5 step process to prevent churn in your startup/ business
Churn has always been a pain in the ___ (fill in the blank) for all businesses. Whether it be a B2B/ B2C, Product/ Services, Large/ small, or any other type of firm — this demon has haunted us all. So if any of you have been wondering what’s the best way to tackle this beast — here’s some best practices gleaned both from my experiences with both B2B Customer and B2C consumer churn management. While the principles are broad and may be used in many cases, this insight is primarily gleaned from the subscription cases.
- Monitor Net $ churn: In case you offering has multiple variations (like different products and pricing models), the next revenue expansion achieved from recurring customers need to be benchmarked against total churn to calculate whether those customers that do retain are compensating for the churned customers. If the upgrades and cross sales cannot keep pace with the churn, the problem is even bigger than thought.
- Segregating customer and revenue churn: Churn can be looked at both in terms of revenues (lost from churning customers) and customers churn. If the customer retention curve is steeper than that of revenue churn, you are losing relatively high value customers and your problems are to keep hold of the higher paying customers. Additionally focus then needs to be on cross selling and up-selling with a key measure on Net $ churn (Churn $ — Net expansion $) with Net Expansion $ = Upgrade $ — Downgrade $.
- Deriving key business insights: Some key ratios and calculations can tell a lot about the business’ health and future direction. Customer Lifetime (CLT) = 1/ Churn %. Customer Lifetime Value (CLTV) = CLT X Price. This CLTV needs to be benchmarked against CAC (Customer Acquisition Cost) to get a sense of unit economics (CLTV > CAC for positive unit economics). This helps align sales and marketing on a common goal.
- Experiment on Pricing model: One of the most effective ways of structurally incentivizing retention is to increase the period for the contract/ subscription. If you only have a monthly package, try a longer package such as annual (quarterly, half yearly, etc.). If a monthly customer switches to annual, then of course the retention chances go up immediately. NOTE — pricing is an extremely specialized and sensitive topic so several factors need to be considered with a lot of experimentation done. I’ll highlight 3 aspects here. A) The retention curve shape is a critical determinant of annual pricing. If say the monthly churn is high, then only a very steep discount can incentivize users to commit to an annual term. In Indian media subscription services which suffers from low retention, many companies give 50%+ annual discount vis-a-vis monthly price. B) Repurchase/ resurrection rate. For e.g., if customers typically see only an occasional need and come back may be 6–7 times a year, then ~50% discount can possibly incentivize an annual shift. C) Possible opportunity cost due to lost revenues. Some customers who would’ve retained the monthly subscription, now shall switch to annual and there’s money lost by your company. Additionally, willingness and ability to pay a higher magnitude of fees can also be studied.
- Segmentation: Churn can be much better understood once it’s decomposed into specific customer segments relevant to your company. Each company would have their own way of defining this but the key is to analyze churn by each various customer segments (e.g. by geography, industry, customer size, product, etc.) and focus on higher churn segments. Another way is to look at New, Recurring and Resurrected (returning after Churn) separately.
I have seen many companies jumping to fixing churn by increasing New sales. Note that the leak in a bucket will only become bigger if the bucket grows. Thus it’s important to deep dive into the funnel and fix the main reason(s) of churn. Overall, Churn is one of the most health metrics in a business (and an important valuation driver for startups) so and company would do well to have a dedicated person/ team focussed on improving churn.
Disclaimer: The thoughts and opinions expressed are purely my own and do not reflect those of my past or present employer(s).