Episode 226 | Everything You Always Wanted to Know About Churn (But Were Afraid to Ask)

Show Notes

In this episode of Startups For the Rest of Us, Mike and Rob define churn, talk about the different varieties, explain the different ranges you can expect, how to calculate churn, and present ideas on how to reduce it.

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Transcript

Rob [00:00:00]: In this episode of “Startups for the Rest of Us,” Mike and I discuss everything you always wanted to know about churn, but were afraid to ask. This is “Startups for the Rest of Us,” episode 226.

[Theme music]

Rob [00:00:18]: Welcome to “Startups for the Rest of Us,” the podcast that helps developers, designers and entrepreneurs be awesome at launching software products, whether you’ve built your first product, or you’re just thinking about it. I’m Rob.

Mike [00:00:27]: And I’m Mike.

Rob [00:00:28]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. [What’s the word?] this week, Mike?

Mike [00:00:32]: Well, we got a[n] email from Gavin Ballard, who commented about a previous episode we did about the stairstep approach, and he says, “Hey, Mike and Rob. Thanks for the podcast. Seriously valuable and thought-provoking. I enjoyed your discussion of the stairstep approach to launching products in episodes 222 and again in 224. I thought I’d add one to the mix which might be considered step 1½. Building a plug-in or an add-on app for an existing SAS platform or subscription-based product can be a great way to start small, but still get the advantage of recurring revenue. Examples would include building shop [?] applications or add-ons for Heroku’s platform.”

Rob [00:01:03]: I like this idea. I think it’s a clever hack. It’s not widespread enough that I would add it as a full step yet. Like, no one I know has done this. If you’ve done this, feel free to drop us an email at questions@startupsfortherestofus.com, but most folks I know are doing the one-time thing and then moving up. I don’t know how many opportunities there are for the small, but monthly fee type apps.

Mike [00:01:25]: You know, it’s interesting, because a couple of years ago at MicroConf, Constant Contact was introducing people to their Developer platform and pushing that angle where you could leverage their customer base and market to their customer base by building add-ons for Constant Contact. And because of all the subscription billing that they were doing, you’re essentially tapping into a market that is already used to paying for things on a subscription basis.

Rob [00:01:48]: Yeah, I think it’s a really good idea. I think it’s a clever way to approach it, you know. Anytime you can get recurring revenue, I think that’s good, and especially if you don’t have to worry about churn – right? Or, you have to worry less about it, because if they’re already using Constant Contact, I guess the way they would churn is if they started using your plug-in and then stopped. But it’s kind of like if you become part of their core workflow, the odds of them leaving Constant Contact are pretty low.

Mike [00:02:10]: So, thanks for sending that in, Gavin.

Rob [00:02:12]: We have new iTunes reviews. We have a five-star review from B. Brigg from the U.S. He says, “I’ve been a hardcore podcast listener for four or five years now, but I only found ‘Startups for the Rest of Us’ about a month ago. This one has moved to the very top of my list and is a must-listen podcast.” Thanks for the review there.

Rob [00:02:28]: And then one from Ruben Gamez [whom] some of you may have heard of. It’s taken you a while to post this review, Ruben. It’s [chuckles] December. From December 2014 – I know he’s been listening for several years, but we appreciate it. It says, “‘Startups for the Rest of Us’ is one of the few podcasts I listen to every week. Each episode has tons of useful and practical advice for anyone launching or growing a startup.”

Rob [00:02:48]: And another five-star we get from Joshua G.K. in the U.S. “I love this podcast. It’s informative, practical and inspirational. Mike and Rob don’t just talk theory; they talk in-depth about the [?]-ties of startups.”

Rob [00:02:58]: So, thanks for your reviews. If you haven’t left a review, you can leave them in iTunes, in Stitcher – whatever podcatcher you’re listening to. And I think you can even leave it now on the iOS padcast app. You can actually leave just a five-star. You don’t even need to type this whole review thing. You can just give it five stars. We have 391 worldwide reviews, and we’d love to see yours in there.

Rob [00:03:18]: So, Mike, before we dive into churn, I have a listen question I wanted to toss around just because it’s kind of a fun one. It is from Andrew Boot, and he says, “I like to read paper-based material over breakfast, or just when I have spare time, and I prefer physical magazines to tablets. What paper magazines do you read or recommend? In the past, I’ve read ‘Wired,’ ‘The Economist,’ “Bloomberg BusinessWeek,” and ‘Interzone.’”

Mike [00:03:40]: I’m almost ashamed to admit that I’m contributing to the downfall of the entire newspaper and editorial industry [chuckles] and magazine industry, because I don’t read any of them. I used to read “Wired,” and there were a few others. Their names escape me at the moment. But I just don’t have time anymore. And it’s not really that I don’t have time. It’s I don’t make time. I don’t make it a priority to read those things, and I think it’s because I feel like they’re not really relevant to me anymore. I don’t know whether I’m just getting older, or my tastes have changed; but I don’t read most of them. I prefer just to seek out the online versions – if I read them at all.

Rob [00:04:14]: Yep. Now, you know, I’m in agreement with you. I actually still am subscribed as of a few weeks ago to several magazines. I’m a subscriber to “Time.” I’m subscribed to “Wired,” “Entrepreneur,” “Inc.,” “Fast Company”; and I had a big stack of them. They all came, and I took them to the beach apartment, and I was just hanging out there, reading. And you know what? I got so little value from all of them – except for “Time”; that actually had some insight – that I logged on, and I cancelled all of the subscriptions. So, I am now –

Mike [00:04:41]: Wow. [Laughs]

Rob [00:04:41]: – yeah. All at once. I was so infuriated. “Wired” is just filled with ads. I got no value out of it. I’ve always read “Inc.” and “Entrepreneur” just to kind of keep on stuff, but it’s just so ridiculous now. I read it, and it’s just such a high level, and it just wasn’t worth it at all. I mean I don’t want to slam those guys. I know they’re doing a service for somebody; but at this level, where you’re trying to be focused and, if you know what you want to do – like, you know you want to launch a SAS app – there’s just nothing in there for you. Or, if you know you want to launch a – whatever – a mobile app, or a WordPress plug-in, or something, go find the people who are really doing this and get the detailed information from them rather than this 10,000-foot-view advice, where they take one person’s experience – or, even worse, like, a journalist’s research – and try to generalize it to stuff, because so much of what I read in there I disagree with.

Rob [00:05:27]: It’s like that o- – you know, that advice that they have in that one column only works under these very specific circumstances. So, if you’re not going to raise funding and start a B to C marketplace and blah, blah, blah, then your advice is totally moot; but they don’t say that in there. They don’t say that, “This advice applies only applies to these types of businesses.” So, that’s where I’ve gone with it.

Mike [00:05:45]: It’s about relevance; and, to me, those things are just not relevant anymore. I mean occasionally, I’ll stumble across a[n] article on “Wired” or the Network World website, or a few other different places where it is relevant; but with the paper magazines, one of the ways that they make all the revenue is with all the ads. And that just annoys the crap out of me, so I just don’t tune into them. And like I said, because of the printing schedule – because my wife used to work in the publishing industry – they publish things, and they basically have all of their articles and stuff ready to go three months in advance. So, by the time you’ve heard about something, that news was new four months ago – easy.

Rob [00:06:22]: Right. It’s like you said. If “Wired” has something relevant to you, it’ll typically pop up. It’ll pop up on Twitter. It’ll pop up on Hacker News, or growthhackers.com, or some source that you already read. And so actually getting the magazine, I’ve just found, is not super relevant.

Rob [00:06:37]: So, today we’re talking about churn. We’re going to define it, talk about how to reduce it, talk about ranges to expect. And this all comes from a question from Daniel Nelson, and he said, “One episode idea I’d like to hear is to focus entirely on churn. It comes up often, but I’m really curious as to what churn rates you can expect with different types of SAS apps, how to calculate it, and how degrees in churn can be a sign of product-market fit.

Rob [00:06:59]: So, I think the first thing I want to talk about is basically to define churn. If you’ve never heard this term, you don’t really know what it is. It really only applies to subscription businesses, so it’s going to be your typical SAS stuff, or maybe if you have a membership website. And I suppose even having subscription e-commerce – it could also fit that, like the razor blade subscriptions they have.

Rob [00:07:20]: So, here’s how we’re going to define it. It’s the percentage of people who cancel in a given time period. Okay? So, today we’re going to be talking about monthly churn, because that’s the most common metric used in SAS. If you’re in a large enterprise doing enterprise SAS, they often talk about “annual churn,” because they have mostly annual contracts.

Mike [00:07:41]: Yeah, and I think that’s an important distinction just because you can look at churn a bunch of different ways, and that’s what’s so screwy about a churn, I think – especially when you’re reading about it online, because people always want to talk about churn in a way that makes their business look good: “Oh, we have 10 percent churn,” or, “5 percent churn,” or, “3 percent churn.” But they don’t necessarily always tell you what the time period is. And there’s also this concept of, well, churn only counts if the person had an opportunity to cancel.

Mike [00:08:10]: So, if you’ve got monthly subscriptions and annual subscriptions, you probably only see one churn rate; but it matters whether you’re talking about one, the other, or the aggregation of the two. So, I think that there’s definitely some caveats that you have to take a look at, and there’s these little, subtle nuances about churn that you have to pay attention to. Otherwise, the numbers don’t really matter a whole lot. They don’t mean very much.

Rob [00:08:34]: Yeah, that’s a good point. We’ll talk about that a little later and how to calculate, because there’s a bunch of nuances that’s way more complicated than the definition I just gave makes it out to be.

Rob [00:08:43]: You know, in terms of monthly versus annual versus an aggregate, in my opinion, the aggregate is pretty worthless. You really want to break it down to, like, monthly versus annual. In addition, you really even want to start thinking about it in terms of different pricing tiers. You know, you could calculate monthly churn for each, individual tier. That’s a way to do it. So, that’s a bunch of ways to drill into it.

Rob [00:09:04]: But before we dive into stuff like that, let’s take a look at the types of churn. There are a bunch of different types. I’m only going to talk about three here, and then we’re going to focus on one of them. So, the first type of churn is the most common you’ll see defined, and it’s customer churn. That’s the number of customers who cancelled divided by the number of customers that were there at the beginning of the period – right at the beginning of the month. That will give you a certain churn percentage.

Rob [00:09:32]: A second type of churn is revenue churn, and that’s where you say, “Of those customers who cancelled, how much were those collectively paying per month?” divided by how much was everyone paying at the beginning of the month. And revenue churn feels a little more advanced, or maybe a little more irrelevant; but what I’ve found over these last several years of running SAS is that revenue churn is the better measure. And there’s a bunch of reasons for that we can go into later, but if you’re on the fence between having customer churn and revenue churn in your dashboard, I personally have both; but I focus on revenue churn. And I rarely look at customer churn anymore, because the number of customers who cancel is really not as relevant.

Rob [00:10:11]: And then there’s another type of churn that I’ll mention offhand. It’s involuntary churn, and that’s when people basically cancel because their credit card fails, or it expires, or there’s some other reason why they don’t continue; but they don’t even really know that they’re churning. And so that’s a subset, frankly, of your revenue and your customer churn – is this involuntary churn. But these are probably the three terms that you hear most often thrown around when someone’s talking about SAS churn.

Mike [00:10:38]: Yeah. I think the one that we probably hear about the most of those three is the involuntary churn. At least that seems like it gets a lot of publicity, because you have all these people who – like, every so often, people’s credit cards are going to expire; and you somehow need to deal with those, and you want to reach out to those people and say, “Hey, your credit card’s about to expire,” in an effort to help prevent that involuntary churn.

Mike [00:10:59]: But the other ones, as you said, are just as important. I mean you do have to pay attention to these different things, because each of them means something different as well. It’s one thing to lose a customer that is paying you money, but it’s another to lose a customer that is paying you a third of your revenue. Or, they’re at your highest payment plan, and they’re paying you a thousand dollars a month. And depending on the size of your business, that could be a huge loss, or it could just be almost inconsequential. It depends on how much your price points are.

Rob [00:11:26]: Let’s talk a little bit about maybe some ranges of revenue churn that you – I don’t even want to say that you should expect, but it’s kind of like where things might fall. This is kind of a hard thing to nail down, because with SAS there’s a huge range. And even I’ll throw out some membership website stuff, too, based on my experience and [the] experience of other folks I know.

Rob [00:11:47]: But let’s take SAS first off. If you have a low price point versus a high price point, your churn is going to be dramatically different; because higher-price-point customers, while they’re harder to land, they tend to not churn out nearly as much as low-price-point customers. [It] might be counterintuitive, but that’s how it works out. If you are pre-product-market fit – meaning if you are before you’ve really locked in on a market who really needs your product – versus being post-product-market fit, your churn’s going to be totally different.

Rob [00:12:15]: If you are, like, a line-of-business app – meaning you’re something that people use on a daily basis: an invoicing software, time tracking, maybe email marketing, even sending out proposals for their business – those are going to tend to have lower churn versus a tool like an SEO rank tracker, or even a tool like HitTail – it’s not a critical piece for most people’s business. And so analytics and metrics apps can fall on either end. I think if you have Kissmetrics, and you’re all-in on that and you have a ton of data, that could be something that you do stick with; but I also think you could have a Kissmetrics account and have some data in there and have it not be a key part of it.

Rob [00:12:54]: So, depending on where you call across all those ranges, your churn range that you’re shooting for is going to be pretty dramatically different.

Mike [00:13:02]: Yeah, I mean that just depends a lot on how integrated you’ve gotten into your customers. You know, as you said – you pointed out Kissmetrics. It could very well be a very critical piece of their operations, but it could just be something that’s inconsequential. So, if times or bad, or it’s low on the priority list to update the credit card information, it might get dropped. But if it’s core to their business and lots of people are looking at it, then it obviously is much, much higher-priority.

Mike [00:13:26]: So, you want to put your business in a position where you’re as deeply ingrained as [sic] the customer as you can possibly be in order to lower your churn rates, but at the same time, there’s a balancing act about how invasive you are in your marketing and all the other things that you’re doing to get that level of integration into your customer.

Rob [00:13:44]: So, before we talk about some specific numbers, I need to couch this; because, typically, you’re going to see your first 30, 60 or 90 days have a dramatically different churn rate, a dramatically higher churn rate, than post 30, 60 or 90. And you have to figure out for your particular app where that number is. So, I think it was WP Engine. I think Jason Cohen said it was, like, first 30-day churn was X-number. I think it was, like, 15 percent, or 20 percent. And then after that, it dropped to, like, 2 percent.

Rob [00:14:11]: And I’ve seen a very similar pattern with all of my subscription apps where, for the first 30 or 60 days, it’s like people are still deciding if they want to engage. They may not be on-boarded yet. They’re almost using it as an extended trial that they had to pay for, so you’re going to get a lot more cancellations then. But once people settle in and they’re four or five, six months in, they tend to be using the app. At least [they’re] more engaged with it. And so the ranges that I’m going to give here are more for that post 90-day period.

Rob [00:14:40]: You know, I’ve seen apps with 40 or 45 percent churn in the first 60 days. So, I’m not going to be talking about that. I’m going to be talking about what the post 60-day would look like. And you really have to fight that first 60-day churn differently than the post 60-day. Right? So, the first 60-day is almost like how you would get people on board, and you need to attack it from that angle. You need to send emails. You need to offer help. You need to offer to get them engaged and using your app so that you bring that 45 percent down as low as you can. If you cut that down to 20 percent, you’ve made big strides.

Rob [00:15:13]: The post 60- or 90-day churn – the numbers we’ll talk about in a second – these you’re going to attack through a different approach, and we’re actually going to talk about that towards the end of the episode.

Mike [00:15:22]: Yeah, and this goes to something along the lines of a cohort analysis. You’re just making sure that you’re treating those people the same from one month to the next. So, like when somebody joins – let’s say they join in January. They sign up for your app, or they join your community. In January, that churn rate is going to be a certain amount. And then in March, your churn rate for that cohort from January is going to be different than the people who signed up for your app in March. So, just make sure that – as we said before, there’s different types of churn; but there’s also different snapshots of the churn that you could look at, and you can analyze them very, very differently based on how those numbers come out and what your goals are that you’re trying to achieve.

Rob [00:16:00]: Exactly. That’s a really good point to bring up. So, when you first launch an app, your numbers are too small, and everything’s a mess. So, what I start with – what I did with Drip when we first launched was I just had a simple churn rate, and it doesn’t tell you very much. But I didn’t want to spend the week of developer time to build a cohort churn grid like you’re talking about, where it shows every cohort, shows which month and shows what the numbers are. And so all we did was a simple churn, which was just the total number of customers who cancelled divided by the total number who started at the beginning.

Rob [00:16:30]: Then I moved in to simple revenue churn. And then at a certain point, after we were out – it was, like, four to six months – where things started to settle down, and I felt like having a picture of it would be worth it, then I worked with a developer and literally – you think this is going to be easy, but it takes – if you really want to build a cohort churn grid, I’ve never seen it take less than about 30 hours of trying to get in there to get all the edge cases and get everything right.

Rob [00:16:54]: And so I like that you bring up that point – is that I start[ed] with simple churn just because I wanted to have some number to look at and see how it went up and down. But you have to get away from that, because it’s kind of like looking at Amazon reviews and seeing if it has ten five-star and ten one-star, then that averages to – what – like, a 2 ½ star review. But if you only looked at that 2½ number, it doesn’t tell you anything. You need to look at the histogram of it – right – that Amazon shows you where it shows you a lot of the 5’s and the 4’s and the 3’s. And it shows you what the reviews are.

Rob [00:17:21]: So, that’s the same thing. [A] cohort churn grid shows you all the numbers instead of just this one, big-bucket average that isn’t actually that helpful.

Mike [00:17:28]: I think the other thing you have to be careful of is that, because over time you’re making changes to your app, there could be things that – you do something in January, and you don’t see the results of that until April, or May, or June just based on when people signed up. So, there are these subtle things that you’re going to do, or even major things that you do, that have implications down the road. And until you’re able to compare some of those cohorts against each other, that makes it even more difficult.

Mike [00:17:53]: But I think you also bring up a really interesting point – is that early on, you said you started with just one churn rate. And I would almost argue that when you’re just launching, you have no data to go off of. So, really what you have to go off of is talking to people and finding out why are they cancelling. That’s probably the much more important indicator than whatever that number happens to be, because if you have ten customers, let’s say, and one of them cancels, well, your churn rate is 10 percent; but one data point does not help you very much. You really need to have a lot more data behind that, and because it’s just a single data point, you just have that one conversation.

Mike [00:18:28]: But you can use that to extrapolate a little bit and then go talk to your other customers who are still customers and find out if they’re having some of the same types of issues and if that’s something that you need to address in your product.

Rob [00:18:39]: I totally agree. I mean until you are in the low triple digits of customers, looking at an overall churn rate is not even helpful. And until you’re over let’s say even 50 new customers a month – because let’s say you have 20 new customers a month and one of those cancels in the cohort versus two. That’s a difference between a 5 and a 10 percent churn rate. So, you can have these big spikes up and down that really are not statistically significant. So, having 20 new customers, which a lot of SAS apps are not even at that level – that’s not enough to get a really good picture. So, I think you need to be up around 40, 50 new customers a month before you really think about building out a churn grid.

Rob [00:19:19]: So, let’s take a look at some ranges that I’ve thrown together. And these are tough, because it’s kind of like saying, how much should you charge for your app? What should your price range be? And we have rules of thumb and ideas and stuff, so that’s what this is. In essence, when the big guys raise funding – and they try to raise VC funding – they typically need to be in the 1 to 2 percent per month range. I’ve often seen that Enterprise SAS has about around an 18 percent annual churn, which is around 1 ½ percent. And so that’s a typical range.

Rob [00:19:50]: Now, getting down to 1 to 2 percent – if you have a subscription app, you know how hard this is. But that’s the range that they are, and that’s the range they tend to have to be to raise big rounds of funding. When you first start off, if you launched a brand new SAS app, my guess is, for the first several months, your churn is going to be 10 to 20 percent per month; because until you get product-market fit, until you figure out your marketing and you on-boarding and all that stuff, it’s going to be really high.

Rob [00:20:15]: And the first thing that I try to do is get that number under 10 percent. And, frankly, you want to try to push it to between a 5 and 8 percent range. And I did a MicroConf talk a couple years ago. It was about growing HitTail, and I talked about some very specific things that I did. It was sending a lot of emails, and it was figuring out where the bucket was leaking, essentially. It helping people get on-boarded, doing free concierge. That’s when I first started doing concierge stuff. So, that’s how you’re going to try to push it down and get to 5 to 8 percent, because if you’re churning 10, 12 percent of your customers every month, it is so hard to grow.

Rob [00:20:49]: Like, even if you’re dumping a bunch of people into your funnel, you’re just bleeding them out of the bottom of the funnel. So, you want to try to get that down under 5 to 8 percent. And then with a low price point – you know, so let’s say it’s SAS under maybe 50 bucks a month. I think you’re going to bottom out – best case – between 3 and 5 percent churn per month. I don’t know of many SAS apps in this lower-end price point – maybe even below 100 bucks – that can get down below that. Okay? And remember this is not in the first two months; this is kind of after that time, after people sink in.

Rob [00:21:24]: I think that getting to the 2 to 4, 3 to 5 percent range is a really good goal to shoot for. If you get to that point, in my opinion, you have achieved product-market fit with someone – you know, with some group of people, if your churn really levels off to that level; because most SAS apps that I see that – let’s say they’re charging 20 or 40 bucks a month – they stay in that 5 to 8, 5 to 9 percent range, and they really have a tough time getting below that.

Mike [00:21:51]: Yeah. I think one of the things that is not intuitively obvious about the churn rate is that if you’re losing 5 percent of your customers on a monthly basis, then your yearly churn rate is 54 percent. And I’ve done the calculation on this. It’s massive, and it’s not obvious when you first start looking at that churn rate. You’re like, “Oh, I had a hundred customers, and I lost five.” But if you lose 5 percent of your customers every, single month, that means that you have to get 47 new customers by the end of the month in order to just replace those people. And just looking at that number, it’s 5 percent.

Mike [00:22:24]: Well, that’s not a big deal; but then it’s another 5 percent, another 5 percent, another 5 percent. And over time, it adds up. And that’s why not only do you have to make sure that your customer base is expanding, but you pay attention to that churn rate so that you’re expanding at a rate that exceeds what your churn rate is. Otherwise, there is a point of inflection at which somewhere down the road you’re going to start going negative; and it’s going to start going negative very, very quickly.

Rob [00:22:49]: Yeah. And the struggle with it is, if you’re churning – let’s say you’re churning 10 percent every month, and you’re at a hundred customers. So, you’re losing ten customers a month right now. You can replace ten customers reasonably easily – right – with paid acquisition. But let’s say you continue to grow, and then you’re at 500 customers, and then you’re at a thousand customers. So, now you’re at a thousand customers. You’re churning a hundred of them every month. Replacing a hundred customers every month just to stay even is really, really hard.

Rob [00:23:15]: And there becomes kind of a mathematical point where you cannot grow any further. Right? If your churn is 10 percent and you – you know, you have to drive thousands of trials in order to – depending on your whole funnel and how it looks. But you have to drive so many trials in order just to stay afloat, that your growth basically stalls out. And that is why it’s – you know, if you’re going to go to someone to try to raise investment, if they look at your churn and you’re at 7 percent, then they know that you can’t get to a certain valuation. You can’t get past a certain revenue mark.

Rob [00:23:45]: And so that’s why having that low churn is a big deal. And, actually, frankly, Rand Fishkin from SEOmoz talked about this. He blogged all about raising funding and how SEOmoz’s churn was too high, and that they had trouble raising funding even though they’re a profitable company. They eventually did raise funding, of course, but they really had to work on that and work with the investors about it.

Rob [00:24:06]: I guess the last thing I’ll add about ranges is, instead of a SAS app, if you run a membership website, membership websites traditionally have a high churn. The folks that I’ve talked to who own them – there’s a number of folks I know – they see 10 to 20 percent a month. So, the lifetime value of a membership website customer tends to be a lot shorter than, say, someone who really gets engaged with your SAS app. And I’m sure there’re exceptions out there, and there’re certain communities. You know, if you have more of a tighter community, then people are going to be less likely to churn. But overall, I would say that if you’re in the 10 to 20 percent range on a membership website, that you’re probably not doing too bad.

Rob [00:24:42]: So, in terms of calculating churn, I kind of already threw the how to do that out earlier; but there’s a couple notes I wanted to throw out. One is that you have to leave new customers out of the picture. You can only look at people who cancelled during that month and the number of customers who existed at the beginning of the month, because any new customers are a net gain; but that doesn’t count in terms of churn. Right? That might be overall business growth, but if you’re really looking at churn, you don’t want to look at new customers at all.

Rob [00:25:11]: The other thing you want to do, as Mike said earlier, is you want to exclude people who didn’t have the ability to cancel that month. So, if someone is an annual subscriber, and they did not have the ability to cancel in June and you’re running churn for June, you do not include them in the calculation. This is a big mistake I see a lot of people make, actually. I made this early on, and as soon as you remove those people from it, it becomes a lot more painful; because your churn instantly goes up when you fix that piece of it.

Rob [00:25:37]: So, Mike, we’ve talked about some ranges for churn. We’ve defined it. Let’s talk about a few ways someone might reduce churn. And there’s a whole bunch of approaches that people can use; but let’s talk about a few, maybe, that we’ve tried or heard about.

Mike [00:25:51]: Well, I think the obvious one is to improve your product. I mean when you’re having people churn out, if you can get any sort of information back from them – what you should put in place is, if they have to cancel, they have to answer [in?] some sort of a reason. There’s a lot of people who just put in a bunch of gobbledygook into the text box, or whatever; but you can always follow up with people with an email and ask them. If you ever got their phone number, you can resort to calling them. But do whatever it takes to try and understand why it is that people are cancelling.

Mike [00:26:19]: And there’s going to be roadblocks in your product. There’s going to be certain pieces that don’t work, or don’t meet their needs for whatever reason. And some of those people are not going to be a good target customer for you. So, just because they say, “I left because it didn’t have feature XYZ,” doesn’t mean you go out and implement feature XYZ. It means that you look at that and figure out whether or not it makes sense in the context of your product to go implement that, or whether it’s just maybe they signed up for your product, and they weren’t necessarily a good fit for you.

Rob [00:26:47]: Yeah. One tip I have is I actually remove the required field when someone’s cancelling, because when someone wants to cancel, they really want to click and be done; and they tend to get frustrated if they have to do stuff and don’t actually enter info. But then I have a Drip email that follows up with them. I think it’s, like, 15 minutes later. And it just asks them why they cancelled. It asks them to hit “REPLY” and type it in. And I’ve found that a lot of people do that. I get a better response. I get more in-depth responses, and it’s also then easy to strike up a conversation.

Rob [00:27:13]: Some people say, “Oh, I decided to go with this other provider,” and then I reply, “Hey, who’d you go with, and why?” And then they’ll actually reply to me. So, it’s much easier. It’s not like a cold email for me. They’ve already replied, and it’s easy to get a conversation going. And that’s the important thing – right? If you are going to fight churn by improving your product, which is probably where I would start in most cases, you need to know how to improve your product in order to actually keep people around; because you don’t want to be guessing at this. You want to have customer feedback and be able to act on it.

Rob [00:27:41]: Another approach is to improve your traffic quality; because, frankly, if you’re getting a bunch of random traffic, or traffic from people who are not in your target market, then that’s not helpful – right? They may sign up for a trial, and you may be able to convince them through some value proposition you have; but they could just perhaps be lower-quality lead[s?] – people who are more price-sensitive. You know, if you do a big deal – like I know folks who’ve done deals with, let’s say, like a Groupon, or an Appsumo, or something. And you get a lot of traffic from that; but, in general, overall, they’re more price-sensitive, and they try a lot of things. And so they tend to maybe come in to look around, and then they churn out.

Rob [00:28:19]: So, that kind of traffic versus a warm lead that’s a referral basis from an existing customer is going to convert very, very differently. And so thinking about ways to improve your overall traffic quality, I think, is a big deal.

Mike [00:28:31]: You can also leverage something called “sales prevention tactics.” And this kind of ties into traffic quality, but basically telling people that your product is not right for them if X, Y, Z. So, if they need certain requirements, or if they have certain criteria that they need to fulfill, or they fit a certain profile, this application is probably not for them – essentially discouraging people from signing up for your product based on the profile. And it’s hard to do this based on where they’re coming from, but to some extent you can do that; because if you see a bunch of people coming in from a certain website, and it’s generating a lot of interest in sign-ups, but those sign-ups aren’t converting, it may be that those people are not [a] good fit for your product and it’s misleading on that other website.

Mike [00:29:17]: Well, you can’t change that other website, but you can change the copy on your own to say, “If you fall into these buckets, you’re not a good fit for this,” and essentially pushing people away who are not a good fit. In a way, that’s essentially modifying the quality of the traffic that gets through your sales funnel to the next step. Now, it may very well cause a hit to your conversion numbers, but wouldn’t you rather have a hit to your conversion numbers rather than having a hit to your churn rate?

Rob [00:29:45]: Yeah. This is a good point. I think an example of this is with HitTail. We can’t help you unless you have maybe – I don’t know – a thousand, 1500 unique visitors per month and at least a third of that comes from organic traffic; because otherwise, there’s not enough data for HitTail to analyze. And so we had talked about at one point asking that before you sign up – like, having a box when you go to start a trial, that it says, “Do you have at least a thousand or 1500 uniques, and does X percent come from organic traffic?”

Rob [00:30:14]: And I’d want to [split-test?] that, because I wouldn’t want people to not answer and wander off. But that’s the kind of thing that you could do. I’ve seen Kissmetrics do this as well. If you’re not qualified, or you’re not someone who’s really going to get a lot of value, they don’t want to bother with you getting in the product at all. And the ideal way to do it would be to ask these questions, and if they say “no,” then say, “You know what? I don’t think HitTail’s a fit for you right now. Enter [your] email here, and we’ll ping you back in four months and see if you’ve hit that point.”

Rob [00:30:42]: I think the same could be said for a lot of products. I can think right off the bat of a way I would do this for Drip and a bunch of other SAS apps. Like, if you’re in your app and you know your customers, you kind of know who gets the most value out of it and who sticks around. And so improving your traffic quality to drive more of those people and then discouraging sign-ups from anyone else is not a bad way to keep folks from getting in who are unqualified.

Mike [00:31:04]: You could kind of do that to some extent with pricing as well. And that’s the interesting thing – is if you push your price – and we’ve kind of talked about this in the past – not with this terminology, but you can do sales prevention and getting rid of the people who are not a good fit for your product just by raising your prices. If your price point is ten dollars, you’re going to attract a certain type of customer that may not be the customer you want; because they’re going to have higher expectations, and they’re going to cut into your support costs. And it just makes it difficult to have some of those customers. So, raising your prices can essentially filter out some of those people.

Rob [00:31:35]: Indeed. Yeah, like I said before, higher-priced customers tend to churn less than lower-end customers.

Rob [00:31:44]: The next tactic for reducing churn is to get them properly on-boarded during their trial. It’s to get them using your product. And we’ve recorded entire episodes on this topic, but it’s emails sent to them, you know, during their on-boarding. It’s free concierge services. It’s just touching base and offer to help. It’s making a product intuitive and having kind of a guided setup, or a wizard, or something that walks them through and gets them to that minimum path to [awesome?] as quickly as possible.

Rob [00:32:10]: And I guess, you know, there’s another MicroConf talk. Mine from 2014 talked a lot about how to do this and how we structured this with Drip. Because if someone’s not actually engaged in using your product, then they are going to churn eventually – you know? They’re just not going to stick around, paying for something. So, getting them using it is one of the best ways to reduce churn.

Mike [00:32:28]: Another thing you can do is actively reach out to the people who are using your product and try and provide them additional value with either weekly or monthly emails. I get one from Kissmetrics every, single day that has traffic numbers for me. And, yes, I could go to Google Analytics, and I could go look it up; but having it right there in my inbox, that tells me exactly how much traffic I got and what the relative percentage is for that particular day versus yesterday, and the month-to-date and comparison against last week – it’s really nice to see that information right in my inbox, so I just subscribe to it, and I tell it to keep sending it to me.

Mike [00:33:04]: But if you can get in front of your customers on a regular basis and keep providing them additional value, not only are they going to not churn out, but they’re going to love getting that information – especially if it is relevant to them. It is providing them a good and valuable service.

Rob [00:33:19]: Perfect Audience has one that’s really good. There’re several apps that do this. This has been on my list for so long to put into Drip, because there’s a lot of metrics we could send – right? “Here are your new subscribers. Here are the number of conversions.” I mean there’s a lot of stuff, with a nice graph in the email. It’s the kind of thing that reminds people on a weekly or monthly basis of the value that they’re getting out of it so that when they get the bill, they have a good feeling that you’re actually doing something for them on an ongoing basis.

Rob [00:33:42]: I also wanted to throw in a couple apps I think people could check out to reduce churn. There’re obviously a lot out there that can help you. The three that I wanted to mention: one is Keepify, and it’s at keepify.com. It’s from Micropreneur Academy member Robert Graham. And the value prop there is to win more trials and fight churn, and he has a lot of graphs and stuff. I think it’s predictive in kind of identifying people who might be churning out of your app.

Rob [00:34:09]: And then there’s a couple that deal with kind of a[n] involuntary churn – essentially, like, credit cards failing. And I think both these guys [only tie into Stripe?] at this point, but I think they’re working on being able to support other providers. But Churn Buster.io from Andrew Culver and [Be?] Stunning from Richard Felix are both essentially dunning services where, if you have failed credit cards, they will either email or make phone calls to your customers. And you can imagine they wind up rescuing a lot more people than if you don’t email or call them. So, this can help reduce that involuntary churn number.

Rob [00:34:41]: So, to recap, we defined churn. We talked about some different types, talked about some ranges to expect, how to calculate it; and then gave you some ideas for how to reduce it. If you still have questions about churn after listening to this episode, feel free to contact us at questions@startupsfortherestofus. And if you have other ideas for how to reduce churn, including maybe some apps that we didn’t mention, or some other techniques, feel free to email us and let us know. Maybe we’ll mention them in a future episode.

Mike [00:35:07]: Well, that wraps us up. If you have a question for us, you can call it in to our voicemail number at 1.888.801.9690; or, email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Outta Control” by MoOt, used under Creative Commons. Subscribe to us on iTunes by searching for “startups” and visit startupsfortherestofus.com for a full transcript of each episode.

Mike [00:35:25]: Thanks for listening, and we’ll see you next time.

[End]

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4 Responses to “Episode 226 | Everything You Always Wanted to Know About Churn (But Were Afraid to Ask)”

  1. For tech magazines that are still worth subscribing to: 2600: The Hacker Quarterly

    The content is of varying quality (some of the articles aren’t exactly insightful), but it’s typically fairy interesting or amusing, and if you’re writing any code online it’s good to have a little insight into the Grayhat/Blackhat world.

    Also of note: the content is not posted online, so you need a physical copy.

  2. I know one product that falls perfectly into the category described by Gavin: https://www.expeditedssl.com is a product for the Heroku after-market and helps you set up SSL for your Heroku-hosted applications

  3. Daniel Nelson March 7, 2015 at 4:42 pm

    Guys – that was a fantastic episode. It’s clear you both were fired up on this topic.

    Thanks so much for taking my question and topic! I got tons of value and I’m sure many others will too.

  4. This was an awesome podcast. I was pretty familiar with churn, but there were some great insights.

    Specifically, the discussion of what is “normal” was awesome. I’ve read a lot on this topic and always heard 2-3% or less is critical since it’s mentioned almost everywhere. It led me to assume that all/most successful saas businesses were at this number. Since our SAAS app is closer to 6-7% and we’re $49/month, I am feeling much better about our progress so far! Sometimes it’s difficult not to compare ourselves to these big, funded companies that write a lot of the great material available on the internets.

    Also, liked how you discussed some of the common mistakes, like including yearly subscriptions in monthly churn and the difference between revenue churn, etc.

    Awesome work!