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.
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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.