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.

Startups should:

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.

Startups should:

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:

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.

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