To reduce churn by more than 2 percentage points, you have to raise product value and usage

From Churn is the single metric that determines the success of your subscription service by David Packman:

“There is a laundry list of optimizations subscription services implement to improve retention, and collectively these have a positive effect—re-billing insufficient fund accounts on the 15th and 30th of the month, allowing members to pause their service, allowing members to reduce the frequency of delivered goods, winback campaigns to churned members, etc.

But a key observation about businesses which show high churn in their early stages is that the churn will not meaningfully reduce. That is, you can expect your optimization efforts to maybe move churn 1% — 2% (absolute points) or so, but they will never halve churn or reduce it dramatically beyond this. This is because churn is a statement from your customers about how habitually valuable your service is to them. In my experience, the only way to meaningfully reduce churn in high-churn businesses is to essentially redesign the service and the value proposition.

For clarity, I have looked at close to a hundred subscription services and have never seen churn improve from, say, 12% a month to 7% a month without fundamentally changing the service…but I have seen it move from 12% to 10% or thereabouts through optimization.”

(1) Re. “Churn is a statement from your customers about how habitually valuable your service is to them” — see The relationship between frequency of habit and customer retention.
(2) The optimizations which David Packman argues have limited ability to reduce churn do not address insufficient product usage. For an alternative approach, see How to reduce churn by identifying your “red flag metrics”.
(3) We’ve raised retention for Seeking Alpha Premium by (i) identifying our most valuable product features, and (2) redesigning the product UX to increase the usage of those features. For example, our ranking of the top stocks in each industry is valuable because it enables investors to discover stocks which subsequently outperform the market, so we’ve redesigned our product to increase usage of those rankings.

Why revenue retention is the wrong operating metric to combat churn

Edited excerpt from Why Retention Is The Silent Killer by Brian Balfour:

When I ask someone from a SaaS business, or another subscription model business, about their retention, I almost always get an answer involving monthly or yearly revenue retention. This is a red flag for me. I’m far more interested in how retention is reflected in the breadth and depth of product usage.

Why, you ask? Revenue retention is the output of engaged users. The usage is the input, and looking only at revenue retention as a proxy for usage retention has two big problems:

1. Revenue can hide what is going on under the hood with product usage, and shield you from signals about your product’s health over the longer term. You may earn a month or a year’s worth of revenue from a paying subscriber, but if that person isn’t using the product, they will churn when that month or year is up.

2. If you are trying to improve retention but only tracking revenue retention, the game is over before you’ve even had the chance to play. Once a paying subscriber has churned, winning them back is almost impossible. If you want to improve retention you need to look at usage retention first.

(1) Contrast Brian’s emphasis on product usage with David Skok’s approach in How to reduce churn.
(2) Cf. The relationship between frequency of habit and customer retention.
(3) Cf. How to reduce churn by identifying your “red flag metrics”.
(4) …and the other posts in the Churn & Retention section of Best practices for startups — a list by topic.

Improving retention helps growth in 4 ways

Excerpt from The One Growth Metric that Moves Acquisition, Monetization, and Virality by Brian Balfour:

Most people think retention is so crucial simply because it means you lose fewer users than you otherwise would. Though this is true, it misses the critical point. Retention is the core of your growth model and influences every other input to your model. This is important because if you improve retention, you’ll also improve the rest of your funnel:

1. Retention drives acquisition. For many products, especially those that grow through virality or user generated content (UGC), retention has a double effect. As you retain more users, those additional users take more of the key actions that accelerate acquisition, either through sharing, inviting, word-of-mouth, or creating content. As more of those new users retain, more are acquired – improving retention sets off a self-reinforcing cycle that drives acquisition.

2. Retention improves monetization. When it comes to monetization, two important things happen with improved retention – you can retain a larger proportion of a cohort, and in doing so, make more money from that cohort within a given period of time, and you can increase the length of time that a cohort retains, increasing LTV.

3. Retention builds an acquisition competitive edge. As you increase retention, monetization, and LTV, you can pay more to acquire a customer. In doing so, you can push competitors out of acquisition channels, open up new channels that were previously too expensive, and grow faster.

4. Retention accelerates payback period. Payback period is the time it takes to break even on the cost to acquire a customer. It also determines how fast you can start reinvesting in acquisition to fuel growth. Improving retention can help shorten your payback period to grow faster.

(1) Cf. A radical approach to marketing
(2) Cf. Sustainable growth vs. growth hacking
(3) Cf. Why retention is the key to growth

How to reduce churn by identifying your “red flag metrics”

Edited excerpt from How One SaaS Startup Reduced Churn 71% Using “Red Flag” Metrics by Alex Turnbull:

We decided that, if we were to systematically reduce churn, we’d need to systematically study it and find its source. What I found was illuminating. There were very strong differences in the behavior of users who had abandoned Groove and the behavior of those who stayed. These are our “Red Flag Metrics”, and we use them to identify churn before it happens.

When we looked at the numbers, there were two metrics that seemed to be the most significant in the first 30 days after a user signs up – length of first session and frequency of logins. (There was a difference in total number of logins as well, but it wasn’t as disparate as the other two.) The average user who did not quit after 30 days spent three minutes and 18 seconds using Groove in their first session, and logged in an average of 4.4 times a day. The average user who quit spent 35 seconds using Groove in their first session, and logged in an average of 0.3 times per day.

So we began to send targeted emails to users who spent less than 2 minutes on their first session, as well as to those who (regardless of first session time) logged in fewer than 2 times a day in their first 10 days. We reduced our churn from about 4.5% to 1.6%.

(1) The full article includes the text of the emails sent to “at risk” users. They’re excellent.
(2) Re. “length of first session” — see The first ten minutes of a customer’s experience are crucial.
(3) Cf. How to reduce churn and How to reduce churn — a process.

How to reduce churn by winning back cancelled customers

Edited excerpt from Why a SaaS customer hasn’t churned when they cancel by Andrew Tate:

Send a succinct, targeted survey that forces the cancelled customer to pick the biggest and smallest reasons for churning. These surveys work best in three main forms: An exit survey that’s displayed upon hitting cancel, an automated (but seemingly personal) email survey in the cancellation confirmation email, or a highly personalized email with an open-ended question: What made you cancel?

Then, catalog why the customer is leaving and align the easiest solution to bring them back:

Bought away: Customer feels they aren’t getting value. If you don’t have properly aligned buyer personas, you’ll likely hear this excuse considerably more than if your pricing is aligned correctly. Solutions: discounts, downgrades, and better customer persona alignment.

Moved away: The customer decides your services are no longer needed. Especially true of customers who “graduate” to an enterprise product or downgrade to a lighter weight option. Solutions: trials and product feature/plan expansion.

Pulled away: Customer switches to a competitive product. Solutions: discounts/downgrades, re-aligned value propositions, and better feature hooks.

Pushed away: A member of your customer’s team starts briefing against your product, or customer feels that the service is poor quality or that expectations of the service have gone unmet. Solutions: Better communication and customer support.

(1) Cf. How to conduct customer cancellation interviews in the “Job To Be Done” framework.
(2) Cf. How to reduce churn — a process, also by Andrew Tate.
(3) Cf. The customer success role — a job description.

How to reduce churn — a process

Edited excerpt from How to reduce Churn by building a bulletproof retention process by Andrew Tate:

The key to fighting churn is to develop a systematic, defined retention process, that allows you to find all the small ways to reduce your churn. Here are 5 steps of a retention process:

1. Define your goals
Your overall goal is to reduce churn, but to make this actionable you need to both quantify this goal and break it down further into smaller goals, corresponding to the 3 stages of churn. For example, Main Goal: reduce churn by 50%; Stage Goals: reduce short-term churn by 20%, medium-term churn by 20%, long-term churn by 10%.

2. Ask the right questions
Drill down to specifics as much as possible. Brainstorm ideas for reducing churn in the short term, during the first few months of use, then the medium term, then the long-term. Segment customers by how they use your product, and target specific experiments at them.

3. Develop your hypothesis
Developing a hypothesis forces you to think about your questions in more detail and the impact of experiments on churn. It helps prioritize ideas, through defining the probability of success of the experiment, and resources needed. Low impact, high probability, low resource ideas should be high on your list —  a number of them will add up.

4. Test and analyze your ideas
Get the minimum viable test up and running as quickly as possible. Don’t overthink the experimental design or over-engineer a solution. You are looking for quick results. If the experiment didn’t reduce churn, what assumptions did you make in the hypothesis that led you to think it would, and how can those be fed back into the process to improve future experiments?

5. Refine, reject, repeat
Perform a post-mortem on your techniques so that you can optimize the process for future iterations. Were you improving over time? Did you improve your accuracy? Did you run enough experiments?

(1) On reducing short-term churn before medium-term churn, cf. The first ten minutes of a customer’s experience are crucial.
(2) Cf. How to reduce churn and The customer success role — a job description.

How low retention of customers and suppliers bankrupted Homejoy

Edited excerpt from Homejoy at the Unicorn Glue Factory — Why Homejoy Failed by Christina Farr:

Only about a quarter of Homejoy’s customers continued to use the service after the first month, and less than 10% used it after six months. Many first-time customers were not satisfied with the cleaning, or experienced a last minute cancellation.

Cleaners who excelled would sometimes strike independent relationships with clients. This often resulted in a pay increase, and some cleaners even attracted enough new clients to start their own small cleaning businesses.

Meanwhile, Homejoy’s cost of customer acquisition was crippling. By mid-2014, thousands of people were scooping up deeply discounted first time Homejoy cleanings for $19.99 on daily deal sites like Groupon. The company offered these aggressively even though its own internal data showed most of these people never used the service again.

By focusing on growth above all else, other projects to boost retention and reduce costs fell to the wayside.

(1) Thank you Zach Abramowitz, founder and CEO of ReplyAll, for the tip.
(2) Homejoy is a striking example of a company which scaled customer acquisition before achieving sufficient product quality, ie. basic product-market fit. The tell: poor customer satisfaction, low repeat usage, and high churn.
(3) See: The most fatal mistake to avoid as a startup

Why you should incentivize sales people for customer retention

Edited excerpt from Why This CEO Will Never Hire Another Salesperson by Brian de Haaff:

Here are four reasons why emerging technology companies will not look to commissioned salespeople to drive their business:

1. Relationships. Growing a business is about fostering trust and relationships, not pushing product. The goal is to show the value of the product and build a relationship with the customer. The only thing that matters is the customer’s success.

2. Authenticity. People crave honest suggestions, and can tell when someone is pushing an agenda. They do not want to be cajoled to buy something, especially a product that is a poor fit.

3. Collaboration. It’s much more exciting to collaborate to understand the customer’s needs vs. making a disjointed pitch when there is a bad fit.

4. Information. Today’s buyers have access to endless information and peer feedback like never before. New data on B2B sales shows that 60% of a typical purchase decision is made before talking to suppliers and up to 90% of the buying cycle is done before buyers speak with sales reps. This brings transparency to a process that was previously veiled. They don’t need someone to connect them with products anymore. What they do need is to be engaged, surprised, and delighted on their own terms.

Don’t get me wrong. There will always be people who work with customers, but I doubt that in the most successful companies that their compensation will be tied to the deals they close.

(1) Brian’s right that the traditional commission structure for sales people misaligns their interests and their company’s and customers’ interests. But that in itself isn’t an argument against sales people. It’s an argument for fixing their incentive structure.
(2) Sales people are traditionally commissioned on closing a sale. That’s appropriate for businesses where the initial sale is the most important driver of profits. But in an increasing number of businesses, revenue per customer is spread out over a multi-year period, so lifetime customer value is determined more by customer retention than by the value of the initial sale. This isn’t only true of SaaS and subscription businesses, but of any business where growth will come from retaining customers as much as adding new customers.
(3) So how do you incentivize sales people for customer retention? Compensate them disproportionately for renewals vs. the initial sale.

If you have low retention, don’t scale and keep your costs low

Edited excerpt from Growth vs. Retention by Fred Wilson:

There’s a common view in Silicon Valley that growth is the one thing you should focus on. But it’s hard to grow if you are churning your users. And if you are paying for user acquisition, as many startups do in search of growth, then retention/churn becomes even more important.

You might think you have product market fit and so you scale up your hiring, your marketing, your sales, and your capital raising and spending. But if you can’t retain a healthy percentage of your users past ninety days, you don’t have product market fit yet and all the investment you make in your business is just money down the drain. So focus first on retention, then scale.

(1) Re. “It’s hard to grow if you are churning your users” — see Why retention is the key to growth.
(2) If you have low 90 day retention, then you don’t have product-market fit. But 90 day retention might not be sufficient on its own to demonstrate product-market fit. Consider also user engagement, your net promoter score, whether your product is liked or loved, and the ease of closing sales.
(3) Cf. Product-market fit and fundraising and Don’t scale before you have product-market fit.

Increasing customer loyalty with “Memorable Engaging Moments”

Edited excerpt from Turning your Customers into Fans by Ryan Battles:

At a company I used to work for, our co-founder was always striving to inject “MEMs” into our product, that is, “Memorable Engaging Moments.” Essentially, we were trying to create situations where a customer does X, expects Y, but receives Y, Z, and a few other extras. This works in any type of business, not just software.

When I had a flat tire that needed to be fixed, I ran it into the auto mechanic near my office. They fixed the tire. I then asked how much an oil change would cost. Knowing that I was not a regular customer, the technician said, “For you, nothing. Bring this card in for a free oil change next time you need one. Thanks for trusting us with your business today.”

Not only did I come back to that establishment for my oil change a few weeks later, but I continued using them for projects large and small ever since. I’ve even recommended them to a few friends in town looking for a mechanic. I became their advocate.

In what way can you do something unexpected whenever someone purchases your product? People are getting used to transactional emails, “thanking you” for your purchase. What if you actually sent them a short video clip of someone on your customer success team (or yourself if you are a solopreneur) thanking them by name, and giving them your email if they have any questions or concerns?

The first ten minutes of a customer’s experience are crucial

Edited excerpt from Customer success is important, but sometimes it’s just too late by Boris Wertz:

One of my portfolio companies recently discovered through a variety of a/b tests that user engagement within the first 10 minutes is crucial for their product, as there’s an exponential drop-off in engagement after that time. Given the amount of products, services, and technology competing for our attention, I imagine this is a similar trend across the SaaS space. If the benefits aren’t immediately obvious, it’s easy to move on to something else.

Another take-away from those A/B tests was that there is a huge difference in conversions depending on the initial page shown during the onboarding process: people who were shown a page that was most relevant to solving their problems viewed more pages early on in their account life, completed more goals, and ultimately converted to a paid account at a higher rate.

The big question for you is how can you hook a customer in the first 10 minutes? If you want to increase goal completion, customer success emails and sales outreach might be too late and reactive. Users need to get hooked early, or they’re gone.

(1) On generating initial engagement, see Getting users up the engagement ladder.
(2) See also Identifying the moment a user becomes truly engaged.

The relationship between frequency of habit and customer retention

Edited excerpt from Grabbing Attention and Holding Onto It by Ben Yoskowitz:

In the consumer world (although this applies to B2B software too), attention is the currency that matters. If you can get people’s attention you have a chance of winning. Without it, you can pack up and go home.

When talking to entrepreneurs I often ask, “Do you envision this as a daily, weekly, or monthly use case?” If it’s a monthly use case it’s hard for me to get excited because the gaps between when you’ve (hopefully!) captured people’s attention are too big–it’s harder to get people coming back and the cycle times for testing things are too long. You won’t learn and iterate fast enough. A weekly use case is better, but daily is the best. Find a daily use case for something–and prove it–and you’ve got something very interesting.

If you’re building a product that doesn’t have a daily or weekly use case be very, very afraid. Certainly there are products that don’t get used a lot and are very successful (tax software anyone?) but it’s not a direction I’d recommend. And if you’re building a product that you think has a daily or weekly use case you need to prove that quickly.

(1) Service providers for infrequent habits often become dependent for distribution on service providers for frequent habits. Example: Online retailers for occasional purchases (= infrequent habit) are dependent on Google search (= frequent habit). The only solution is to form a strong enough bond with your customers to generate loyalty.
(2) Sometimes a market has low frequency of habit. But a disruptive startup can lower price and friction enough to raise demand to a frequent habit. Think cars vs horse-drawn carriages.
(3) Our experience in Seeking Alpha: Monitoring your portfolio is a daily (weekday) habit. By providing better content on users’ portfolios, we’ve been able to win tremendous “attention”.

The number 1 growth hack

From Jason Lemkin, in Jason Lemkin: The Right Sales Metrics for Your SaaS Startup:

Everyone’s got growth hacks – some work well, some don’t. There are a whole group of entrepreneurs that have already had one successful SaaS company, and they’re working on their second SaaS company. You want to know what all of these guys are doing? They’re way over-investing in the beginning in customer success. Most first-time entrepreneurs hire one person for success, and then do it as cost center and hire maybe one customer success manager for every $2 million in revenue. Those of us that have done it before know that making your customers happy isn’t just a good thing to do, it creates all your subsequent revenue down the road – 80% of it. Overinvest in customer success – that’s my #1 growth hack. That doesn’t get you to your first 10 or 20 or 100 customers, but that’s the best way to turn those 100 customers into 1,000.

(1) See Product strategy — retention trumps acquisition and Why retention is the key to growth.
(2) Thank you Andrew Fine for the tip.

How to think about churn

From Jason Lemkin, in Jason Lemkin: The Right Sales Metrics for Your SaaS Startup:

Churn is not an absolute. Just because your SaaS service churns at 3% and mine churns at 4% doesn’t mean you have a better product than me. These statistics are almost nonsense. Let’s talk about the funnel – the easier you make it to get into your funnel, the more people will go into your funnel. The harder you make it to go into your funnel, the fewer people will sign up, but your conversion rate is going to go up. You’re going to end up with an organic churn rate that is inherent to your product. The most important thing is measure it and then drive it down. That’s what I did.

We set a goal at Echosign to decrease churn 20% year over year. You need to measure it and force the team to own a metric. The job of your customer success team – period – is to drive churn down, or drive revenue from the install base up.

(1) See How to reduce churn.
(2) Thank you Andrew Fine for the tip.

Why retention is the key to growth

From Retention is King by Jamie Quint:

There are too many companies asking, “How do we acquire more users?” that should instead be asking “How do we get better at keeping the users we already have?”.

It’s easy when approaching the problem of growth to think that you just need to get more users, after all that seems to be the very definition of growth. However, if you take a step back though and think about growth as the maximization of user-weeks over time, it quickly becomes apparent that focusing on retention has a much larger effect than topline growth. This is also much more of a sustainable growth mindset. Rapid user growth followed by rapid user attrition is an indicator of unsustainable growth. Strong retention of users over time is a good indicator of product-market fit, something you’re hopefully looking to achieve anyway.

At a high level, retention is more important than virality because if your users don’t stick around they are not able to invite others to your product over an extended period of time. If you have high retention and no virality you will sustainably grow your user-base over time. If you have high virality and no retention you will not.

(1) The key factor in building a large business is whether it grows cumulatively over time. If you have high retention, user growth leads to cumulative growth. But if you have high churn, you need to work hard each month just to stay in the same place.
(2) So why do so many startups make the mistake of focusing on new users instead of retention of current users? Perhaps because marketing is easier than building a great product.
(3) This is so important, it’s been written about before from different angles. See Product strategy — retention trumps acquisition, The best product and growth hacking advice ever, Sustainable growth hacking and Sustainable growth vs. growth hacking.

Sustainable growth vs. growth hacking

Notes from Kyle Wild‘s presentation Product is the Ultimate Growth Hack:

  • Most people think about growth in terms of Acquisition and Activation: “How many signups and activations have we had?” “How can we get more signups and activations?”
  • But they should focus on Retention and Referral: “How can I retain an insanely high percentage of my users?” (= product-market fit); “How can I get them to refer their contacts to my product?” (= virality)
  • Virality matters because this is how good products have always spread. You don’t need a share button; just a truly compelling value proposition and a brand that your customers are proud to represent.
  • If your growth, which is a derivative of customer base, is itself a function of your customer base, you will grow exponentially. And that growth curve comes without you having to spend money.
  • Whereas if your growth is all based on hacks, then your growth is a function of how much effort you can keep putting into these hacks.
  • Bottom line: Product is the ultimate growth hack. If you build it, and it’s something compelling that they really love, they will stick around, and they will invite their friends to do the same.

Compare this to Sam Altman’s the only way to build a massive business, and Jason Fried’s radical approach to marketing.

How to reduce churn

From Manage Customer Success to Reduce Churn by David Skok:

This much is obvious: if you want to stop your customers from churning, you will need to make them happy with your product/service. However what is less well understood is what makes a happy customer? Many SaaS companies believe this comes from engagement and usage of the product.

However I believe they are on the wrong track, and I’d like to move the conversation to a higher plane. Customers bought your product to get a clear business benefit. To make them happy, I believe that you need to make sure they are getting the business benefits they hoped for.

A radical approach to marketing

Excerpted from Jason Fried:

…every marketer we met with was focused on one thing: customer acquisition… But the more I spoke with all of these talented and passionate marketers, the more I realized that I wasn’t interested in what they had to offer. In fact, I found myself thinking less about new customers than about our existing ones.

The way I see it, I can spend a lot of time and money trying to persuade a bunch of newcomers to try Basecamp. Or I can spend a lot less effort helping current customers get more out of something they’ve already purchased and enjoy using. As I said at the outset, sales take care of themselves when you put out a great product and treat your customers with the ultimate respect.

Or, to put it another way: If you take care of your existing customers, they will take care of your new customers.

(1) This dovetails with Sam Altman’s view that “All companies that grow really big do so in only one way: people recommend the product or service to other people.”
(2) See: The only way to build a massive business.

Product strategy — retention trumps acquisition

Excerpted from Kiss Metrics:

It’s a rookie mistake to focus on customer acquisition instead of customer retention, especially early in a startup’s life. It’s exciting to get new traffic and acquire new users, but the primary purpose of your first visitors is to inform you of the holes in your funnel.

Early visitors exist for one reason, and one reason only – to show you how broken your website really is. Until you are successfully learning from, and retaining, those visitors, you are not ready to drive a lot of new people to your product. Leaky buckets don’t need more water, they need their holes fixed.

Separately, Tomasz Tunguz provides tips to measure and optimize retention.