Dan Martell - How to Lose Less Customers (Churn Reduction)

00:00:00.080 What's up, everybody?

00:00:01.160 Dan Martell here, a serial entrepreneur, investor,

00:00:03.160 and creator of SaaScademy.

00:00:04.560 In this video, I'm going to teach you

00:00:07.560 why your churn is hurting and potentially killing

00:00:11.160 your business, to teach you how to understand churn.

00:00:14.920 I'm just going to pass this to Jarrett.

00:00:16.760 How to understand churn, how to fix it,

00:00:19.280 and really understand the true cost.

00:00:20.760 And be sure to stay to the end.

00:00:21.880 We're going to share with you an exclusive resource

00:00:23.760 called the Churn Buster Cheat Sheet 0.96

00:00:25.240 to help you stop the bleeding and also scale up your marketing.

00:00:29.360 Let's get into it.

00:00:43.180 So recently, I was doing a growth session

00:00:45.160 with a potential new coaching client.

00:00:46.780 And we were just going through kind of understanding

00:00:48.740 their business, where they're at, where they want to go.

00:00:50.940 And the question of churn came up.

00:00:52.640 And they said this, oh, it's not that bad.

00:00:55.260 It's only about 20% per month.

00:00:57.940 my brain kind of went like, whoa, and I just asked them.

00:01:01.300 I said, do you realize that 20% per month,

00:01:03.620 that means that if you didn't add any new customers,

00:01:06.940 essentially in five months, you're

00:01:08.240 going to churn through all of your existing customers.

00:01:11.380 And they were like, what?

00:01:12.580 I was like, yeah, essentially 20%, five months, 100%.

00:01:16.040 It's a big issue.

00:01:18.040 So they didn't even understand how big of an issue,

00:01:20.240 because it makes it really hard to scale.

00:01:23.260 And when I explained it to them, then

00:01:25.000 we talked about how would you measure it,

00:01:26.860 What are the strategies to fix it?

00:01:28.660 And that, to me, is what I want to share with you today,

00:01:30.860 because I think that churn is a really weird thing,

00:01:34.960 and people don't really understand it,

00:01:36.560 how it impacts your financial reporting,

00:01:40.220 but also why it's truly killing your SaaS business

00:01:44.660 and how to fix it.

00:01:45.700 So let's get into it.

00:01:46.900 Number one, churn flatline.

00:01:49.120 So I call this moment where your growth rate goes like this

00:01:54.220 and slowly declines and declines to a point

00:01:56.760 where you start going sideways.

00:01:59.320 Usually when I get the call, so SaaS founders

00:02:02.440 will reach out to me, usually around year three or five,

00:02:06.020 because what's happened is their ability

00:02:09.080 to add new customers on a monthly basis

00:02:12.520 to overshadow the percent, the total percent,

00:02:16.320 because it's a net number, but it's

00:02:17.620 a percentage of customers that they're losing

00:02:20.780 hits essentially the flat line, the threshold.

00:02:23.860 Let's say when you're small and you've only

00:02:26.100 got like 20 customers and you're losing a few,

00:02:29.160 you can usually add a lot more.

00:02:31.200 But whatever that number is, your ability

00:02:33.780 to add how many x amount of customers per month

00:02:36.580 and the percentage of churn, so just figure it out

00:02:38.880 for your business, that will be your churn flatline

00:02:42.480 if you don't figure out expansion revenue, how

00:02:45.480 to capture more value from your customers.

00:02:48.280 I'm going to talk to you later in this session

00:02:50.580 on how to fix it.

00:02:52.560 But the big thing is understanding

00:02:55.320 that at some point, you're going to hit the churn flatline,

00:02:58.600 which means that your ability to replace customers

00:03:01.200 is at the same level as the amount of customers

00:03:04.260 that you're losing from a churn problem.

00:03:07.560 So you want to run the math for yourself

00:03:09.180 and figure out what that is, because that's

00:03:10.980 going to give you a clear indication of even if we spend,

00:03:14.240 based on what we're doing today, we're

00:03:15.900 going to hit a flatline in our growth.

00:03:18.620 Number two, maximum viable churn.

00:03:21.120 Now, this is a concept that I got from Thomas at Redpoint.

00:03:24.280 If you don't read his blog, you must.

00:03:26.680 It's an incredible.

00:03:27.460 Just search Thomas.

00:03:28.720 It's actually Tomas from Redpoint.

00:03:30.580 I won't even try to butcher his last name.

00:03:32.940 But it is all about sass and growth and stuff.

00:03:37.140 And he talks about maximum viable churn.

00:03:39.400 And in there, he gives an example.

00:03:40.800 Now, I'm not going to get into the math,

00:03:42.540 but the whole argument that he had

00:03:44.760 is that your churn is impacting your ability to grow.

00:03:48.960 And here's the way to think about it

00:03:50.680 is if your sales efficiency rate,

00:03:53.440 let's say you're a $3 million ARR business,

00:03:55.800 and you have a 5% monthly churn, and your sales efficiency

00:03:59.380 is about 0.8, meaning that it takes you like eight,

00:04:04.360 out of a year, it takes you eight months of a spend.

00:04:08.140 So whatever your CAC is, your cost

00:04:09.740 to acquire customer and your LTV,

00:04:12.280 let's say it's $1,250 to acquire a customer,

00:04:14.800 to $1,500 a customer.

00:04:16.940 If you run the numbers with a 5% churn,

00:04:20.080 means that you're going to spend through 60% of your revenue

00:04:24.820 for that year just to replace the lost customers,

00:04:29.060 to acquire new customers.

00:04:30.580 Not to grow, but just to replace them.

00:04:33.880 And it's a really important understanding

00:04:35.920 because in doing the math, when you look at it that way,

00:04:39.340 if you're trying to create forecasts,

00:04:41.140 if you're in the fundraising mode,

00:04:42.440 if you're a venture-backed founder,

00:04:44.180 then you need to calculate not where you need to be

00:04:47.120 for the next level of funding based on MRR.

00:04:51.920 But how does churn impact that?

00:04:54.220 So a lot of people, they're like, OK, we're at this level.

00:04:56.340 We're at a million.

00:04:57.060 We want to get to three.

00:04:58.160 We need to add two.

00:04:59.480 No, you don't.

00:05:00.620 You don't need to just add two by going to say, OK,

00:05:03.080 well, what's our LTV per customer?

00:05:04.460 We need to go add x amount of customers.

00:05:06.000 You have to also then calculate over that period of time

00:05:09.360 how is churn going to impact your revenue growth

00:05:12.240 and make up for it.

00:05:13.700 So when you think about the amount of money

00:05:15.500 that you're going to need to raise based on your ability

00:05:17.460 to acquire customers, the number could be dramatically

00:05:20.280 different than what you think if you haven't run through this

00:05:23.680 math and this understanding of that concept.

00:05:25.560 So minimum viable churn is understanding

00:05:28.360 what's your minimum churn allocation or allowability

00:05:33.480 so that you are able to grow your top line revenue

00:05:36.180 to hit your next round of funding.

00:05:37.700 Because if you don't, what I've seen many times

00:05:40.200 is unfortunately a down round.

00:05:41.780 So understand not only your growth targets,

00:05:44.640 but your churn and how that's going

00:05:46.320 to impact what your needs are going

00:05:47.820 to be from a capital point of view to hit those targets.

00:05:50.640 Number three, moment of churn.

00:05:52.920 So one thing I want to share with you guys

00:05:54.960 is what does true churn mean?

00:05:57.520 Recently, I was working with a client,

00:05:59.800 and they found out that their customer success team

00:06:03.840 had a very sneaky thing they were doing,

00:06:06.300 because their definition of churn was a canceled account.

00:06:09.320 So customer success had a metric of improving retention.

00:06:12.680 What he found out was that their customer success team

00:06:15.620 was convincing customers to not cancel or close their account,

00:06:19.860 but essentially go to a no-cost monthly membership

00:06:24.620 to a pay-per-use.

00:06:26.740 Now, this is a very creative solution.

00:06:28.480 It's easily fixable.

00:06:29.800 But if you don't know, you manage what you measure,

00:06:32.780 they measured it, and then they realized the customer success

00:06:35.760 team was being sneaky about how they do it.

00:06:37.860 Because essentially, the account never canceled,

00:06:40.840 But there was no new revenue.

00:06:42.940 So technically, it was canceled.

00:06:44.740 But they went on as a pay-as-you-go.

00:06:46.540 So essentially, if you ever want to do this in the future,

00:06:48.580 you can just pay every usage.

00:06:50.000 You don't have to pay the monthly, which is obviously

00:06:52.720 not the way I would calculate revenue and revenue churn.

00:06:56.200 But here's the thing.

00:06:57.320 There's two types of churn that's 1.00

00:06:59.120 going to occur in your business.

00:07:00.640 There's cancellations, and there's involuntary churn.

00:07:04.180 A lot of founders don't realize involuntary churn

00:07:06.280 could be up to 20% to 40% of your total churn.

00:07:09.360 And that's usually caused by payment failures, right?

00:07:12.780 Or roles changing and somebody, the company's

00:07:15.200 still wanting to use the product,

00:07:17.340 but nobody updated the payment.

00:07:19.700 So it's usually a payment issue.

00:07:20.940 And there's a bunch of different reasons.

00:07:23.020 I'm not going to get into the credit card decline

00:07:25.020 situations because there's a whole lot of different scenarios.

00:07:27.540 If you want, check out ProfitWell.

00:07:29.640 So Patrick Campbell, the founder of ProfitWell,

00:07:31.380 has built an incredible tool that you can use for free.

00:07:33.580 And they get paid on a success basis

00:07:35.800 to fix your involuntary churn.

00:07:38.360 Also, check out FlexPay.io is their website.

00:07:42.040 They're really about increasing the credit card side,

00:07:46.020 not the credit card dunning challenge.

00:07:49.920 So check out FlexPay, two incredible companies.

00:07:52.700 And Daryl, the founder, is a good friend of mine.

00:07:54.620 So cool products that's going to help with involuntary churn.

00:07:58.440 But there's also the cancellation churn.

00:08:00.560 Now, here's the thing is, if somebody's

00:08:02.060 already paid for the end of the month

00:08:04.100 with their monthly subscription, but they

00:08:06.420 canceled a third through the way,

00:08:07.860 I just want you to know that they're not technically

00:08:09.780 churned yet.

00:08:10.440 The churn happens when essentially their payment

00:08:13.480 or their billing doesn't renew.

00:08:15.360 So even if they cancel a third way through the month,

00:08:17.880 and this is something I teach called the cancellation request

00:08:20.340 flow, is we want to make sure that we have a process

00:08:24.060 for capturing that cancellation and engaging with them

00:08:26.560 to save the account.

00:08:28.440 There's probably 30% to 40% of canceled accounts

00:08:32.400 that happen in that scenario that

00:08:33.960 could be saved through downgrades,

00:08:36.820 showing your solution, talking to them about their problems.

00:08:39.660 Sometimes there's features that you

00:08:41.900 have that will help provide the benefit,

00:08:43.920 your customers that canceled loss,

00:08:45.300 because they didn't even know.

00:08:46.420 They weren't even aware.

00:08:48.040 So to me, it's just really understanding

00:08:49.740 the moment of churn under those two filters, involuntary

00:08:53.920 and cancellations, and knowing that there's actually

00:08:56.160 things you can do to improve it.

00:08:59.200 So make sure that you understand and define that

00:09:01.360 with your team.

00:09:02.000 What does churn mean?

00:09:03.880 Because a lot of founders have not had that conversation

00:09:05.580 with the team.

00:09:06.080 You're going to run into issues, like I mentioned earlier,

00:09:08.320 where your customer success team is fixing retention,

00:09:11.740 but involuntarily masking it more than anything.

00:09:15.200 Number four, fight the impact.

00:09:17.620 Here's the deal.

00:09:18.620 There's only a few ways, really five key things

00:09:21.240 you can do to fight the impact of churn, OK?

00:09:24.340 Now, I'm going to tell you how to get my Churn Buster Cheat 1.00

00:09:26.340 Sheet, but these are the five things

00:09:28.040 that you need to understand to really overcome revenue churn.

00:09:32.600 is one, you need to be growing your new active trials

00:09:36.560 or sign-ups or sales.

00:09:37.620 Essentially, you need to be able to grow faster

00:09:40.240 than your churn account just by being more efficient

00:09:43.420 in funnels, marketing, and becoming cheaper on your CAC

00:09:47.080 so you can grow it, find new channels, et cetera.

00:09:49.000 So that's number one.

00:09:49.940 Number two is raise prices.

00:09:51.880 Now, here's what I know.

00:09:53.100 So one question I love asking my founders,

00:09:54.920 if somebody bought you tomorrow from your industry,

00:09:57.300 they bought your business tomorrow,

00:09:58.640 what is the first thing that they

00:10:00.120 would change in your business?

00:10:01.880 And I got that question from Andy Grove.

00:10:03.600 He wrote a great book called High Output Management.

00:10:06.120 And the reason I ask that is because there's things that,

00:10:08.540 you know, as a founder, that you should change,

00:10:10.640 that you probably haven't because of whatever reasons,

00:10:12.740 whatever values, whatever beliefs that you've had,

00:10:16.160 that somebody that actually is more knowledgeable

00:10:18.300 would make that in a heartbeat.

00:10:20.580 And raising prices is definitely on that list.

00:10:23.420 It's typically the first thing if a private equity firm

00:10:26.640 buys your SaaS business, it's the first thing

00:10:28.460 they're going to change.

00:10:29.760 So that's two.

00:10:30.400 Three is improve your retention.

00:10:32.900 Actually build a concerted effort

00:10:34.900 to increase your retention.

00:10:36.820 Number four, see four just pops up there with the pinky. 1.00

00:10:40.360 Number four is improve your upsells

00:10:43.240 to be able to have, so a lot of founders

00:10:45.280 don't have a strategic product strategy, essentially

00:10:49.220 for packaging and add-ons, et cetera,

00:10:51.080 to create expansion revenue.

00:10:52.360 I've got another growth stacking show session just

00:10:56.980 on how to increase your expansion revenue,

00:10:59.400 So search that in my name.

00:11:00.740 And then number five is improve your downsells.

00:11:04.320 So if you have people that are going

00:11:06.500 to churn because they're at this level,

00:11:08.320 figure out how you can increase.

00:11:10.400 Instead of canceling on you, get them

00:11:12.400 to take maybe a lower plan.

00:11:14.700 Maybe some people talk about putting a pause plan

00:11:17.860 or adding some value and keeping them on the plan.

00:11:20.000 But you just got to reduce and improve the downsell as well.

00:11:23.980 So those are the five ways to fight back on churn.

00:11:27.860 So quick recap on how to think about churn

00:11:29.960 and why it's killing your SaaS business.

00:11:31.940 Number one, figure out what your flat line is today

00:11:35.140 in regards to the ability to replace being less than your

00:11:38.600 total number of customers that are churning every month.

00:11:40.940 Number two, maximum viable churn.

00:11:43.700 Figure out based on your CAC what

00:11:46.620 you need to get from an MRR point of view

00:11:48.460 if you're in that fundraising mode

00:11:49.740 or you've set some aggressive growth channels

00:11:51.380 and you've got so much capital to kind of grow into.

00:11:53.740 Don't forget to take into consideration

00:11:55.720 the lost customers to essentially stack on top of your new MRR

00:12:00.100 growth.

00:12:00.720 Number three, moment of churn, getting clear with your team

00:12:05.260 what it means to churn and understand

00:12:07.160 involuntary versus cancellations.

00:12:09.460 And number four, how to fight back,

00:12:11.740 review those lists of five and educate yourself

00:12:14.740 on how to improve your expansion and your MRR growth.

00:12:19.900 As I mentioned in the beginning, I

00:12:21.120 want to share with you an exclusive resource

00:12:23.120 called my Churn Buster Cheat Sheet.

00:12:25.260 Essentially, it's nine different strategies

00:12:27.760 that you can deploy into your SaaS business

00:12:31.280 to really dial in your churn to reduce it.

00:12:33.860 Now, you're always going to have some because of your market.

00:12:36.840 You might be SMB, mid-market, or enterprise.

00:12:39.260 But getting to those industry norms

00:12:41.340 and understanding what those are,

00:12:42.660 you can learn all about that if you click the link,

00:12:44.640 download the Churn Buster Cheat Sheet below. 0.59

00:12:47.740 I really break it down and give you those specific strategies.

00:12:50.860 If you like this video, I would love a like.

00:12:53.500 Or if you're new, subscribe.

00:12:54.820 And if there's anybody that you feel this video could serve,

00:12:57.340 feel free to share it with them directly.

00:12:59.500 As per usual, I want to challenge you

00:13:01.900 to live a bigger life and a bigger business.

00:13:04.060 Build a bigger business.

00:13:05.060 And I'll see you next Monday.

00:13:07.700 Employ, deploy, deploy, impact.

Dan Martell - August 05, 2019

How to Lose Less Customers (Churn Reduction)

Episode Stats

Summary

Transcript