5 Situations When Massive Churn is Just Fine

5 Situations When Massive Churn is Just FineThe mantra of “grow at all costs” – that seems to include acquiring wrong-fit customers (those who aren’t your Ideal Customers), churn be damned – has popped up several times lately and my reaction to it is two-fold.

First, I immediately thought how stupid this is and how it flies in the face of everything that has to do with customer success and what I’ve been preaching for the last few years, but also goes against the core fundamentals of building a high-growth business (of which not losing more customers than you bring in is kind of important).

But then I thought maybe this could be a fun thought experiment where we can explore five situations where having high churn is actually just fine… in fact, it’s totally acceptable.

Cool, let’s do this.

A small caveat before we get into this list, though; the chances are – and I mean these are really good chances, statistically speaking – none of this applies to you. So use caution.

Okay, let’s dive into the list…

5 Situations When Massive Churn is Just Fine

I came up with 5 for this list, but I’m sure there are many other examples feel free to share those in the comments below.

Example 1: You Have a Legitimately Massive, Transient Market

If you have a product where the market of potential users and customers is legitimately massive and you know that those users and customers come and go and that’s just the way it is perhaps having a high churn rate in this market is just the way things will be.

And what I mean by a massive market is literally something that everybody with an Internet connected device is a potential customer, everybody that uses an iPhone is a potential customer, everybody that has a job is a potential customer, everybody that eats food is a potential customer, etc. Those are massive markets.

But just having a massive market doesn’t mean that churn is a good thing, the other part of this is the transient aspect.

Some markets have customers and users that come and go in a fashion one might describe as willy-nilly.

In a transient market, churn is expected because customers change their minds frequently, their situations change and they have to lower costs and then they get more money and they come back, trends change, fads come and go, and customers use and stop and come back and it’s just this perpetual churn machine that is the reality. That’s my definition of a “transient” market.

If you are in a legitimately massive market and there is a transient nature to that market, then churn might not only be the reality on the ground, it might be just fine because when customers leave, they probably come back. And when they leave, it’s probably not due to anything you did so they probably won’t badmouth you on the way out.

But again, I have to remind you that you probably don’t fit into this category!

Example #2: You Are Your Competition

Two examples of “you are your competition” that immediately come to mind are web hosting roll-ups like EIG and restaurant groups like Yum! Brands.

EIG owns HostGator, Bluehost and a ton of other “hosting brands” … but this is not exactly common knowledge. Which means, when a customer has a negative experience with Bluehost, for example, they search or ask friends for alternatives and they find HostGator. This means customer churn for Bluehost, a new customer for HostGator… but who cares. It’s all in the same family for EIG.

Yum! Brands owns Taco Bell and KFC (among other brands)… so when I swear off Pizza Hut (again) and decide to go back to Taco Bell for my dinners this week, that’s a customer gone from Pizza Hut (for now; see #1 above) and a new customer (well, I’m not new… just back) for Taco Bell, but Yum! is the real winner.

SaaS companies do this, too, when they roll-up their low-end (flailing, generally) competition. While the smaller competitors are usually purchased for their revenue or to keep around as additional distribution/lead gen/down or upmarket expansion, sometimes they just keep the competitors around as “alternatives” for churning out customers to go to.

As with example #1 above, I feel the need to remind you that you probably don’t fit into this category. I have seen some relatively small SaaS companies acquire their even-smaller competitors, though, so even if you’re a smaller, bootstrapped company, this isn’t outside the realm of possibility for you… but statistically speaking, you probably still don’t fit into this category.

Example #3: You’re Going to Buy your Competition

Just like in example #2 above, if you can buy your competitors then you know when your customer leaves, they’ll just go there and – eventually – they’ll be back under your profit umbrella.

But, if you’re planning to buy the competitor(s) you’re losing customers to, you might want to do this sooner rather than later since every customer you lose to your competition means that competitor is going to be worth more when it comes time to buy.

Also, I’d be remiss if I didn’t remind you that as your customers churn out and go to your competition, that affects how investors see your company and could impact – if not your ability to raise the infinite funds available out there – high churn will certainly affect how your company is valued by investors and the cost of that investment (i.e. their equity stake), or a nice combination of both.

All of that could then impact your ability to buy the other company who is now more expensive because they now have your customers and their associated revenue.

And just as with examples #1 and #2 above, you probably don’t fit into this category so high churn is not something you can have and expect to thrive. It just isn’t.

Example #4: You’re Going to Outlast your Competition

You’ve got more money in the bank, you’ve got investors on the hook for additional funding, you’ve got lines of credit on the ready, you’ve got all the world of oysters at your fingertip… and your competitors don’t. Cool.

And as for your nearest competitors, you know their funding level and current runway, you know their pipeline, you know everything that’s going on in your major competitors world and you’re very confident they’ll start dropping like flies.

At some point in the very near future your competitors are going to go out of business and their customers will have no choice but to come back to you, so who cares what your churn looks like right now; you’re in a great position and they’re not.

You can wait them out… so it’s no big deal.

If this is the case for you fantastic you’re in an enviable position; I wish you nothing but the best of luck, though clearly you don’t need it. However, just like examples 1, 2, or 3 above… you probably don’t fit into this category so high churn is definitely not a good thing for you.

Example #5: You Can Spend to Offset the Negative Market Sentiment

When customers leave, if you’re not in the type of market listed in example #1 above, they typically leave with a bad taste in their mouth.

Word-of-mouth is the type of thing that spreads bad news fast – which, as I said before, is generally because the bad experience they had with you is the ONLY remarkable thing they’ve ever experienced in their relationship with your company – and now not only do you have a churn problem, but they’re spreading the bad news, potentially limiting your ability to land new customers.

Now if you have enough money – and the marketing and PR machine that is powered by those funds – to offset the negative market sentiment that comes along with the high churn (churn that is obviously caused by not focusing on customer success or some other thing that’s in the favor of your customers), then you might be just fine.

But if that’s not you and just like in examples one, two, three, and four above it’s probably not you, then high churn is something you need to avoid.

Reality Check: Churn is Always Bad

The 5 cases above are only a few where – I suppose – the case could be made that having a high churn rate isn’t horrible. But even then, if someone were actually giving me one of those examples, I’d push back and say it’s still bad to have high churn.

In fact, even in the first example where you have a “transient” market, I bet some of that churn that you see as inevitable is actually preventable; but the inevitability of it has caused you to stop looking for ways to mitigate the churn, so it continues to occur.

You just can’t see the root cause forest because of the inevitability trees.

Considering all the ways churn hurts a company, there doesn’t seem to be any reason – even if you happen to fall into one of these five categories – that you should sit back and just accept churn as either inevitable or a good thing.

Unless you fall into one of those categories, high churn is a big problem.

About Lincoln Murphy

I am a Customer Success-driven Growth Consultant. I wrote the Customer Success book which you can buy at Amazon. If you need help growing your SaaS, request at least a 15-minute call with me via Clarity. Be sure to join my mailing list - I send awesome stuff to the list every week or so. Also, connect with me on LinkedIn or follow me on Twitter.

Comments

  1. hey Lincoln,

    Fascinating and insightful post here. I question whether markets like example 1 exist. Can you name 1? Three?

    • Hopefully you’re questioning everything in the article – except the part about how high churn is a bad thing.

      I’m not sure if example #1 exists, either… but if it does, and you’re in it, you can probably get away with massive churn and be just fine. Otherwise, if you have high churn you might be in really big trouble.

  2. Could #1 pertain to a physical, non-SaaS product that a customer would purchase x times a year? (Something like…socks?) Even then, it seems the other rules would need to apply at the same time.

    • I think all of these could pertain to non-SaaS, physical products. But I agree that regardless of the product or business model, the rules around – and consequences of churn – totally apply.

      It’s just harder to know in a non-subscription business (physical or otherwise) when a customer that was a customer once isn’t a customer anymore. At least in a subscription business they have to actively quit, so you know they’re gone.

  3. That’s an interesting thought experiment, but do you think that people with the “grow at all cost” mindset go into this kind of strategic breakdown, or do you think they just don’t understand the importance of targeting?

    • I put this post out there because I don’t think enough people think about this stuff.

      That said, eventually all companies get around to thinking about reducing churn; some companies are forced to go through that thought process earlier than others.

      I know that some founders that have the “grow at all costs” mentality will exit their startup(s) – voluntarily or not – having never have to deal with this… but those that come in to the company after then certainly will.

      Unless you can guarantee that it’s something you can get out before having to deal with, it’s probably good to think about this stuff as early as possible.

  4. I get where you’re going with example #4, but I’m not sure I agree with it completely. Having the ability to outlast your competitors is definitely an advantage, but I don’t think I’d go as far as saying high churn is okay in that situation.

    Not many companies can survive with high churn, regardless of their backing. Typically, if they don’t resolve the deeper issue at hand they’ll have a tough road ahead of them.

    Anyway, still an interesting viewpoint on churn. Thanks!

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