Sep 1, 2016

Read Time 7 min

Current customers as catalysts, startup spend on churn, CS listicle of retention strategies


Fighting Churn Newsletter

Many businesses spend 80% of their budgets to acquire new customers and only 20% to retain current ones. As the acquisition-focused landscape becomes increasingly crowded, it’s important to recognize and value what’s actually driving your business: your customers.

Word of Mouth Customer Advocacy

A brand that allocates more toward understanding, communicating with and learning from customers will see the benefits tenfold. Redirecting your resources to customer retention can mean anything from simple customer swag packages to dedicated support-team development to a full-fledged customer-advocacy program. Regardless of the tactic, every customer-retention program has the same goal: Develop loyal customers who will, in turn, advocate for your brand.

Customers who are advocating have a big impact. In fact, 74 percent of consumers identify word-of-mouth marketing as a key influencer in their purchasing decisions and word of mouth improves marketing effectiveness by 54 percent.

But in order to see consistent advocacy, you need to have a process in place. So where does a successful customer-advocacy program begin? First, look to your customer base and identify the super vocal, the long-term customers and the ones spending the most:

  • The Super Vocal: When you think about finding your most passionate customers who are vocal, you’ll tend to seek out those using words like “best,” “love” or “recommend” along with your product or company name. These people self-identify and you should already be focusing on these relationships and working to make them stronger. But often overlooked are those always reaching out when they have issues. The people who can’t keep quiet because they rely on your product daily should be valued almost above all else – even more than how much they spend with your company. If they’re logging in everyday, purchasing your product religiously or budgeting your service in their monthly necessities, they obviously want your organization to be the best it can be. They’re your biggest cheerleaders, really.
  • The Long-Term Customers: Customers who have been purchasing anything from your organization for an extended time are truly invested. They have consciously made a decision to give you their hard-earned money time and time again. In addition to placing a high value on these people, be sure to communicate with them, too. They may have more insight around your organization than you do. Tap their extensive experience with your brand and pull insights to better your company.
  • The Ones Spending the Most Money: For many businesses, a relatively small percentage of their customers make up a very large percentage of their revenue. Yet many of these same businesses speak to all of their customers the same way, acknowledge their purchases the same way and market the same way. Look into your customer database and find those big accounts. With business-to-business companies, the big spenders are even more important. The decision makers put their reputation on the line when they buy from you. Their trust is critical. Understand what motivated these customers to purchase in the first place, then assess how they got to the substantial amount they are currently paying. Be sure to continue to educate these customers around your product so they don’t lose sight of the value.

Once you’ve identified these types of potential advocate customers, check out the full read to dig into tactics to shift your focus to current customers.

How much should a startup spend on churn?

It’s an important question and one that arises most often as a SaaS startup scales: churn, masked by growth, becomes a limiting factor of growth, so how much should the business invest in managing churn?

Redpoint’s SaaS benchmarks tell us the average public SaaS company has a 3% monthly revenue churn or a 2 year lifetime and a sales efficiency of 0.8, which implies a 5 quarter pay back period on cost-of-sales and cost-to-serve.

Using those numbers, the contribution revenue chart for a typical customer looks like this. The revenue of the first 15 months pays for the acquisition costs and the remaining 9 months before the customer churns are contribution margin.

Unit Economics for an Average SaaS Company at 3 Percent Monthly Churn

Presuming the business signs customers to 12 month contracts, a customer who renews pays a year’s worth more of contribution margin minus the customer success team’s salaries.

To be worth the investment, customer success must drive at least drive one more month’s worth of margin in addition to the 9 created by the standard, 2 year-and-out customer.

Assume a customer success team can save 30% of customers who are at risk. In the success case then, the contribution revenue chart looks like this:

Unit Economics for an Average SaaS Company at 3 Percent Monthly Churn Saved for One Year

For the remaining 2/3 of cases, the chart looks like this:

Unit Economics for an Average SaaS Company at 3 Percent Monthly Churn Loss Despite CS Effort

But on average, the customer success team saves about 4 months of contribution margin per customer which means company can spend up to 3 months’ worth of contribution per customer on churn management.

For a company at a $3M annual recurring revenue clip with customer ARRs of $1k, there are 3000 customers. On each, the company could spend about $156 (which is the $83 in revenue per customer, multiplied by an average gross margin of 63% in SaaS companies’ early years) to save or a customer success budget of $39k per month.

Of course, each company’s metrics will vary and will impact the maximum spend on customer success but the framework should hold across most subscription businesses.

CS Listicle: Customer Retention strategies

In SaaS, customer retention is everything. In order to be truly successful, a SaaS must have steady customer acquisition and successful customer retention. But since retention is less expensive than acquisition, you’re most cost effective strategy is to…you guessed it…hang on to those customers!

Retention is your number-one strategy for profitability. Churn is public enemy number one. So, the question, is, how do you retain customers?

This extensive list gives you 27 – that’s right 27! – different customer retention strategies you can start trying today. The full list is definitely worth a read but here are 3 of our favorites to get you started:

  • Follow up on every customer interaction: This is not talking about service requests. This is talking about going the extra mile after the customer’s problem has been solved. A typical service request and solution looks like this: “Customer: We have a problem. Support Team: I’ve helped you. Have a nice day.” Instead of stopping here, add another layer of follow-up to this process: “Customer: We have a problem. Support Team: I’ve helped you. Have a nice day. Bonus Follow-Up: Hey, we helped you a couple weeks ago. How are things going now? Anything else we can help with?” Not only are you ensuring that the problem is solved, but you’re also making sure that the customer is satisfied. In the customer retention game, solving problems is just as important as satisfied customers.
  • Upsell: A SaaS upsell is the process of engaging an existing customer at a deeper level. You raise the level of service and they pay you more. Upsells improve your profits (as long as you’re pricing them correctly). Upselling accomplishes three very good things: 1) deepens relationships, 2) raises the value that the customer receives, 3) increases the customer’s customer lifetime value (CLV).
    We shouldn’t view upselling as a dirty word or some underhanded technique to filch extra cash from gullible customers. Upselling is a win-win. Customers get better stuff. You get more cash. And here’s the kicker: The customer is going to stay around longer. If you are interested in more guidance on effective upsells, we recommend this great list of 13 tips for upsells.
  • Emphasize engagement as soon as possible: The most important way to improve your churn rate is to drive engagement. Here’s how Lincoln Murphy defines engagement: “Engagement is when your customer is realizing value from your SaaS.” How does a customer realize value from your SaaS? By using it. Whatever you can do to and for the customer to get them to use your product, do it. Emails, questions, phone calls, encouragements, bribery: get the customer to use your service. The sooner they use it, the quicker they realize value. The quicker they realize value, the less likely they are to quit.

Word to the Wise

This week’s wisdom comes from Greg Tate, VP of Customer Success at Optimizely. In the sixth episode of the Strengths in Action podcast, Tate discusses how he leads a large CS team at a hypergrowth startup and his experiences crossing the chasm from a Sales background to being a leader in the customer success space. Tate also talks about the danger of our beloved health scores:

“Something that everybody talks about if they’re brand new into the world of Customer Success, “We need customer health score. Why don’t you just do that for one quarter and then we’ll have it all figured out and I’ll move on to the next thing.” If I set out a set of OKRs, “We’re going to figure out the customer health score,” and I thought, “Yeah, we have enough of a framework here. This is good enough and I’ll move onto the next thing,” and it really did bite me because customer health score is not something that you can just decide upon and move forward. It’s a much longer term, possibly never ending effort to really evaluate and iterate on how you are scoring your customer’s health in a meaningful and useful fashion.

To learn more about the risks of a one-and-done health score – and much more CS goodness – we recommend listening to the entire episode:

Strengths in Action Podcast - Greg Tate

Fighting Churn is a newsletter of inspiration, ideas and news on customer success, churn, renewal and other stuff and is curated by ChurnZero.


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