How To Think About Churn & Why It’s Killing Your Business


What’s up, everybody? Dan Martell, here– a serial
entrepreneur, investor, and creator of SaaS Academy. In this video I
want to teach you why your churn is hurting
and potentially killing your business, to teach you
how to understand churn– I’m just going to
pass this to Jared– how to understand churn,
how to fix it, and really understand the true cost. Be sure to stay to the end when
we’re going to share with you an exclusive resource called
the churn buster cheat sheet to help you stop the
bleeding and also scale up your marketing. Let’s get into it. So recently, I was
doing a growth session with a potential
new coaching client and we were just going
through understanding their business, where they’re
at, where they want to go. And the question
of churn came up. And they said this–
oh, it’s not that bad. It’s only about 20% per month. My brain kind of
went like, whoa. And I just asked him– I said, do you realize
that 20% per month– that means that
if you didn’t add any new customers,
essentially in five months, you’re going to churn through
all of your existing customers. And they’re like, what? I was like, yeah. Essentially, 20%– five months– 100 percent. It’s a big issue. So they didn’t
even understand how big of an issue because it
makes it really hard to scale. And when I explained
it to them, then we talked about how would
you measure it, what are the strategies to fix it. And that, to me, is what I
want to share with you today because I think that churn
is a really weird thing. And people don’t
really understand it– how it impacts your
financial reporting– but also why it’s truly
killing your SaaS business and how to fix it. So let’s get into it. Number one, churn flatline. So I call this moment where
your growth rate goes like this and slowly declines
and declines to a point where you start going sideways. Usually when I get the call– so SaaS founders will reach out
to me usually around year three or five because what’s
happening is their ability to add new customers
on a monthly basis to overshadow the total
percent– because it’s a net number, but it’s a
percentage– of customers that they’re losing
hits, essentially, the flatline– the threshold. Let’s say– when you’re
small and you’ve only got like 20 customers and you’re
losing a few, you can usually add a lot more, right? But whatever that number is,
your ability to add how many x amount of customers per month
and the percentage of churn– so just figure it out
for your business. That will be your churn
flatline if you don’t figure out expansion revenue–
how to capture more value from your customers. I’m going to talk to you
later in this session on how to fix it. But the big thing
is understanding that at some point,
you’re going to hit the churn flatline, which
means that your ability to replace customers is at
the same level as the amount of customers that you’re
losing from a churn problem. You want to run the
math for yourself and figure out what
that is because that’s going to give you a
clear indication of, even if we spend, based
on what we’re doing today, we’re going to hit a
flatline in our growth. Number two, maximum
viable churn. Now this is a concept that I
got from Tomasz at Redpoint. If you don’t read
his blog, you must. It’s incredible. Just search Tomasz. It’s actually Tomasz
from Redpoint. I won’t even try to
butcher his last name. But it is all about SaaS
and growth and stuff. And he talks about
maximum viable churn. And in there he
gives an example. Now, I’m not going
to get into the math. But the whole
argument that he had is that your churn is
impacting your ability to grow. And here’s a way
to think about it– if your sales efficiency rate–
let’s say you’re a 3 million ARR business. You have a 5% monthly churn. And your sales
efficiency is about 0.8, meaning that it takes you
like eight– out of a year– takes you eight
months of a spend– so whatever your CAC is–
your cost acquire customer to your LTV– let’s say it’s $1,250
to acquire a customer at $1,500 a customer. If you run the numbers
with a 5% churn, means that you’re going to spend
through 60% of your revenue for that year just to
replace the lost customers– to acquire new customers. Not to grow, but
just to replace them. And it’s a really
important understanding because in doing the math,
when you look at it that way, if you’re trying to
create forecasts, if you’re in the
fundraising mode, if you’re a venture
backed founder, then you need to
calculate not where you need to be for the next
level of funding based on MRR, but how does churn impact that. So a lot of people– they’re
like, OK, we’re at this level. We’re at a million and
we want to get to three. We need to add two. No, you don’t. You don’t need to just add
two by going to say, OK, well what’s our LTV per customer? We need to add x
amount of customers. You have to also then calculate
over that period of time how is churn going to
impact your revenue growth and make up for it. So when you think about
the amount of money that you’re going to need to
raise based on your ability to acquire customers,
the number could be dramatically
different than what you think if you haven’t
run through this math and this understanding
of that concept. So minimum viable
churn is understanding what your minimum churn
allocation or allowability so that you are able to grow
your top line revenue to hit your next
round of funding. Because if you don’t,
what I’ve seen many times is unfortunately a down round. So understand not only your
growth targets, but your churn and how that’s going to
impact what your needs are going to be from a capital point
of view to hit those targets. Number three, moment of churn. So one thing I want to
share with you guys is, what does true churn mean? Recently, I was
working with a client and they found out that
their customer success team had a very
sneaky thing they were doing because their
definition of churn was a canceled account. So customer success had a
metric of improving retention. What he found out was that
their customer success team was convincing customers to not
cancel or close their account, but essentially go to a
no-cost monthly membership to a pay per use. Now, this is a very
creative solution. It’s easily fixable. But if you don’t know– you manage what you measure. They measured it. And then they realized
the customer success team was being sneaky about how
they do it because essentially, the account never canceled. But there was no new revenue. So technically, it was canceled. But they went at it
as a pay as you go. So essentially, if you ever
want to do this in the future, you can just pay every usage. You don’t have to pay the
monthly, which is obviously not the way I would calculate
revenue and revenue churn. But here’s the thing. There’s two types
of churn that’s going to occur in your business. There’s cancellations and
there’s involuntary churn. A lot of founders don’t
realize involuntary churn could be up to 20% to
40% of your total churn. And that’s usually caused
by payment failures or roles changing and somebody at
the company still wanting to use the product, but
nobody updated the payment. So it’s usually a payment issue. And there’s a bunch
of different reasons. I’m not going to get into the
credit card decline situations because there’s a whole
lot of different scenarios. If you want, check
out ProfitWell. So Patrick Campbell, the
founder of ProfitWell, has built an incredible tool
that you can use for free. And they get paid
on a success basis to fix your involuntary churn. Also, check out–
flexpay.io is their website. They’re really about increasing
the credit card side, not the credit card
dunning challenge. So check out FlexPay– two incredible companies. And Darryl, the founder,
is a good friend of mine. So cool products that’s going
to help with involuntary churn. But there’s also the
cancellation churn. Now, here’s the thing. If somebody has already
paid for the end of the month with their
monthly subscription but they canceled a
third through the way, I just want you to
know that they’re not technically churned yet. The churn happens when they’re– essentially, their payment or
their billing doesn’t renew. So even if they cancel a third
of the way through the month– and this is something I teach
called the cancellation request flow– is we want to make
sure that we have a process for capturing
that cancellation and engaging with them
to save the account. There’s probably 30% to 40%
of canceled accounts that happen in that scenario
that could be saved through downgrades, showing
your solution, talking to them about their problem. Sometimes there’s
features that you have that will help provide
the benefit your customers that cancel lost
because they didn’t even know– they weren’t even aware. So to me, it’s just
really understanding the moment of churn
under those two filters– involuntary and
cancellations– and knowing that there’s actually things
you can do to improve it. So make sure that you understand
and define that with your team. What does churn mean? Because a lot of
founders have not had that conversation
with the team. You’re going to run into issues
like I mentioned earlier, where your customer
success team is fixing retention but
involuntarily masking it, more than anything. Number four, fight the impact. Here’s the deal. There’s only a few ways–
really five key things you can do to fight
the impact of churn. Now, I’m going to tell you
how to get my churn buster cheat sheet. But these are the
five things that you need to understand to really
overcome revenue churn. One– you need to be growing
your new active trials or sign ups or sales. Essentially, you need to
be able to grow faster than your churn account
just by being more efficient in funnels,
marketing, and becoming cheaper on your CAC so you can grow it. Find new channels, et cetera. So that’s number one. Number two is raise prices. Now, here’s what I know. So one question I love
asking my founders– if somebody bought you
tomorrow from your industry– they bought your
business tomorrow– what is the first
thing that they would change in your business? And I got that question
from Andy Grove. He wrote a great book called
High Output Management. And the reason I ask that
is because there’s things that you know as a founder
that you should change that you probably haven’t
because of whatever reasons, whatever
values, whatever beliefs that you’ve had– that somebody that actually
is more knowledgeable would make that in a heartbeat. And raising prices is
definitely on that list. It’s typically the first thing. If a private equity firm
buys your SaaS business, it’s the first thing
they’re going to change. So that’s two. Three is improve your
retention– actually build a concerted effort
to increase your retention. Number four– see four just
pops up there with the pinky. Number four is improve your
up sales to be able to have– a lot of founders don’t have
a strategic product strategy, essentially for
packaging and add-ons, et cetera, to create
expansion revenue. I’ve got another growth
stacking session just on how to increase
your expansion revenue. So search that in my name. And then number five is
improve your down sales. So if you have
people that are going to churn because
they’re at this level, figure out how
you can increase– instead of canceling
on you, get them to take maybe a lower plan. Maybe– some people talk
about putting a pause plan or adding some value and
keeping them on the plan. But you’ve just got
to reduce and improve the down sales as well. So those are the five ways
to fight back on churn. So quick recap on how
to think about churn and why it’s killing
your SaaS business. Number one, figure
out what your flatline is today in regards to
the ability to replace– being less than your
total number of customers that are turning every month. Number two, maximum
viable churn. Figure out, based
on your CAC, what you need to get from
an MRR point of view. If you’re in that
fundraising mode or you set some
aggressive growth channels and you’ve got so much
capital to grow into, don’t forget to take
into consideration the lost customers
to essentially stack on top of your new MRR growth. Number three, moment of churn– getting clear with your team– what it means to
churn and understand involuntary versus
cancellations. And number four,
how to fight back. Review those lists of
five and educate yourself on how to improve your
expansion and your MRR growth. As I mentioned in
the beginning, I want to share with you an
exclusive resource called my churn buster cheat sheet. Essentially, it’s nine
different strategies that you can deploy
into your SaaS business to really dial in your
churn to reduce it. Now, you’re always
going to have some. Because of your market, you
might be SMB, mid-market, or enterprise. But getting into
those industry norms and understanding
what those are– you can learn all about that
if you click the link. Download the churn
buster cheat sheet below. I really break it down and give
you those specific strategies. If you liked this video,
I would love a like. Or if you’re new, subscribe. And if there’s anybody that you
feel this video could serve, feel free to share it
with them directly. As per usual, I
want to challenge you to live a bigger life
and build a bigger business. And I’ll see you next Monday. Employed. Employed, deploy,
re-ploy, impact.

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6 thoughts on “How To Think About Churn & Why It’s Killing Your Business

  1. Are you being careless with your customer churn numbers? Watch this week's episode to make sure you won't regret ignoring it 5 months from now.

  2. Didn't raise yet but it's a must to learn as much as possible before managing investors money. Thumbs up samurai!

  3. If you had a software for businesses and a recurring payment system and you had to choose between pricing for each employee registered (somthing like $25 per employee each month) and using fixed prices (less than 10 employees $100, between 11-25 employees $200, etc) which one do you think is better?

  4. Great video Dan. I wonder can you do an episode about, " Should or shouldn't you start a saas base business? " As I'm currently, considering should I turn my existing business into a saas.

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