- Hey there, Dan Martell here.
Serial entrepreneur, investor, and creator of SaaS Academy.
In this episode I want to share with you what is churn,
simplified and explain, and how to reduce it.
Probably the most important thing,
because I think if you wanna grow a software business,
it's really important to understand how to measure it,
how to structure it.
And more importantly,
how to capture the cancellation
and be sure to say the M word,
I'm actually gonna share with you my exact six screens.
Literally, I'm gonna give you the mock ups
of the six screens that I use
when any customer goes to cancel their subscription
on my SaaS business, but let's get into it.
(upbeat music)
So a long time ago I was having a board meeting,
and it was one of the first few board meetings we have
for my company Flowtown,
which was a venture-backed social marketing platform
that my co founder, Ethan, and I had built.
And one of our investors asked us,
what's your churn looking like?
And you know, we kind of thought we knew how to measure it.
So we just kind of said, you know, it's about 14% right now,
but it's getting better. We feel good.
And he was like, wow, is that per month?
And I was like, yeah.
At first I was like sounds pretty good.
'Cause you hear these numbers and you're like, okay, well,
you know, we're retaining customers.
They're paying us every month.
And what I discovered through that conversation,
because obviously he's a very seasoned investor
and what I've, you know,
now that I've now coached hundreds of SaaS founders,
try to improve their churn
to increase their monthly reoccurring revenue,
I've realised that there's so many different dimensions.
If you've ever felt confused about understanding
how to measure churn, understand the difference
between logo churn, net revenue retention, grocery tension.
Like all these different aspects of the equation.
I'm gonna simplify it today,
so that you can get your head wrapped around it.
Realise that there's only two
different kind of dimensions to look at it.
And with that, you'll be able to understand
how to predict it and how to reduce it
in your SaaS business.
So number one, calculate churn,
or sometimes called logo churn.
So we're going to simplify there's revenue churn.
So how much money we lose every month
from customers that cancel.
And we also have just like logos or accounts.
If you have individuals as a consumer type SaaS
or a pro or business SaaS,
that's like the account level churn.
So right now we're just gonna keep it simple.
The way to measure this is
at the beginning of the quarter or week,
because you can measure churn
on a weekly, monthly, quarterly, annual basis.
Is you want to look at the total number of customers.
So at the beginning of the month,
if you had 100 customers,
and at the end of the month you now have 90 customers
from that same cohort.
Not any new ones you've added.
Just that it just that same group of people.
You have 10% monthly churn, simple and easy.
So you can do this on a quarterly basis, et cetera.
But for right now just go calculate your last months churn,
and maybe the last previous 12 months, okay?
You're trailing 12 churn on a logo basis,
but that's how we calculate the beginning.
Same group of people.
How many are sticking around at the end of that period,
divided by across that period and that is the number.
Number two net negative churn.
Now this term sounds so weird because net negative churn
sounds like a bad thing. Churns bad negatives bad,
but it's actually a positive thing.
If the number is positive, right?
So what net negative churn is more like revenue retention.
You might hear people say net revenue retention.
To me it's the same thing.
If I have a group of 100 customers
at the beginning of the year and they spent a $100,000.
And that same group of people end up at the end of the year,
having spent $130,000,
then I have a 30% net revenue retention
or 130% net revenue retention, meaning that it went up.
Okay.
And the way that goes up is by expansion revenue.
Cross-sells, upsells, add ons.
So this is a thing about SaaS.
A lot of early first time SaaS founders don't understand is
that your business is predicated on your ability to move
customers through your plans,
expand their usage through some kind of value metric.
Or use an add on to sell them to increase what's called
the average revenue per user per account ARPA.
But that is what net negative churn means is,
is do you have a scenario where the longer customer stay
with you, their spend is more than the amount of money
you've lost who count cancellations or downgrades.
Number three acceptable churn by market.
Now if I didn't lose you on the second bull, I apologise.
There is some math involved here,
but the big idea is you have logo churn,
you have revenue churn.
Now I'm going to talk about logo, churn your accounts.
What is the norm? People always say,
well what should I be aiming for?
What's the point of diminishing returns in regards to like,
if my churn is X per month, am I serve this type of market?
Is that okay? So I want to break it down for you.
First is SMB on average cause you gotta think about small,
medium businesses. They're going out of business every year.
So you can't there's certain forces against cancellations
that you'll never be able to overcome,
because it's just in the same vein of business failure rate.
So three to 7% on a monthly basis for logo
is where you want to be.
Now previous point that I met the net negative retention or
a net revenue retention
that same, even though you're losing those logos,
If you have a product that has really well designed pricing
and expansion revenue, like a value metric, and ad-ons,
you'll be able to overcome that cancellation force by
expansion revenue.
So that's why you have these SMB SaaS companies that are
very profitable to continue to grow.
Even though they're losing three to 7% of their customers
every month,
because the way they monetize that base of customers allows
them to grow the revenue base.
So that's the SMB space.
Mid market you're looking at about,
one to 2% on a monthly basis, that's good.
And then on the enterprise level, 0.5% or 1%,
and it's very normal and not uncommon to have enterprise
customers with like no churn on an annual basis because
they're selling these big integrated platforms that are
incredibly hard to rip out for business.
So the stickier it is the lower your churns going to be.
And on a monthly basis when you get to that level,
like, focus right now to get there.
But once you're there,
you also wanna start looking at ways to monetize better,
cause that's really going to help you increase your average
revenue per account. So mid market enterprise and SMB,
that's the way you want to look at it.
You might serve all three, so make sure you segment out your
customers and churn by segment, so that you know what they
are individually on a monthly logo,
and just multiply by 12 to get your annual numbers.
Number four, churn prediction.
So how do you know ahead of time,
before the customer actually cancels that they're gonna
to not renew? Great question.
So the way we do that is a customer success strategy
called the customer engagement score, The C E S.
Now I teach a framework called the member at risk monitor,
which is essentially the same concept.
But if you think about it if you look at your users,
and you look at what happened prior to them cancelling,
you'll probably see certain activities that were true.
Maybe they stopped logging in so often.
Maybe they had a change, this is a big one.
I had a customer that I coach they noticed that when
the person who was the account owner changed jobs,
there was like a 70% chance that they weren't going to renew
on their next renewal cycle. Duh!
Because the person that made the decision to buy that
software had moved on so they built in a monitoring tool.
That actually told them if the account owner changed,
reach out to the company, find out who took over the role,
build a relationship. And not only retain that account,
this is the kicker, they would actually go,
and reach out to the person on LinkedIn that changed to
the new job to see if they could sell
their software into that new customer.
That's the level of thinking that you need to have to make
sure that you can start to reduce and really predict your
churn. So customer engagement score I have another video
that's all about the different tools that you should be
using to measure this.
You can do it yourself very simply.
I mean, honestly, if it's log-ins, if it's usage,
whatever data tells you, if they're red, green,
or yellow, that'll help.
So the way I stack it though, I want to give you this,
is red's bad, yellow's trending bad.
Green is good, but then the top level is purple.
So you have these four colours.
And purple means reference able.
Meaning if you want to refer customers for testimonials or
prospects to talk to customers, et cetera that's purple.
And what you do is you create a playbook,
a customer success playbook, a documented strategy.
To say if somebody ends up in red,
here's what we do and we execute.
We call them, we set up a scheduled kickoff.
We do whatever we need to do to engage them,
to get them to yellow. If they're yellow,
we do this we try to get them to green.
If they're green we try to get them to purple.
So we ask for, if they're willing to do testimonial,
be interviewed on our podcast, et cetera, et cetera.
But that is at a high level how we not only predict it,
but we overcome it. Number five limit churn.
So how do you limit your churn?
Well the reality is is people might be cancelling your
software. Not because they don't have the need,
and they don't think you can solve it.
Maybe they're just frustrated.
Maybe they had a bad customer support experience.
Maybe they feel like there's a feature that's critical for
their business that you don't serve or you don't offer.
But you actually have it they're just not aware of it.
So there's, there's six dimensions of doing this.
And the big idea is I want you to capture the cancellation.
Okay? I want you to monitor using the different,
traffic light systems you know. Red, green, yellow, purple.
But I also want you to somebody actually goes to cancel.
I want you to capture their reason,
and figure out if there's a way to save them.
Sometimes people cancel or really just want to pause their
account because there's a downturn in the market.
But I want you to capture that feedback
and feed it back to your product team
because all those reasons are probably product opportunities
to improve the gaps in your roadmap,
so that you can retain more customers.
Pretty much I would say, you know,
20% of your engineering time should be fixing bugs,
and fortifying the platform.
60% should be built on reducing churn and adding features
that are missing to keep the customers you have.
And the other 20% should be on innovation
and new kind of product strategy
so that you don't get left behind by your competitors.
So quick review of the hot principles of churn
and how to make it predictive.
Number one, we need to calculate our churn.
Number two, we need to ensure
we're heading towards net negative churn.
Number three, benchmark our churn
by acceptable churn by markets,
the percentages there on a monthly basis.
Number four, churn prediction using software
or coding it ourselves.
And number five, limit churn by capturing the cancellation.
As I mentioned in the beginning of this episode,
I want to share with you an exclusive resource.
It is called the Cancellation Capture System.
It's the exact framework, wire frames
that I use in all of my software companies.
All my coaching clients implement it
to not only save the cancellation
but more importantly learn from the customer that's leaving
as to where the gaps are in our product
to be able to not only save them,
but potentially reduce the amount of future cancellations
from our current customers.
So make sure that you download that,
just click the link below.
Download your copy with the wire frames,
so you can implement that.
Just give it to your product team
and they'll write up the code.
And if you like this video,
be sure to smash the like button,
leave a comment and let me know
what was your biggest takeaway from this episode.
And as per usual,
I want to challenge you to live a bigger life
and a bigger business, and I'll see you next Monday.