Churn is a drag on growth. Churn hurts company valuation. There is no good reason to have churn in your business.
I did an “Ask Me Anything” on Slack as part of the build-up for my “Building an Engine of Growth” Workshop and Keynote at SaaStock 2016 in Dublin, Ireland and it was awesome… until the last question, which started out like this:
“I’ve always felt like Lincoln’s recommended churn rates are, in many cases, unreachable.“
Oh no… and I’d been having such a great time until that point. He went on to say…
“Yes, I understand low churn rates are best for business, but realistically, how many companies actually do have 5% annual churn instead of what I more commonly hear which is closer to 5% monthly (painful, but technically survivable).“
Who starts a business to just “technically survive.” WTF?
Well, even though what I talk about is unrealistic, he still wanted to know how to lower his churn from 5% per month to, you know, 1 or 2% per month.
Okay, so I composed myself and addressed his question… and I thought it would be useful to you, too.
But first, let’s get clear on why so many people think near-zero churn is unrealistic; they’re trying to justify negative results by blaming the customer instead of owning their failures.
Roughly 100% of the time, the pushback I get around my “unrealistically low churn” is from executives, leaders, founders, etc. of companies that haven’t been deliberate in their growth.
They didn’t identify an Ideal Customer Profile and didn’t specifically target those customers with their sales and marketing efforts, essentially taking whatever customers came their way.
Because they didn’t develop an ICP – or otherwise take the time to learn about their best customers – they didn’t know their customer’s Desired Outcome.
Not knowing the customer’s Desired Outcome, they failed to orchestrate and operationalize an experience that ensures the customer continually achieved value, causing the customers to churn out at a high rate.
And then they’re like, “well, I guess 45% annual customer churn is just the norm.”
It might be the norm, but that’s because so many companies do so many things wrong!
But just because it’s the norm, doesn’t mean it has to be your experience.
If I were you, I’d want to do what the best companies do, not the average companies.
Level-up Your Understanding of Churn
To really understand all of this, you need to get clear on a few things:
- The difference between Customer and Revenue Churn
- The fact that Churn is a Symptom, not a Disease
- What Customer Success is in the first place
- The Only Two Reasons Customers Churn
- 5 Lesser-Known Ways Churn Hurts your Company
- 7 Ways Customer Success Drives Company Valuation
Okay, so now that you’ve leveled-up your understanding of churn, here’s…
The Recipe for Near-Zero Churn
Here’s the three-part not-so-secret secret to near-zero customer churn:
- Acquire good-fit customers; that means actively turning away those customers that are a bad fit
- Get super-clear on the Desired Outcome of your Good Fit (Ideal) customers, which is made up of Required Outcome, or what they need to achieve, and Appropriate Experience, or how they need to achieve it
- Orchestrate and Operationalize the journey to achieving that Desired Outcome – from marketing and sales, to onboarding, across all of their interactions with your company, in-app and beyond – understanding that the same Required Outcome may be shared across discrete customer segments, but the Appropriate Experience could vary wildly from segment to segment
- Bonus: Since you have Good Fit customers that are achieving their Desired Outcome and you aren’t in fire-fighting, save-the-customers mode, you can now focus on Logical Account Expansion.
That’s it. (Easier said than done, obviously, but it’s a pretty simple concept to grok.)
Okay, I guess that’s not so much a secret as something a lot of companies know, but choose to ignore.
That success recipe requires you to figure out what it’s going to take for the customer to be successful – what they have to do, what you have to do, what the product does, what you can do for them (for a fee), etc. – and operationalize around that.
Of course, that may require you to completely change everything about your business, but don’t say it’s not possible to achieve super-low churn rates. It is, you’ve just chosen to do business a different way.
Oh, and you need to be aware of…
The Storm before the Calm
When you decide to get deliberate in your growth, you may encounter some obstacles that will test your commitment to doing what’s right.
- Your new business conversion numbers will go down because your pipeline is full of bad fit customers that you’ll stop closing, but your conversion rate will go up. When we ramp marketing/sales around good fit customers, your conversion numbers will go back up.
- Your sales pipeline will be cut in half (or more) because, as above, it’s full of bad fit customers that you’ll kick out of the pipe. Of course, we’ll replenish what we remove from the pipeline with more good fit prospects, but at first, it’ll look bad.
- Your Customer Churn will go up; as you actively jettison bad fit customers, you will experience a cycle or two where churn is higher than it ever was. Once those bad fit customers are gone and you’re actively acquiring good fit customers with success potential – and then working to ensure the customers achieve their ever-evolving Desired Outcome – churn becomes a non-issue.
You have to understand that those things are going to happen and you need to manage expectations with everyone (executives, the board, etc.) that – because you screwed up so bad to this point – tweaking little things here and there isn’t going to cut it; you need to rip it apart to make it stronger.
Now, let’s tackle this typical refrain…
“But My Market has High Churn”
I can almost guarantee someone reading this post – not you, of course, but someone – will read my words and say “yeah, that’s great, but there’s just a lot of churn in my market…”
Yes, some markets that you choose to do business in – or some customer segments within a market – may have customers that churn out more than others.
Maybe this is because companies in that market go out of business frequently, maybe they get acquired at a higher rate, or perhaps they are simply more transient in nature (seasonal, project-based, transactional, etc.).
If those things are actually true for your market (they generally aren’t; they’re usually something you think, hope, or made up as the reason for your high churn), then those are the realities of the market you chose to do business in.
Frankly, they may not even constitute “churn” as much as “they did what they needed or outgrew your solution and moved on.” Sure, that’s a negative hit to your revenue, but it’s very different than a customer churning out for not achieving their Desired Outcome.
What’s usually true when it comes to churn is that your customers failed to achieve their Desired Outcome – either because you signed customers without Success Potential in the first place or failed to deliver on your promise to Good Fit customers – and they churned out; they either actively cancel (if contractually able; some will even pay a fine to cancel) or simply decide not to renew.
Which means you need to understand…
Avoidable vs. Unavoidable Churn
Unavoidable Churn is when, regardless of what we do (because they’re a bad fit, don’t have success potential, or they go out of business, etc.), customers are going to churn.
Customers that would continue being our customer if we proactively ensured they continued to achieve their ever-evolving Desired Outcome, but who cancel or don’t renew because that didn’t happen, are referred to as Avoidable Churn.
There’s actually a secondary classification that helps us get an even better grasp on what’s going on with our churn and that is Expected vs. Unexpected. We’d say those that didn’t have success potential were “expected” since there wasn’t any way they were going to be successful, while those customers who were on Positive Success Vector but suddenly went out of business were “unexpected.”
Now, unless you’ve done everything wrong in your customer acquisition process, the amount of churn you have that is truly unavoidable is likely FAR lower than what you think (or want to admit).
Pulling it all Together
Will you ever get to zero customer churn? I don’t know, but you should try. If you have any churn, you should learn from it, and try to reduce it.
Customers that churn out stop paying you.
Customers that churn out, take with them what you’ve spent to acquire and serve them as they leave.
Customers that churn out add no value to the business; they only reduce value.
Churn is a symptom of something else that’s going on; you’re acquiring the wrong customers or not helping the right customers be successful.
Churn is ultimately your fault and if you choose to ignore that, fine; but don’t blame your customers.
By ensuring the customer is on a path to achieving their Desired Outcome, you reduce avoidable churn.
By being deliberate and only acquiring customers with Success Potential, you reduce unavoidable churn.
That’s not just how you get to near-zero churn… that’s how you build a real, sustainable, and efficiently scalable business.