When it comes to customer churn, there are two kinds: avoidable and unavoidable.
But I guarantee that the amount you label as “unavoidable” is actually much smaller than you think.
I know, but…
“Most of our churn is out of our control, so it’s unavoidable”
“We sell to SMB and in that market churn is inevitable.”
Accepting that churn is inevitable since x% of companies fail every year is like saying why workout, you’re just gonna die anyway.
But the excuses continue…
“We have a low price, so of course we have high churn.”
“We sell to [a certain market segment] so of course churn is high. That’s just how this works.”
“We sell to a very transient market, so of course churn is inevitable”
To paraphrase a monologue from this Seinfeld episode:
“No matter how desperate we are that someday a better customer will emerge, with each notice of cancellation, we know it’s not to be; that for the rest of this sad, wretched pathetic quarter, this is who we sell to, to the bitter end. Inevitably, irrevocably; low churn? No such thing.”
SO MANY SaaS – and other types of companies – make this costly assumption, so let’s dig into why this is a dangerous myth.
Time to Reevaluate Unavoidable Churn
It’s very easy to fall into the “unavoidable churn” trap, but you must resist it at all costs.
Which means you can’t blindly accept any churn as “unavoidable.”
You have to challenge that notion every time it surfaces.
In fact, anytime you find yourself saying churn is unavoidable, put a dollar in your “unavoidable churn” pizza fund jar (buy pizza for your team with that later) and then go research whether your assumption is correct or not.
In my experience, actual unavoidable churn is much lower than most people think; not sure why it is, but for some reason we generally accept that churn just happens.
That isn’t to say that some churn doesn’t happen, or that a portion isn’t truly unavoidable – it does and it is – but churn will happen a lot less if you figure out the root cause and do the things necessary to keep it from happening in the first place.
Segmenting Avoidable vs. Unavoidable Churn
Okay, to figure out what part of your churn was avoidable vs. unavoidable, look at your overall churn numbers for the last year and pull together a list of all the customers that churned out in that time period.
Now, sit down with your team and look at the actual churn – on a customer basis if you can, or at least on a logically-grouped (cohort) basis – and say “of this churn, what do we think is truly unavoidable – churn we’re not going to worry about – and what do we think we actually could have controlled?”
When you find that something was, actually, avoidable, spend some time talking about what could be done – in the future – to keep avoidable churn in instances like that customer or cohort from happening again.
Focus on the future, not the past, when talking about what can be done (not what coulda or shoulda…).
In fact, two keys to making this work are:
- Be honest with yourself. Only 100% honesty will work here.
- Resist the temptation to place blame – either on yourself as CEO or on your team – during this process… what’s done is done. This is about moving forward.
The outcome of this process will be a list of actual, unavoidable churn and some ideas going forward – both high-level strategic and low-level tactical – on how to keep avoidable churn at bay in the future.
Justifying the Plan to Eliminate Avoidable Churn
But ideas are just ideas until you create a plan to execute on those ideas… and then follow-through on the plan.
In order to execute on plans, you often need to justify to someone – your CEO, board, boss, or yourself – that following through on those plans makes good financial (or strategic, or marketing, etc.) sense.
So let’s look at what going through this process might mean using a completely made-up scenario. (if you have only one customer segment, just apply all of this to that one level)
As you go through this, you’ll quickly see how it becomes really important to get precise. It’s easy to say, “I want to move my overall churn rate from 10% to 8%” but what does that really mean? Let’s find out.
So imagine your company has $10M in Annual Recurring Revenue (ARR) and it’s broken out in 3 buckets; Top, Mid-Market, and Small.
Now, imagine you discovered that your avoidable churn rate was 5% overall. As you analyzed the data, you see that this breaks out into: 2% in the Top accounts, 5% in the Mid-Market, and 10% in the Small group.
By breaking it down into what’s avoidable and then breaking that avoidable churn down by segment, you can start making some much more realistic assumptions around what you can do to positively affect this avoidable churn.
Maybe you say you’ll move your enterprise churn from 2% to 1% and cut your mid-market churn in half to 2.5%, which could be significant, and your Smaller company churn down to 8%.
Interestingly, while you could have said you just wanted to reduce overall churn from 10% to 8%, which is actually the result we’d get by reducing avoidable churn from 5% to 3.4%, doing it the way we did in this exercise gives you an idea of how to actually move forward to reduce that churn.
The high-level, overall churn method may give you a number, but is hardly actionable.
Avoidable Churn Reduction by the Numbers
Percentages and rates are great, but let’s boil this down to something even more tangible.
If you take the average Annual Contract Value (ACV) per customer group, you’ll quickly see how this plays out in terms of actual customers saved: 1 more customer in the top accounts, 2 extra customers in the mid-market and 24 in the small customer group.
This is when this all becomes real; it’s no longer “let’s reduce churn from 10% to 8%” but now it’s “hey, we can save 27 customers!”
Having a very specific goal in place like this, around a metric everyone instantly understands – customers – makes it much easier to put a plan in place and rally the troops.
Okay, so it should be clear that separating Unavoidable and Avoidable churn is a powerful way of moving forward in your business.
But I want to specifically call out the…
Top 3 Mythical Reasons for Unavoidable Churn
You’ve heard this – and probably said it – the only acceptable churn is from “death, marriage, or divorce.” I don’t agree with that sentiment anymore. Those traditionally accepted reasons for churn were identified at a different time; Customer Success was not a strategic advantage as it is today.
Allow me to flout convention for a bit…
Unavoidable Churn Myth #1: Customer Goes Out of Business
Your customer going out of business is probably the number one “acceptable” reason for churn, but it shouldn’t be.
You shouldn’t be fine with a client who’d have a high chance of going out of business. Maybe there’s an opportunity for better sales qualification up-front or better targeting in your marketing efforts.
Or maybe there’s a way for your product to continue to be used regardless; I know of several technology products that continue to be used by investors, executives, and employees well beyond the life of the company that originally purchased them (and beyond the next couple of companies, too!).
And if you have a product that is central to the success of your customer’s business – from operations to finance to HR to marketing – and you have a large amount of churn due to customers going out of business, you may want to look at how you could better contribute to their success.
While there are many factors well beyond the scope of what your product does – and well beyond your control – think about this: what could you do to help your customers NOT go out of business? If anything, that’s a very powerful thought experiment.
Unavoidable Churn Myth #2: Customer Gets Acquired
The second most common acceptable reason for churn is that your customer gets acquired. This really isn’t that frequent of an outcome for a business, so the fact that this is the second most common acceptable reason for churn is interesting.
But that fact aside, your client getting acquired – assuming you did your job right – should actually be an expansion opportunity for you… not an acceptable churn event!
Accepting that churn is inevitable when a customer is acquired doesn’t just result in that customer leaving, but keeps your company from realizing the expansion potential within the new organization. That’s a double-whammy!
Unavoidable Churn Myth #3: Sponsor Change
The third most popular reason for “unavoidable” churn is sponsor change, or when the person you sold to last (your internal champion) leaves. I’d argue that it’s totally avoidable; if you had multiple sponsors within your customer’s company, you could keep the relationship even if one of them left.
In fact, I’ve created a Customer Success Growth Hack (here are slides from a presentation I gave on that topic) called “3×3 Relationship Redundancy.”
The “hack” is simple: identify three people at your customer, and three people on your end to reach out to them at least once per month. If someone leaves – on either side – there’s relationship redundancy in place so the account is not at risk.
Again, while some churn is unavoidable, a lot of what we classify that way is actually quite avoidable. That’s why going forward, you should…
Focus on Avoidable Churn
When you’re looking for actionable data, I would focus less on your total customer churn (any roll-up metric like that is not something you can take action on, anyway) and instead focus on segmenting unavoidable and avoidable churn, and focusing your attention on the latter.
Chances are, you have two or three – or 17 – reasons your customers churn that you have designated as “unavoidable” … my challenge to you is to go open the cold case file on those, re-examine the evidence, and find out whether those really were unavoidable.
Bonus points if you retroactively fund the “unavoidable churn” jar and add karaoke to the pizza party for your team.
Customers are a Choice
If you’re selling to customers that churn at a super-high rate, and you’re complaining about it (lots of companies sell to high-churn markets, make a lot of money, and don’t complain), remember this:
YOU GET TO CHOOSE YOUR CUSTOMERS!
If you stop doing random things and get deliberate in your marketing and customer acquisition – focusing on your Ideal Customers – and dropping the whole “vendor as victim” mentality, you’ll not only reduce your churn, but also be happier.
In fact, in situations where you’ve worked diligently to eliminate avoidable churn, you can reduce unavoidable churn even more by identifying customer segments less likely to churn at such a high rate and focusing on acquiring more of those.