every time a customer churns. When a customer churns, they cost you:
- The money you spent to acquire them, if they haven’t paid it back.
- Future revenue you could’ve earned from them.
- The money you must spend to gain another customer in their place.
Churn is a big problem at scale
Startups need to compensate for a shrinking customer base through new sales. This leaky bucket can seem manageable for early-stage startups, but it becomes costly and difficult to solve at scale.
When you have 100 customers, a 3% monthly churn rate costs you three customers per month. So, to hit your sales targets, you must sell to three additional customers per month. Early-stage startups often enjoy high growth rates, so a few extra sales are trivial to make.
When you have a thousand customers, a 3% monthly churn rate costs you thirty customers per month. You must sell to thirty additional customers per month to hit your sales targets. This bleeding could consume multiple salespeople’s efforts for the entire month.
At scale, startups tend to grow more slowly, exacerbating the impact of the same churn rate as a smaller startup. Your churn rate directly reduces your growth rate. Shaving 5% churn off a 200% growth rate isn’t a big deal. Taking 5% churn from 15% is enormous — a third of your total growth flushed away.
Startups should build good customer retention habits early. It’s easier to scale these efforts as you grow than to start from scratch as a mature scale-up. If you tackle churn when your growth rate is high, growth will compound better over time. Most importantly, if your growth starts to slow, your business won’t be at risk.
31 July, 2023
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