How To Stop Churn From Decimating Your Business

This post is excerpted from our deeper discussion of the impact of churn on the ProfitWell blog.

The number of times I speak to $50M+ ARR companies who are just now starting to look at churn is startling. Here's why.

Imagine you're a new SaaS company that just reached your first 100 customers. You notice that 3% of your customers have churned in the past month. You're not too phased—getting those 3 customers back might be as easy as getting on the phone or sending them a personalized email.

Now imagine you have 100,000 customers. Suddenly, your unaddressed 3% churn is a major issue. Nice emails won’t win you back 3,000 customers a month.

The larger your customer base, the larger a problem churn becomes. Let's dig into this concept and get you on the right track.

Churn comes back to bite you

Preventing churn from destroying your company in the future is all about establishing good foundational business practices early on. This means measuring churn, understanding where it's coming from, and taking steps to retain those customers.

Churn compounds with growth because it is a percentage of your total customer base. This can hurt you in many ways:

• The more customers churn, the more revenue you have to pour back into your company just to keep the bottom line flat.
• If you've set goals to grow month-over-month or year-over-year, those goals are going to be harder to reach and will take longer.
• You'll have to spend money to acquire customers and replace the ones you've lost that could have been spent on other things like product improvements or hiring.

It can be difficult to tell the threshold for dangerous churn in the early days of your company. Let's model out the growth of two companies with different user churn rates over time to demonstrate the disastrous effects of short-term thinking. Then we'll look at how you can adjust your strategy to plan for long-term success.

Churn looks different 5 years down the line

Your current churn rate won't have the same effects on your company in a few years as it does today. One of the most significant changes is financial: customer churn makes it more expensive to grow as your company gets bigger.

Imagine two different SaaS companies who are all going to try to scale up in the next five years. Both companies make $500,000 in annual recurring revenue. They each have 1,000 customers that pay $500/year each, and each customer costs $625 to acquire. Each company's sales efficiency is about 0.8, meaning that 80% of the CAC is repaid within a year.

Each company plans to grow from 1,000 customers to 10,000 customers over five years. These numbers below show hypothetical growth, as each company aims to increase the size of their customer base year after year.

Company A has 1% monthly churn and Company B has 3% monthly churn. Even though these three companies have identical metrics except for churn, this growth is going to come at very different costs.

Company A: 1% monthly churn

Company A loses 1% of their customers each month and 12% of their customers each year. As the company grows, 12% of their customer base becomes a bigger and bigger number of customers.

Company A aims to grow from 1,000 to 10,000 customers over 5 years, despite the fact that they lose customers to churn every year.

By Year 5, losing 1% of customers a month means Company A is losing 1,200 customers in that year. In order to grow, Company A has to replace all of those lost customers and then acquire more on top. This comes at a steep cost, because each customer costs $656 to acquire.

In Year 5, Company A will have to feed 15% of the revenue they make that year into replacing churned customers.

In total, Company A will have to spend $1.8M to replace customers that churn over the course of 5 years.This cost to acquire customers that help them grow from 1,000 to 10,000 customers—this is just to replace the ones that are leaving each year due to 1% monthly churn.

Company B: 3% monthly churn

The churn rate for Company B is slightly higher than that for Company A. With 3% monthly churn, Company B loses 36% of their customers each year.

Company B wants to grow by the same numbers each year as Company A. In five years, they aim to grow from 1,000 to 10,000 customers.

By Year 5, when Company B is losing 3,600 customers, they'll have a huge churn problem on their hands.

The only way Company B can grow their customer base is by first replacing those churned customers.

Replacing 3,600 customers in Year 5 means spending $2.25M in CAC, which is almost half of what the company makes that year in revenue.

Over 5 years, Company B will have to spend $5.4M to replace churned customers and stay at flatline, before they spend a penny on acquiring new customers that will grow their user base.

It’s unreasonable to think that spending half of your yearly revenue to refill your customer base and get back to flatline is sustainable for long-term growth.

Shift your thinking from short-term to long-term

You can make important changes to your growth strategy by simply changing your mindset. Short-term “growth-hacks” that prioritize aggressive acquisition aren't sustainable over time. Eventually, your acquisition channels will dry up and those customers that aren't a great fit will churn.

Long-term growth goals involve acquiring customers who have genuine interest in and need for your product. You need to figure out what they're willing to pay and create a value-metric to ensure they’re satisfied and you’re not leaving any money on the table.

SaaS teams looking for actionable ways to stop churn and plan for long-term success should consider:

• What factors about your customers correlate with churn? Small companies tend to be bigger churn risks than larger companies because they may run out of resources more quickly or go out of business. Figure out the shared characteristics of customers who tend to churn more than others and focus less on acquiring those customers.
• What features do customers with high lifetime value engage with the most? Figure out what keeps your ideal customers coming back. If it’s a feature, emphasize it during onboarding.
• Why did customers churn? Reach out to churned customers and personally ask them why they left. You may find ways that you can improve the product, the customer experience, or the pricing that you wouldn't have thought about otherwise.
• Can you create less opportunities to churn? Customers with higher ARPU are less likely to churn—so by growing customers' accounts through up-selling and cross-selling, you're both increasing revenue and aiding long-term churn reduction. A higher percentage of annual plans is also correlated with lower gross churn rate.

Pull together the information you learn from talking to your customers and look for patterns in your data. Use what you learn to focus your acquisition tactics on focus your efforts on customers who find the most value in the product and are willing to pay because they’ll have the highest lifetime value.

Use your findings to shape your retention strategies, too: understand what customers really want and make sure they're getting this value from day one, and look for ways to up-sell them and deliver more value over time.

Fixing your churn problem puts money back in your bank account

In five years, you don't have to be worrying about where you'll get several million dollars to replace your churned customers. You can pre-empt and prevent that problem by making customer retention a top priority.

Devote the money that you'll save in CAC to grow your business in more productive ways that fixing preventable churn.