High-growth SaaS startups often think they have it all figured out. They nail product market fit, staff up a go-to-market team, and grow to several million in ARR. The path ahead seems clear … until churn begins to smack them in the face.
Suddenly, customers begin leaving and cancelling at a faster rate than expected. Hysteria often sets in. Sales people blame the product for not delivering. Product teams blame customer success for not onboarding. Customer success points back to sales for targeting the wrong customer. Marketing begins to worry about reputational effects.
This is an all too common scenario. Early stage startups often don’t really know what churn looks like. They’re still experiencing the law of small numbers, with few customers that have gone through a renewal cycle. As the first big cohorts bake and churn comes into focus, it’s not unusual for companies to see larger numbers than they anticipated.
And unfortunately, the collective company hysteria comes from the right place. High churn is a big deal — your entire business as a SaaS company is predicated on cohorts compounding.
Although every business and industry is different, the following are typically acceptable gross revenue churn rates (not including upsell):
If your gross annual revenue churn is higher than the bottom quartile rates above, it’s time to develop an integrated plan to address it. Churn is a solvable problem but a complex one that usually can’t be pinned on a single function or solved with a silver bullet.
Running a cohort analysis
You can’t address what you don’t understand. Understanding churn starts with a cohort analysis, in which you analyze churned customers and compare them to your non-churned ones along every dimension. Here’s a non-exhaustive list of things to look at:
- Segment/contract size
- Contract sign and activation date
- Use case
- Customer champion (role, level in organization) and key stakeholders
- Account executive who sold deal
- Sales Region
- Customer service rep who onboarded deal
- Integration/onboarding speed
- Customer Net Promoter Score (NPS)
- Product utilization rate/number of seats
- Feature requests
- Stated reason for churn
The last of these is obviously the most important. When a customer churns, you need to get as much feedback as your business model allows. In an enterprise setting, this means a call with each churned customer to understand what happened. In a high velocity SMB, make a simple survey available for all customers, and try to have targeted calls with a few representative ones.
If you’re able to get churned customers on the phone, there’s no need to be defensive: the decision has been made, and your task is to learn as much as possible. Try to create a safe environment and coax out the real reasons for churn. Common cop outs like “we lost our budget” or “the price was too high” more likely reflect a failure to deliver value than any signal on pricing. Listen for the key integrations, features, or support you could have delivered that would have retained the customer
Once you’ve compiled the cohort, crunch the numbers and look for trends. Patterns in churn likely reflect underlying issues and will inform your game plan to address them. Here are a few examples of what to look for in different areas of your business — and how to address them.
Pinpointing the problem — and the right fix
Customer success. Signals that poor customer success is the cause for high churn include slow response times, outstanding support tickets, customer complaints about feature requests ignored, or a high number of customers who fail to launch or debook. If your analysis reveals this as the root cause, it’s probably the easiest problem to fix. Add customer success resources to improve service times, and consider adding or upgrading your VP of Customer Success. But while it’s common for customer success to be the first function blamed for churn, it’s rarely the whole story.
Sales: Overzealous or ineffective sales teams can contribute to churn if they target unqualified customers or oversell customers on what the product can do. Signs this may be the case include higher churn by a particular account executive or team, a wide variety in use cases and segments, or a wide variety in who has championed the sale and who the stakeholders are.
If these signals show up, you’re likely getting the wrong customers because your team is stretching too far. Consider reassessing your sales playbook and retraining or rebuilding staff on the correct target segments. We also often encourage companies to consider retention-based compensation for sales to address overselling tendencies.
Product: Although no one wants to hear it, product is usually at least partially to blame for high churn. Fundamentally, churn reflects a gap between what the product does and what the customer needs. Look for signals like low product use, low product NPS, patterns in what features are used by churned and non-churned cohorts, and customers replacing you with a competitor. Each of these is an indication that your product is falling short in some way.
Addressing product weaknesses is a serious task. You can start by combing through product feedback and NPS results to find consistent negative feedback and quick wins. But occasionally a more dramatic product evolution or pivot may be necessary. The most common product evolution is a decision to let go of a segment with high churn (usually SMB) or build new features to target a more attractive segment (usually midmarket/enterprise). This evolution or pivot can be a daunting undertaking, but if your analysis suggests the current product falls short, it may be an essential one.
Marketing. If you see high churn in a segment that marketing has targeted, or receive customer feedback that the product is not what was promised in product messaging, marketing may be to blame. Turn back to your cohort analysis to understand what segments and use cases you are serving well (the non-churned cohort) and refine your marketing to target this customer.
Addressing churn requires a holistic understanding of the root causes and an integrated approach to improvement. It’s a common mistake to throw the task to the customer success team. The issue is really as big as the company itself. It can be terrifying to face down churn, but once you understand the patterns behind it, developing the appropriate response becomes much easier.
John Cowgill is Principal at Costanoa Ventures. Investments to date include AppOmni, Fossa, Kepler Communications, Parallel Domain, PayNearMe, NumberAI, and Roadster. Prior to joining Costanoa, he was a business analyst at McKinsey & Co., advising consumer and technology companies on strategy and operations projects. Before McKinsey, he worked as a Business Development Associate for Techweek, a nationwide technology conference company.