Dan Martell - August 05, 2019


How to Lose Less Customers (Churn Reduction)


Episode Stats

Length

13 minutes

Words per Minute

183.49875

Word Count

2,422

Sentence Count

140

Misogynist Sentences

2

Hate Speech Sentences

3


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

Transcript

Transcript generated with Whisper (turbo).
Misogyny classifications generated with MilaNLProc/bert-base-uncased-ear-misogyny .
Hate speech classifications generated with facebook/roberta-hate-speech-dynabench-r4-target .
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
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
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
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.
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.
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.