The Four Kinds of Churn
this is a guest post by Kareem Mayan. customer retention was a recent topic in our predictable revenue online hub, and he dropped some knowledge for everyone on the different types of churn and how to manage them. Kareem sold his last SaaS business, and is now a principal at TheChurnGuys.com, a consultancy that helps SaaS companies reduce churn. thanks for this great piece, Kareem!
“Churn” is too vague a word to be useful when talking about growing your SaaS business. You need more context to understand what someone means: revenue or customer churn? Billed monthly or annually? And which of the 43 ways is it being measured?
When it comes to improving your churn, the same holds true. You want to unpack the type of churn that’s causing you grief, and then solve for that specific kind of churn. In my five years running SaaS businesses, I’ve learned that:
There are 4 types of churn
- Onboarding
- Product
- Credit card
- Champion
Your approach to reduce your churn will be different depending on the type. Below, I’ll describe the four kinds of churn, the metrics to pay attention to, and a few tactics to address each kind of churn.
1. Onboarding Churn
The happens when your customer doesn’t get to a first good experience and thus decides your product isn’t for them. Another way of describing this is that your customer doesn’t have the “a-ha” moment — the moment where they understand how your product will solve their problem.
Who Owns This
Your Customer Success and Product teams play a major role here. They need to understand what value your customers expect from your app, and help them get it as soon possible (this measure is called “time-to-value” in the Customer Success world). Product can always make the onboarding experience tighter, but Customer Success may need to step in with training, webinars, phone check-ins, lifecycle emails, etc. for those that don’t see value after signing up.
Key Metrics
– At risk users. You’ll want to determine how to measure your app’s “a-ha” moment (see how we did it at my last SaaS company here). You can figure this out by looking at what your current customers did in your app that your churned customers didn’t do.
Once you know what these “a-ha” metrics are, your Product team should change your onboarding flow to increase the likelihood that customers will have an “a-ha” moment soon after signing up. And Customer Success will want to keep a close eye on who hasn’t gotten value after signup (your at risk users) and proactively reach out to help them get to the “a-ha” moment.
– Trial-to-paid conversion. This is the ultimate indicator that a customer values your service: what percentage of signups end up paying you?
– 30 or 60 day churn. Even after customers pay you, the risk they churn in the first couple of months is higher. Measuring churn in the first 30 or 60 days after a customer starts paying you will help you understand and overcome the obstacles they face that prevent them from using the tool regularly. Is your service easy to integrate into their workflow? Can they drive adoption internally? Does it solve their problem? Do customers need more training, more material to socialize your app internally, or better product hooks to drive adoption?
Once you uncover which customers are leaving in the first couple of months after signing up and understand why, you’ll be in a better position to fix your onboarding churn.
2. Product Churn
This happens when the product doesn’t appear to solve the problem that the customer needs solved. This is fatal if not resolved: high product churn usually means you’re not in a good market with a product that can satisfy the needs of that market (e.g. you don’t have product-market fit).
This churn can happen for a variety of reasons, things like a bad product, or the wrong customer for the product, or a price that’s too high.
Who Owns This
Product, Marketing, and Customer Success typically play roles in reducing this churn. Marketing needs to bring the right customers to your site. Product, Marketing, and Sales need to make sure plans are segmented correctly and pricing is appropriate. Customer Success needs to understand who your at-risk customers are, and have a process in place to help them.
And most importantly, Product needs to understand the core customer problems and build a solution that elegantly solves them.
Key metrics
– Engagement. What are the key activities that a customer should do to get ongoing value from your product? And what are the activities they should do to engage deeper and make it more valuable to them? These are your key leading indicators of churn. It’s key that customer success is on top of these metrics to understand who’s at risk.
– 30+ or 60+ day churn. Once a customer gets over the post-sales high-churn hump (usually 30 to 60 days; at the last SaaS company I founded it was 61 days), you want to keep an eye on this figure and make sure it stays low.
If it creeps higher than you like, try looking at 60+ day churn on a cohort basis by signup date, marketing channel, pricing plan, amount paid, feature usage, and cancellation reason. You’ll likely find some clues as to how to bring it down.
3. Credit card churn
If you take credit cards, this kind of churn occurs due to failed payments and expired cards. Roughly 3% of your customers’ cards will expire every month, which means 36% of payments may fail per year just due to expiring cards. This doesn’t include cards that fail due to other reasons (card over limit, card number changed, etc).
Who Owns This
This is usually a Product or Revenue team function. You can reduce this by sending emails out when payments fail (called dunning emails). You can build this in-house or through a 3rd party SaaS app. Another way to attack this is using a “card updater” service that’s offered by many credit card gateways. It ensures a customer’s card will continue to work even if the physical card gets replaced by the bank (due to, saying, expiration or theft). A phone call to the customer is also incredibly helpful to save a customer with a failed credit card.
Key Metrics
Since credit card churn is immediate (in the case of a failed payment) or possible to see coming (in the case of an expiring card), most of these metrics help you understand and anticipate the impact on your cash flow.
– Expiring dollars
How many dollars are expiring in the next 30-60-90 days? How will this impact your ability to spend over the next 90 days?
– Failed dollars
How many dollars are currently in a failed state? These are dollars you’ll lose unless a customer updates their card.
– Time to recover
How long does it typically take to recover a failed payment? When can you be reasonably sure to get the money back, or kiss it goodbye?
– Dollar recovery percentage
Of all your dollars that go into a failed payment state, what percentage do you recover?
4. Champion churn
Your customer champion or economic buyer leaves, and the new one wants to use a different solution. The best way to handle this is to build other “mini champions” at your customer. This is especially important if switching costs are low.
Who Owns This
Customer Success or your Account Reps can help prevent this kind of churn. One of the best ways to do this is to ask your economic buyer which other people use your software (so you can thank them). Then send those people a gift – fruit basket, bottle of whiskey, Starbucks gift card, etc. This can help inoculate you against the “cleaning house” that occurs when a new economic buyer comes in and wants to boot you — a (now very popular) vendor with useful software — in favor of someone else.
Key Metrics
There aren’t really; keeping on top of champions is a matter of regular contact from your Customer Success team or account managers. Keeping on top of LinkedIn is also helpful, though if you’re hearing about your champion leaving via LinkedIn you’re probably behind the curve already.
Understand, then attack
Since “churn” can mean different things to different people, I’ve found the above frameworkuseful for putting churn into the right context. For example, these two examples both describe “churn”, but are very different in how to diagnose and solve the problem: we’re losing $20k MRR per month and we think it’s due to product churn vs. we’re losing 100 customers per month and we think it’s due to onboarding churn.
Once you understand which of the four types of churn is causing you to lose the most money, you can focus your team around solving the right problem to make sure you get the best bang for your buck.
Thanks to Arif Bandali and Ryan Stocker for reading drafts of this, and to Hiten Shah for helping me understand key components of this framework.