Kyle’s note: For a startup owner, customer churn is one of the most important numbers to understand. It is the key to the maximizing lifetime value of your customers and could mean the difference between success and failure for a business. In this article Dan Virgillito shares strategies to reduce your churn rate and keep your business growing. Over to Dan.
As your startup grows, a percentage of your customers will stop doing business with you, and that’s completely normal. Churn rate is the metric you can use to calculate the amount of customers who abandon your company during a given period of time.
The more existing customers leave, the more new customers you need to acquire to make up for that loss, which means that a high churn rate can put a dent in your company’s growth.
This post shows why customer churn rate is an important metric for startups and how to reduce it to achieve sustainable business growth.
Why is it so important to reduce the churn rate?
Trying to grow a company with a high churn rate is like pouring water into a leaky bucket – no matter how much water you pour into it, the bucket is never full.
For example, if you had 100 customers in the beginning of the month, and by the end of the month 10 of them left, your churn rate is 10%. This means that if you grow by 10% every month, your company stays in the exact same position, despite of all the time, energy, and money you pour into acquiring new customers.
Sure, you might manage to keep your head above the water for a while, but a company with a high churn rate is unsustainable. So if your churn rate is in double digits, reducing it should be your first priority.
And even if your churn rate is relatively low it still makes sense to make an effort to reduce it – acquiring new customers is expensive, so it pays to do your best to keep the existing ones. So how can you stop the bleeding?
You’ll learn all about reducing the churn rate in a moment. But first things first…
3 things you need to understand about reducing churn rate
There are three things that you need to understand about churn rate before we get into the nitty-gritty of reducing it:
#1. Churn rate is your problem
It’s easy to blame ex-customers for your high churn rate. They just don’t get it. If only they could see your grand vision…
Stop right there.
Instead of going back to the starting line, you may need to consider that to some degree it’s your approach that is to blame.
You are the one who is responsible for your business. Miscommunication with customers and mismanaging their expectations can be some things that cause customers to leave.
#2. Churn is a customer life-cycle problem
Many entrepreneurs see churn as a problem of a customer leaving their company – and therefore attempt to solve that problem by trying to prevent that customer from leaving.
However, in reality, churn is a customer life-cycle problem, which means that a customer leaving is a result of a sequence of events – service creation, customer acquisition, onboarding process, usage of your service, etc. – and you should address that entire sequence, not only the end tail of it.
#3. You have to focus on the big picture
Of course, the tactical stuff matters, but it should never come before strategy.
For example, you could spend a lot of time tweaking minor details of your UI, and that would probably help you reduce your churn rate a bit…
Or, you could spend that time improving your customer acquisition process so that you’d attract the right kind of customers, and drastically reduce your churn rate this way.
You have to stay focused on the big picture. Go after big wins first. Then, once you have exhausted all the high-level solutions, you can try minor tweaks. But don’t get distracted by small details to an extent where you forget about the big picture.
Okay, so now that we have these three points covered, let’s talk about the ways to reduce churn rate…
Top 13 ways to reduce to customer churn
Here are 13 reliable ways to reduce customer churn:
1. Make sure that your product is amazing
Companies often make the mistake of thinking that the product is less important than the marketing.
Of course, the problem with that is that if you have a crappy product no amount of marketing will help, meanwhile if your product truly adds value to people’s lives, you will find that it pretty much sells itself.
Noah Kagan, marketing whiz and chief sumo at AppSumo, says that he only works with companies that have an awesome product. As a 30th employee at Facebook, 4th employee at Mint, and the founder of AppSumo, Noah is known for his marketing chops. However, he claims that he doesn’t necessarily consider himself to be a really good marketer, and attributes a lot of his success to working with companies that have products that practically sell themselves. Interesting, right?
Sure, there are snake oil salesmen who make tons of money by selling products that offer little value, but they have to constantly look for new markets since their customers quickly realize that they are getting little value for money.
That’s not a smart way to do business – and especially a SaaS business that relies on customers renewing their subscriptions.
So before you concern yourself with anything else, make sure that your product is amazing, and that it makes the lives of your customers better.
2. Understand your target demographic
Do you know who exactly are you trying to sell to? It’s easy to fall into the trap of trying to appeal to everyone, but that only means that you will end up being so bland that you will appeal to no one. That’s why it’s so important to know who your ideal customers are.
Take a look at MailChimp. They put a lot of time and effort into analyzing the data they gather and determining who their ideal customers are. Then, in order to make the vague concept of target demographic more relatable, they create several customer personas that represent different segments of their customer base.
Now, imagine how much easier it is to make the right businesses decisions when instead of trying to appeal to everyone your aim is to impress the ideal user of your product?
Take time to determine who your ideal customers are and then make sure that you understand them well. Only then you’ll be able to keep your customers happy and loyal.
3. Focus on attracting the right customers
After you learn about your ideal target demographic, you can move towards examining your user acquisition process.
In 2007, O2 Ireland, a mobile phone service provider, had a lot of data from a lot of sources, but little idea as to which customers they should focus their retention efforts on.
So O2 decided to organize and analyze the data. They invested in a data warehouse and business intelligence tools to centralize the process of data collection and storage. Then they started working on making sense out of it all.
Data analysis revealed that only around 65% of pre-paid SIM card buyers had an ongoing relationship with O2 (as opposed to people who only used the SIM card for a short period of time, such as travelers, foreign students, international businessmen, etc.).
That made things much easier for O2. Instead of wasting their efforts in trying to attract and retain everyone, they focused on attracting and retaining their ideal customers.
The key takeaway? Take a look at the data. How can you attract more of your ideal customers? In most instances, data analysis will speak for itself.
4. Set clear expectations and meet them
The worst thing you can do when it comes to customer retention is to overpromise and underdeliver.
A lot of businesses make the mistake of promising things that they can’t possibly deliver.
For example, if you sell email marketing software, it might be tempting to use something among the “Shoot an email, increase profits by 60%” lines as your pitch. But you can’t really promise someone that sending out an email blast will make them a profit, can you?
Yes, hyped up sales pitches might lead to more sign-ups, but those users can end up leaving if the sender doesn’t make a constant effort to retain them.
So, instead of making promises you can’t keep, set clear expectations from the very beginning, then make sure that you meet (or exceed) those expectations.
5. Optimize your onboarding process
Are you aware of the fact that you are probably losing a big amount of hard-won customers during the onboarding process?
Software developer and entrepreneur Patrick Mckenzie says that 40%-60% of users who sign up for a free trial of almost every SaaS application will use it once and never come back.
Some of that is unavoidable, since customers simply realize that the product isn’t a good fit for them. However, a lot of customers who never come back find the onboarding process complicated and give up. And then there are those who simply forget that they signed up for an application. Scary, right?
Patrick’s Bingo Card Creator is a software that allows elementary school teachers to use a list of words to create classroom learning aids.
Take a look at Bingo Card Creator’s funnel analytics:
As you can see, there are drop offs at every stage, and a lot of people never get to actually downloading the PDF, which is the last observable step in the funnel (it’s not possible to track when people print the PDFs). Patrick hypothesized that many users would assume that the process would be too long and complicated and therefore they would quit without getting their PDF.
As a result, he added a visible progress indicator + an option of moving forward without making changes to the default settings which resulted in 90% of people completing the “Customize” step (as opposed to the previous 86%).
Patrick continued that the goal of Bingo Card Creator’s onboarding process is getting the teacher through the funnel to the point where she walks to the printer, sees the cards, and thinks “Wow, my class will love these!” as quickly and painlessly as possible.
And that should be the main aim of any onboarding process. Get your customers through the funnel to the point where they can see the results for themselves. And make sure that they get there as quickly and painlessly as possible.
Take a look at your own funnel. What are the drop off points? Why do you think people are giving up? How can you fix it? Acquiring users costs a lot of time, energy, and money – so make sure to fix your onboarding leaks.
6. Discover and leverage your competitive advantage
What makes you stand out from your competitors?
It’s important to know what your competitive advantage is. When a potential customer looks at your website, is there anything that immediately jumps out at them? You have to give people a reason to choose you over your competitors.
For example, how do you think Squarespace is able to compete with WordPress?
Well, while the open-source WordPress appeals to the technically inclined, it can be quite a challenge to the technically challenged. Meanwhile, the non-open-source Squarespace offers less flexibility, but is a breath of fresh air for those who want a beautiful and functional website, but aren’t sure what words like “HTML”, “widget” or “plugin” mean.
And that is Squarespace’s competitive advantage that keeps them in business and allows them to compete with a monster that powers over 24% of the Internet.
Ask yourself, what is your competitive advantage? Use it to distinguish yourself from others in your industry.
7. Add an extra “Wow” factor to your product
You don’t want your customers to be merely content with your product – you want provide a “Wow” customer experience.
Zappos, the online shoe and clothing store, is legendary for its “Wow” factor.
“Zappos sells shoes and apparel online, but what distinguished us from our competitors was that we’d put our company culture above all else. We’d bet that by being good to our employees – for instance, by paying for 100 percent of health care premiums, spending heavily on personal development, and giving customer service reps more freedom than at a typical call center – we would be able to offer better service than our competitors. Better service would translate into lots of repeat customers, which would mean low marketing expenses, long-term profits, and fast growth” explains Tony Hsieh, Zappos founder.
Of course, you might think that great customer service isn’t that special, after all, most companies try to treat their customers well. But Zappos took it to an entirely new level; their 10 hour customer call is a great example of the experience they provide.
Find out in what ways you can offer additional value to your customers. Creating a beautiful product design, offering shipping faster than anyone else at a small-scale or doing quick repairs are some smart ways to create a ‘Wow’ customer experience.
8. Provide educational resources + customer support
When your customers succeed, your company succeeds. But how can you make your customers more successful?
Simple. Provide educational materials and resources + support. Sure, a lot of your customers know what they are doing, but those who don’t will appreciate your guidance. The better results your customers get by using your product, the more likely they will continue doing business with you.
Take a look at HubSpot. They sell inbound marketing and sales software. Needless to say, most of their customers know a lot about inbound marketing and sales, so HubSpot could have gotten away with a FAQ page and some customer support.
However, instead of taking the easy route, HubSpot decided to do all they can in order to ensure the success of their customers. How?
They decided to educate their customers in inbound marketing. There’s the Marketing Grader where you can enter your website URL and email address and you’ll get a full work-up on how you are doing marketing-wise. There’s also the HubSpot academy where you can learn all about using HubSpot. And then there’s the Marketing Library where you can find guides on a wide variety of marketing-related topics. On top of that, every new customer is assigned an inbound marketing consultant who works with them for the first few months to make sure that they know how to get the most out of HubSpot’s software.
Given all the resources and support they provide, is it any wonder that HubSpot’s customers tend to stick around?
9. Identify “at risk” customers & do your best to reengage them
Customers don’t just wake up one day, think “You know what? I don’t need this”, and then cancel out of the blue.
What are the commonalities among the customers that have cancelled your services? Did they get stuck early on and never completed the onboarding? Did they give your product a try, but didn’t get the results they wanted? Did they log in less and less often? Once you know the signs, you can keep an eye for them, and reengage customers who are about to jump ship.
Intercom.io, like many SaaS products, is built around teams. That means that when one user stops logging in as often as they used to, it’s not a major red flag since they might have simply gone on holidays. However, when an entire team stops logging in as often as they used, then it’s likely that they are going to cancel their subscription.
When Intercom realized that they set up automated emails that were designed to reengage the teams that were about to leave.
Intercom’s Des Traynor says that what really matters is activity churn, meaning customers becoming less and less engaged (as opposed to cancelling their subscription).
You see, keeping an eye on activity churn allows you to reengage customers, because someone who still logs in once in a while is probably someone you can persuade to stay.
So don’t miss the red flags. Once you see them, do something different.
10. Know your weaknesses… and work to improve
Do you know what your weaknesses are?
Here are two questions that you should be able to answer:
Why some people don’t sign up for your service?
What your company is not very good at?
People often say that you should focus on your strengths. Maybe… But if you don’t pay any attention to your weaknesses, you won’t be able to fix them, and that might sink your company.
Take a look at Microsoft. Remember the days when their PCs ruled the market? Yeah, thanks to Apple, those days are gone. But what happened?
Well, there were a lot of problems with Windows, such as spyware, malware, viruses, freezing, etc. Of course, there weren’t any other options. Sure, were was Linux, but only those who were technically inclined understood it. So most people just kept using Microsoft’s software.
And then came Apple. Better design, faster and more reliable OS, in-built security… Is it any wonder that today Apple is rapidly catching up with Microsoft in the PC market?
Microsoft could have made a greater effort to address the problems surrounding their core product. Yet, they decided to sleep on their laurels, and leave major issues such as security to third parties. Their weakness was what enabled Apple to capture a major chunk of the market.
Don’t make the same mistake – know your weaknesses and work on fixing them.
11. Listen to your customers
Many companies only interact with their customers when someone has a problem or when they want to upsell.
However, how can you expect to understand your customers, create a product they want, and help them succeed if you don’t actually interact with them?
Here are three things that you should be doing if you want to understand your customers better:
Conducting customer satisfaction surveys: Surveys can provide a lot of information. Make sure that you only have around 10 questions and that those questions are open-ended. Then watch as priceless feedback comes in.
Asking customers what led them to cancel their subscription: Automate this. Set things up so that when someone cancels their subscription they’d immediately get a request for feedback. You want to know why people decide to cancel their subscriptions.
Taking your customers seriously: You probably already see some trends that emerge when you listen to what your customers say. Maybe a lot of them are unhappy about a particular issue. Or maybe a lot of them are asking for a particular feature. Or maybe a lot of them are switching to a competitor for a particular reason. Whatever it is, you better take what your customers say seriously, because when one person says it, it may be an opinion, when a lot of people say it, it’s something that can make or break your company.
Don’t waste time trying to come up with what you think your customers are like. Go to them. Talk to them. Listen to them. Then you won’t have to think, you will actually know.
12. Avoid bad PR as much as possible
Bad PR is inevitable. As your company grows larger there will be bugs that slipped through the cracks, miscalculations of risk, and unwise decisions. That’s okay. It doesn’t mean that your company will fail. It simply means that you have to be prepared to handle the crisis if you get hit by a PR nightmare.
Remember the Airbnb story where an apartment in San Francisco was burglarized and vandalized?
That was an “every Airbnb host’s worst nightmare” kind of a situation. A woman rented out her apartment to a seemingly normal individual. However, that individual proceeded to steal the host’s valuables and completely trash her apartment. This was the first case in Airbnb history when things went that wrong – and, as you can imagine, it was a terrible blow to their otherwise great reputation. So what did the company do?
Airbnb didn’t have much experience in handling such reputation crisis, so there were some hiccups. Although their initial response was great, they dropped the ball once the story went public. According to the victim, the founders reached out to her and asked her to take down her blog post, and didn’t show much concern for her safety and well-being.
However, eventually Airbnb CEO made a statement on the company’s blog, in which he apologized to the victim, announced $50,000 insurance for the Airbnb hosts, and listed all the security measures they were going to implement in order to avoid incidents like that in the future. The company managed to survive the crisis, but this could have turned into an even uglier situation.
You never know what will go wrong, but as your company grows you can be sure that something, somewhere will. Make sure you are prepared for the worst case scenario. And if you find yourself in the middle of a PR nightmare, make it your priority to show your customers that if the worst happens, your company is going to be there for them.
13. Watch out for market changes
It’s important to understand that things that you don’t have any control over – economic crises, new technologies, scientific breakthroughs, etc. – can change your industry forever.
Say, bookstores in their modern form were around since the invention of printing press, and there wasn’t much reason for bookstore owners to worry about becoming obsolete, at least not until recently. And then Amazon came on the horizon. Now, bookstores all over the world are closing, and the ones who are still in business will have to adapt or die.
This is why you have to keep your eyes peeled for changes in your industry – and be ready to adapt to those changes in order to keep your existing customers and acquire new ones.
Final thoughts
Remember not to focus all your efforts in acquiring new clients. All startups and successful companies must also keep customer churn low for continued success. The tips mentioned above can help you retain customers and address your product’s usage drops immediately.
What are your experiences with customer churn? What steps have you taken to reduce the churn rate? We’d love to hear your thoughts.
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