Dan Martell - What Is Churn？ SaaS Churn Prediction EXPLAINED

00:00:00.000 Hey there, Dan Martell here,

00:00:01.080 serial entrepreneur, investor, and creator of SaaScademy.

00:00:03.160 In this episode, I wanna share with you

00:00:04.600 what is churn simplified and explained

00:00:08.280 and how to reduce it, probably the most important thing,

00:00:11.020 because I think if you wanna grow a software business,

00:00:13.320 it's really important to understand how to measure it,

00:00:15.900 how to structure it, and more importantly,

00:00:17.720 how to capture the cancellation.

00:00:19.620 And be sure to stay at the end

00:00:20.480 where I'm actually gonna share with you

00:00:21.540 my exact six screens.

00:00:23.800 Literally, I'm gonna give you the mock-ups

00:00:25.000 of the six screens that I use

00:00:26.660 when any customer goes to cancel their subscription

00:00:29.400 on my SaaS business, but let's get into it.

00:00:44.120 So a long time ago, I was having a board meeting

00:00:46.340 and it was one of the first few board meetings

00:00:48.120 we had for my company Flowtown,

00:00:49.620 which was a venture-backed social marketing platform

00:00:52.020 that my co-founder Ethan and I had built.

00:00:54.980 And one of our investors asked us,

00:00:56.780 what's your churn looking like?

00:00:57.940 And, you know, we kind of thought we knew how to measure it.

00:01:01.400 So we just kind of said, you know, it's about 14% right now,

00:01:04.360 but it's getting better and we feel good.

00:01:06.300 And he was like, wow, is that per month?

00:01:07.680 And I was like, yeah.

00:01:08.820 At first I was like, that sounds pretty good

00:01:11.320 because you hear these numbers and you're like,

00:01:12.900 okay, well, you know, we're retaining customers.

00:01:14.860 They're paying us every month.

00:01:16.240 And what I discovered through that conversation,

00:01:18.800 because obviously he's a very seasoned investor

00:01:20.900 and what I've just, you know,

00:01:22.180 now that I've now coached hundreds of SaaS founders

00:01:24.900 try to improve their churn

00:01:26.460 to increase their monthly reoccurring revenue,

00:01:28.760 I've realized that there's so many different dimensions.

00:01:31.580 If you've ever felt confused

00:01:32.960 about understanding how to measure churn,

00:01:35.620 understand the difference between logo churn,

00:01:37.100 net revenue retention, gross retention,

00:01:40.020 like all these different aspects of the equation,

00:01:43.020 I'm gonna simplify it today

00:01:44.440 so that you can get your head wrapped around it,

00:01:46.540 realize that there's only two different

00:01:47.980 kind of dimensions to look at it.

00:01:49.740 And with that, you'll be able to understand

00:01:51.360 how to predict it and how to reduce it in your SaaS business.

00:01:54.680 So number one, calculate churn or sometimes called logo churn.

00:01:58.660 So we're gonna simplify it.

00:01:59.620 There's revenue churn.

00:02:00.560 So how much money we lose every month

00:02:01.980 from customers that cancel.

00:02:02.940 And we also have just like logos or accounts.

00:02:05.360 So if you have individuals as a consumer type SaaS

00:02:07.560 or a pro or business SaaS,

00:02:10.200 that's like the account level churn.

00:02:11.780 So right now we're just gonna keep it simple.

00:02:13.300 The way to measure this is

00:02:14.720 at the beginning of the quarter or week,

00:02:17.020 because you can measure churn on a weekly,

00:02:18.660 monthly, quarterly, annual basis,

00:02:20.800 is you wanna look at the total number of customers.

00:02:22.680 So at the beginning of the month,

00:02:23.520 if you had 100 customers, and at the end of the month,

00:02:26.920 you now have 90 customers from that same cohort,

00:02:29.140 not any new ones you've added,

00:02:30.260 just that same group of people,

00:02:32.460 you have 10% monthly churn.

00:02:34.320 Simple and easy.

00:02:35.940 So you can do this on a quarterly basis, et cetera,

00:02:38.040 but for right now, just go calculate your last month's churn

00:02:41.280 and maybe the last previous 12 months, okay?

00:02:43.440 You're trailing 12 churn on a logo basis,

00:02:46.920 but that's how we calculate.

00:02:48.280 The beginning, same group of people,

00:02:49.820 how many are sticking around at the end of that period,

00:02:51.660 divided by across that period, and that is the number.

00:02:56.420 Number two, net negative churn.

00:02:58.460 Now, this term sounds so weird

00:03:00.760 because net negative churn sounds like a bad thing.

00:03:04.420 Churn's bad, negative's bad, 1.00

00:03:05.860 but it's actually a positive thing

00:03:07.740 if the number is positive, right?

00:03:10.000 So what net negative churn is more like revenue retention.

00:03:13.060 You might hear people say net revenue retention.

00:03:15.520 To me, it's the same thing.

00:03:17.000 If I have a group of 100 customers

00:03:19.320 at the beginning of the year,

00:03:20.880 and they spent $100,000,

00:03:22.620 and that same group of people end up at the end of the year

00:03:26.040 having spent $130,000,

00:03:28.580 then I have a 30% net revenue retention,

00:03:31.800 or 130% net revenue retention,

00:03:33.800 meaning that it went up, okay?

00:03:35.860 And the way that goes up is by expansion revenue,

00:03:39.160 cross-sells, up-sells, add-ons.

00:03:41.160 So, and this is the thing about SaaS

00:03:42.860 that a lot of early first-time SaaS founders

00:03:44.760 don't understand is that your business

00:03:46.720 is predicated on your ability to move customers

00:03:49.600 through your plans, expand their usage

00:03:52.420 through some kind of value metric,

00:03:54.020 or use an add-on to sell them to increase

00:03:56.560 what's called the average revenue per user per account,

00:03:58.880 ARPA or ARPU.

00:04:00.040 But that is what net negative churn means,

00:04:03.220 is do you have a scenario

00:04:04.960 where the longer customers stay with you,

00:04:07.800 their spend is more than the amount of money

00:04:10.340 you've lost through cancellations or downgrades.

00:04:13.300 Number three, acceptable churn by market.

00:04:15.820 Now, if I didn't lose you on the second bull, I apologize.

00:04:18.820 There is some math involved here,

00:04:20.420 but the big idea is you have logo churn,

00:04:22.200 you have revenue churn.

00:04:23.540 Now I'm gonna talk about logo churn, your accounts.

00:04:25.820 What is the norm?

00:04:26.880 People always say, well, what should I be aiming for?

00:04:28.740 What's the point of diminishing returns

00:04:30.400 in regards to like, if my churn is X per month,

00:04:33.100 and I serve this type of market, is that okay?

00:04:35.540 So I wanna break it down for you.

00:04:37.060 First is SMB.

00:04:38.380 On average, because you gotta think about

00:04:39.940 small, medium businesses,

00:04:41.560 they're going out of business every year.

00:04:44.340 So you can't, there's certain forces

00:04:45.880 against cancellations that you'll never be able to overcome

00:04:49.740 because it's just in the same vein of business failure rate.

00:04:52.880 So three to 7% on a monthly basis for logo

00:04:56.100 is where you wanna be.

00:04:57.700 Now, previous point that I meant,

00:04:59.440 the net negative retention or net revenue retention,

00:05:03.600 that same, even though you're losing those logos,

00:05:05.720 if you have a product that has really well-designed pricing

00:05:08.740 and expansion revenue, like a value metric and add-ons,

00:05:11.760 you'll be able to overcome that cancellation force

00:05:14.740 by expansion revenue.

00:05:16.640 So that's why you have these SMB SaaS companies

00:05:19.600 that are very profitable, that continue to grow,

00:05:22.560 even though they're losing three to 7%

00:05:24.400 of their customers every month,

00:05:25.480 because the way they monetize that base of customers

00:05:28.660 allows them to grow the revenue base.

00:05:31.460 So that's the SMB space.

00:05:33.280 Mid-market, you're looking at about one to 2%

00:05:35.700 on a monthly basis, that's good.

00:05:37.860 And then on the enterprise level, 0.5% or 1%.

00:05:41.640 And it's very normal and not uncommon

00:05:44.260 to have enterprise customers with like no churn

00:05:47.860 on an annual basis because they're selling

00:05:49.620 these big integrated platforms

00:05:51.860 that are incredibly hard to rip out for a business.

00:05:54.500 So the stickier it is, the lower your churn is gonna be.

00:05:57.300 And on a monthly basis, when you get to that level,

00:06:00.180 like focus right now to get there.

00:06:02.100 But once you're there, you also wanna start looking

00:06:04.020 at ways to monetize better,

00:06:05.300 because that's really gonna help you

00:06:06.740 increase your average revenue per account.

00:06:08.660 So mid-market enterprise and SMB,

00:06:12.100 that's the way you wanna look at it.

00:06:13.380 you might serve all three.

00:06:14.780 So make sure you segment out your customers

00:06:16.780 and churn by segment

00:06:19.160 so that you know what they are individually

00:06:21.380 on a monthly logo

00:06:22.380 and just multiply by 12 to get your annual numbers.

00:06:25.840 Number four, churn prediction.

00:06:27.660 So how do you know ahead of time

00:06:29.680 before the customer actually cancels

00:06:31.660 that they're gonna not renew?

00:06:33.360 Great question.

00:06:34.080 So the way we do that is a customer success strategy

00:06:36.960 called the customer engagement score, the CES.

00:06:40.060 Now I teach a framework called the member at risk monitor,

00:06:42.880 which is essentially the same concept.

00:06:44.720 But if you think about it, if you look at your users

00:06:47.920 and you look at what happened prior to them canceling,

00:06:50.980 you'll probably see certain activities that were true.

00:06:54.200 Maybe they stopped logging in so often.

00:06:55.940 Maybe they had a change.

00:06:58.020 This is a big one.

00:06:58.700 I had a customer that I coach.

00:07:00.260 They noticed that when the person

00:07:02.400 who was the account owner changed jobs,

00:07:05.140 there was like a 70% chance

00:07:06.640 that they weren't gonna renew on their next renewal cycle.

00:07:09.000 Duh, because the person that made the decision

00:07:10.700 to buy that software had moved on.

00:07:13.120 So they built in a monitoring tool

00:07:15.600 that actually told them if the account owner changed,

00:07:18.240 reach out to the company,

00:07:19.420 find out who took over the role,

00:07:20.960 build a relationship,

00:07:21.800 and not only retain that account,

00:07:24.160 this is the kicker,

00:07:24.900 they would actually go and reach out

00:07:26.380 to the person on LinkedIn that changed to the new job

00:07:28.940 to see if they could sell their software

00:07:30.480 into that new customer.

00:07:32.520 That's the level of thinking that you need to have

00:07:34.700 to make sure that you can start to reduce

00:07:37.280 and really predict your churn.

00:07:38.840 So customer engagement score,

00:07:39.880 I have another video that's all about the different tools

00:07:42.720 that you should be using to measure this.

00:07:44.580 You can do it yourself very simply.

00:07:46.500 I mean, honestly, if it's logins, if it's usage,

00:07:48.760 whatever data tells you if they're red, green, or yellow,

00:07:52.860 that'll help.

00:07:54.060 So the way I stack it though, I wanna give you this,

00:07:55.840 is red's bad, yellow's trending bad.

00:07:58.700 Green is good, but then the top level is purple.

00:08:01.300 So you have these four colors and purple means referenceable,

00:08:04.300 meaning if you wanna refer customers for testimonials

00:08:07.020 or prospects to talk to customers, et cetera, that's purple.

00:08:09.880 And what you do is you create a playbook,

00:08:12.020 a customer success playbook,

00:08:13.520 a documented strategy to say,

00:08:15.600 if somebody ends up in red,

00:08:17.300 here's what we do and we execute.

00:08:18.760 We call them, we set up a scheduled kickoff.

00:08:21.360 We do whatever we need to do to engage them

00:08:23.240 to get them to yellow.

00:08:24.080 If they're yellow, we do this.

00:08:24.860 We try to get them to green.

00:08:25.740 If they're green, we try to get them to purple.

00:08:27.000 So we ask for, if they're willing to do a testimonial,

00:08:29.720 be interviewed on our podcast, et cetera, et cetera.

00:08:31.660 But that is at a high level,

00:08:33.420 how we not only predict it, but we overcome it.

00:08:36.160 Number five, limit churn. 0.77

00:08:37.820 So how do you limit your churn?

00:08:39.160 Well, the reality is, is people might be canceling your software, not because they don't have the

00:08:43.080 need and they don't think you can solve it. Maybe they're just frustrated. Maybe they had a bad

00:08:46.620 customer support experience. Maybe they feel like there's a feature that's critical for their

00:08:50.580 business that you don't serve or you don't offer, but you actually have it. They're just not aware

00:08:55.320 of it. So there's, there's six dimensions of doing this. And the big idea is I want you to

00:09:00.700 capture the cancellation. Okay. I want you to monitor using the, the different traffic light

00:09:06.900 systems, you know, red, green, yellow, purple. But I also want you, if somebody actually goes

00:09:10.560 to cancel, I want you to capture their reason and figure out if there's a way to save them.

00:09:14.980 Sometimes people cancel or really just want to pause their account because there's a downturn

00:09:18.800 in the market. But I want you to capture that feedback and feed it back to your product team,

00:09:24.020 because all those reasons are probably product opportunities to improve the gaps in your

00:09:29.960 roadmap so that you can retain more customers. Pretty much, I would say, you know, 20% of your

00:09:35.620 engineering time should be fixing bugs and fortifying the platform. 60% should be built

00:09:40.280 on reducing churn and adding features that are missing to keep the customers you have. And the

00:09:44.660 other 20% should be on innovation and new kind of product strategy so that you don't get left

00:09:49.960 behind by your competitors. So quick review of the hot principles of churn and how to make it

00:09:56.280 predictive. Number one, we need to calculate our churn. Number two, we need to ensure we're heading

00:10:00.500 towards net negative churn.

00:10:02.140 Number three, benchmark our churn

00:10:04.100 by acceptable churn by markets.

00:10:06.520 The percentage is there on a monthly basis.

00:10:08.660 Number four, churn prediction using software

00:10:11.740 or coding it ourselves.

00:10:13.040 And number five, limit churn

00:10:14.480 by capturing the cancellation.

00:10:16.520 As I mentioned in the beginning of this episode,

00:10:17.720 I wanna share with you an exclusive resource.

00:10:19.960 It is called the Cancellation Capture System.

00:10:22.400 It's the exact framework wireframes that I use

00:10:25.880 and all of my software companies,

00:10:27.280 all my coaching clients implement it

00:10:29.140 to not only save the cancellation,

00:10:31.640 but more importantly, learn from the customer

00:10:34.320 that's leaving as to where the gaps are in our product

00:10:37.400 to be able to not only save them,

00:10:39.020 but potentially reduce the amount of future cancellations

00:10:42.480 from our current customers.

00:10:44.160 So make sure that you download that.

00:10:45.660 Just click the link below,

00:10:46.900 download your copy with the wireframe

00:10:48.520 so you can implement that.

00:10:49.660 Just give it to your product team

00:10:50.660 and they'll write up the code.

00:10:52.060 And be sure if you like this video

00:10:53.400 to smash that like button, subscribe to my channel.

00:10:56.600 And if there's anybody that you care about

00:10:57.940 that you think this could serve,

00:10:59.000 Feel free to share with them.

00:11:00.340 And as for usual, I wanna challenge you

00:11:01.840 to live a bigger life and a bigger business.

00:11:03.880 And I'll see you next Monday.

00:11:07.100 Ready to rock.

Dan Martell - November 02, 2020

What Is Churn？ SaaS Churn Prediction EXPLAINED

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