As executive-in-residence at Scale Venture Partners, I’ve worked with a number of SaaS startups to help them refine the efficiency of their operations. One of the things that is often neglected is customer churn. Early focus on churn helps build discipline that becomes even more important as a company grows to $100 million or more in revenues.
In the bad old days of on-premise Enterprise software, a startup was considered to have traction when it got its first dozen paying customers. These were typically six-figure deals and required a lot of heavy lifting to get the customers into production. While the old-school field sales model was not particularly efficient, it had the virtue of driving an organization toward making early customers successful.
When you have hundreds or thousands of customers, though, things can become rather anonymous and it’s harder to make sure customers are using your product correctly. If customers aren’t successful in using your product, they churn.
Having churn is like rowing a leaky boat. After a while, you spend more time bailing water than moving forward. By contrast, organizations that focus on reducing churn will find that their revenue grows every quarter.
Break it down
To accurately measure what’s going on, you should begin by breaking out churn (customer cancellation) from contraction (a downgrade in spending). Measure downgrade and churn separately from upgrades and expansion; otherwise, your net growth numbers will mask problems that are bubbling below the surface. If your SaaS product has different editions (e.g. Basic, Pro, Enterprise) you should watch for downgrades that suggest customers are not seeing the value in the higher-end features.
It’s also worth paying attention to churn and contraction by customer segment. In most SaaS businesses, churn is highest in low-end customers — some of whom will inevitably be acquired or go out of business. Over time, if you move upmarket to larger SMB or Enterprise customers, low-end churn becomes less significant. Customers who spend a lot of money usually have greater commitment and resources for working through any speed bumps during implementation. They’re also far less likely to switch to another vendor with newer features.
Understand the reasons
The most important thing is to understand why customers are downgrading or churning. While it’s easy to speculate, the best approach is simply to ask your customers. Remember, your purpose in doing this is to understand the customer’s experience, not to second-guess them.While founders sometimes get defensive, recognize the value of the feedback you’re getting, even if it’s negative. And make sure that this information is shared within the company.
Classify your findings to determine whether it was a customer issue, a sales issue, a product issue or some external factor. Did the customer not understand what they were buying? Did they lack the skills to implement your product? Was it missing key features? Were there quality or reliability issues?
Your first line of defense in reducing churn is to make sure your product lives up to its marketing claims and that it quickly delivers value to the customers. Depending on your product, it may be worth adding some introspection to help you determine usage patterns — less-frequent log-ins, for instance — that suggest a customer is at risk of churning.
Try a human touch
At Zendesk and MySQL, we implemented several customer programs to reduce churn and benefited from below-industry churn rates. I wanted to avoid being the kind of company that only calls up customers when seeking a renewal. Instead, we built a Customer Account Management team that worked with customers over the entire lifecycle.
We defined a twelve-month program with regular check-ins, emails and phone calls to make sure customers were successful in using the product. The Customer Account Managers also kept their eyes peeled for issues that might suggest the account was at risk of churn, such as if a new manager was hired, or if certain features weren’t being used. They kept accounts up to date with information about best-practices for customizing their setup, implementing new features and so on. When necessary, the Customer Account Manager could call on resources in engineering or elsewhere to solve a customer’s issues.
Occasionally, fast-growing customers would outgrow their initial setup. We worked proactively to help them through these situations. While this meant undertaking some modest amount of services for free, the alternative was far worse: an unhappy customer who would inevitably blame our software. In general, by being proactive, we could turn these situations around and win the ongoing loyalty of what would otherwise have become a problem customer.
Move toward negative churn
In a rapidly growing business, you may experience “negative churn,” meaning that your upgrades and expansion more than make up for contraction and churn. But even in this kind of scenario, it’s vital to pay attention to churn. To fail to do so leaves you blind to trends of customer dissatisfaction that may indicate fundamental problems with your product or your business model.
While some modest amount of churn is inevitable, you should strive to get your churn rate as low as possible and then continue to monitor any changes. If your churn rate is more than 10 percent annually, you have work to do.
Zack Urlocker is Executive-in-Residence at Scale Venture Partners. He was previously the Chief Operating Officer at Zendesk and the VP Products at MySQL. Reach him @ZUrlocker
Feature image from Thinkstock/AleksandarVrazlski