What’s behind those churn metrics?

Churn is bad for software-as-a-service (SaaS) companies.  Very bad.

But knowing there’s a churn problem is one thing; fixing it is something else.

To bring down churn, we need to understand what’s behind the numbers.  Why are customers leaving?  Different causes will point toward different fixes.

Poor product performance

Sometimes the solution simply doesn’t deliver as advertised.  Customers subscribe, believing it will perform some particular function… but it doesn’t.  Once they figure that out – it may take a few hours or a few months – they leave.

The solution for this problem:  go back to the drawing board with the solution.  Learn where the gap is between what customers want and what the solution delivers.  Improve it to better meet customers’ needs, or explain the solution’s features, benefits, and advantages more accurately.

Ineffective on-boarding

If most of the churn is in the first 90 days after a customer subscribes, the problem may be poor on-boarding.  Entering data, training users, and changing the way an organization does things isn’t easy.

To fix poor on-boarding usually requires putting more thought and more resources to implementation and training.  In fact, it’s not uncommon for SaaS providers to require that customers sign up for training and implementation help.  And often they charge for it.

(See this short video on “Turning SaaS buyers into satisfied users.”)

Inadequate support

SaaS companies cannot afford to ignore their customers.  Especially for more complex, enterprise applications - those that are critical to the customer’s operations - quick and expert support is essential. 

But effective support should go beyond a solid help desk.    SaaS vendors should be regularly providing their customers with expert advice on how to optimize use of the solution.  (See “Your existing customers are prospects too.”)

And they can occasionally remind customers of the solution’s value to their organization.  For example, “over the last 90 days, you’ve used the solution to conduct 450 performance reviews, manage 1200 new inbound leads, process 67 loan applications, or whatever it is the solution does.”

Wrong customers

Sometimes high churn happens when SaaS providers sell to the wrong customers.  Superb salesmanship, yes.  Good fit for the customer, no.  Expect that the customer will discover the mismatch after a few weeks or months. 

I’ve seen this happen when sales people convince a small organization that the product is a good fit for their needs, but it turns out to be overkill. 

I’ve also seen the opposite.  Salespeople tout capabilities required to win a large customer, but the solution’s actual features come up short.

Remedies for over-selling could involve clarifying the messages to more clearly describe what the solution does and who it is designed for. 

A revised compensation scheme can also work as a cure for over-selling.  Salespeople are rewarded for winning customers that stay for a long time, and they’re penalized for bringing in customers that churn quickly.

Susceptible to poaching

In some cases, customers depart for competitors.  They are lured away with more features, more attractive pricing, or some other advantage.

SaaS companies are especially susceptible when switching costs are low.  Customers can easily move

to another solution without painful implementation and training costs.

One approach to counter poaching is to lower prices, though that’s a tough strategy to sustain. 

Adding more useful features, delivering a solution that’s easier to use, or providing outstanding customer support are likely to build a more sustained relationship.

No universal fix for churn

Any SaaS vendor with a churn problem needs to fix it.  The business model doesn’t work when too many paying customers leave too quickly.

In fact, the most successful SaaS companies actually achieve “negative churn,” meaning they actually derive more revenue from their existing customers.

But fixing a churn problem means first diagnosing the cause.  I haven’t provided an exhaustive list here, but it should be plain that there are a variety of explanations behind the numbers.  And each particular cause points toward a different solution. 

Sorry, there’s no simple “one-size-fits-all” approach here. 

Pivoting from early adopters to mainstream buyers

If your software-as-a-service (SaaS) solution is relatively new to the market and you’ve already managed to bring on a group of early customers, congratulations. 

That’s usually solid proof that your product works, somebody’s getting value from it, and people will pay for it.  No small feat.  

But before you go overboard celebrating, I’ve got a bit of bad news:  It gets more difficult from here.

Sure, signing on that first group of paying customers probably was tough.  But signing on 10, 20, or 50 times that number... that's even tougher.

A new kind of buyer

Why does customer acquisition get more difficult?

Here's why:  you’re now selling to a different kind of buyer.  You’re not just selling to early adopters anymore.  You’re now marketing and selling to mainstream buyers.

Yes, these mainstream buyers may be in the same industry and they may need a solution to solve the same set of problems.

But they follow a different evaluation and purchase process.  And your marketing and sales plans need to adjust.

A longer sales cycle

When they evaluate new solutions, particularly those that are critical to their business, mainstream buyers tend to proceed more deliberately.  Unlike many early adopters, who are usually eager to try something new, these folks won’t jump right in. They move forward step-by-step.

Your marketing plan needs to follow this more deliberate process.  Plan to stay in touch with these prospects over an extended time, and implement programs to carefully nurture them along, one step at a time. 

Trying to rush things along is a bad idea.  For example, don’t expect prospects to jump from their first visit to your website and go directly to a one-on-one demo.  Not many will get your first email and immediately contact your sales rep.

They need more time to get more comfortable with you and your solution before they’re ready to talk with you directly.   

Need more proof

Mainstream buyers need to see more proof that your solution works as advertised.  They want to know that organizations similar to theirs have had success.  Unlike early adopters, they’re not interested in being the first of their colleagues to try something.

To satisfy their need to see proof, your marketing programs should include a healthy dose of customer success stories, references, and other ways to show that your solution really does deliver the benefits it promises.

Not interested in tech wizardry

Mainstream buyers usually aren’t wowed by cool technology.  They just want a solution that helps them run their business, and they don’t care a lot about what’s under the hood.  (See “Don’t talk techie to SaaS buyers.”)

They’re especially interested in how easy your solution is to learn and to use.  No matter how sophisticated the underlying technology or how long your list of features, these prospects know that if they can’t figure out how to use your solution - or train their employees to use it - it’s worthless to them.

Talking on and on about your platform, your proprietary algorithms, and your impressive feature list is more likely to distract, overwhelm, or confuse them than it is to impress them.

Rely more on support

Unlike the more adventurous early adopters, the next round of buyers tend to need more help to implement the solution.  Your ability to get them up & running quickly factors heavily in their evaluation.

Show them your on-boarding and training process and highlight your customer support capabilities.  Show them they’ll be working with a company that understands their business and won’t just leave them on their own to figure stuff out. 

Marketing pivot

Many of the companies I work with gotten themselves through the first stage of growth.   By word-of-mouth or direct contacts, they’ve managed to attract a cadre of early customers.

But to ramp up beyond that, they need a “marketing pivot.”  They need to adjust their initial messages and tactics to fit a different kind of buyer.

You may find yourself in a similar spot.  You need to reach beyond the early adopters to attract the broader pool of mainstream buyers.  That’s where you'll find the opportunity to accelerate growth and build a sustainable SaaS business.

Winning new SaaS customers may be easier than keeping them

I talk with a lot of new customers about how and why they bought a software-as-a-service (SaaS) solution. Here are the kinds of things I hear:

• “We didn’t spend a lot of time with the free trial.  We just subscribed.”

• “With such a low monthly cost and no long-term commitment, we figured if we didn’t like the product, we’d just drop it.”

• “We didn’t spend weeks looking at demos and trials; we just bought it.  Once we used the solution for a couple of months, we figured we’d know whether we wanted to keep paying for it.”

It’s not that these companies didn’t evaluate the SaaS solution seriously.  In fact, often they were considering it to manage a critical part of their business.

But they didn’t want to spend time looking at slick demos or inputting lots of data into a free trial - data that they’d lose when the trial expired.

Just do it

They took a different approach:  Just buy it and try it.

After all, subscription pricing is one of the great advantages of SaaS solutions over traditional on-premises software.  Monthly fees are much lower than up-front license costs, deployment expenses are lower, and often there’s no long-term commitment.

For customers, it’s just easier to evaluate and buy SaaS solutions.

That’s good news for SaaS solution vendors, too.

Solutions that are easier for customers to buy are also easier for vendors to sell.  Converting prospective customers from “opportunities” into “paying customers” is faster and simpler.

But there’s a catch

But it’s not all good news for vendors.

For most SaaS companies, they need a customer to stay for at least several months, even 2-3 years, to recover the cost of acquiring that customer.  If the customer leaves too early, the vendor will actually lose money, not make money.   (See “Acquiring Customers Ain’t Cheap.”)

For the SaaS sales and marketing team, this means even when they’ve brought in a new customer win, their work’s not done.

Now they need to convert those new customers into committed users.  Success requires more than converting prospects into paying customers.  It also means converting new customers into long-term customers.

Their responsibilities now include helping with on-boarding, training, expert guidance, or whatever else it takes to convert a new buyer into a committed user.

To fill that role, I’ve seen marketing teams add all kinds of “post-sales” activities to their programs:

• Host webinars for existing customers to pass along advice on using the solution more effectively  

• Publish customer success stories that share best practices

• Support online forums where customers can share ideas with their peers

• Communicate with customers on new features that they should be taking advantage of

• Establish a “VP of Customer Success” role with responsibility for keeping existing customers happy.

(For more thoughts on effective on-boarding, see “Get SaaS customers off to a healthy start.”)

Another step in the customer acquisition process

I know this isn't the best news for sales and marketing folks - adding more work to the customer acquisition process.  As it it wasn’t tough enough already to build visibility, capture leads, convert them into qualified opportunities, and finally into paying customers.

Now you need another step: retaining new users.

Sorry, but that’s the cost of SaaS.  It may be easier to win new customers, but it’s tougher to keep them.

Where Up-Selling Goes Wrong

Up-selling can be a very good thing for software-as-a-service (SaaS) companies. It’s a winner on two counts:

1. It boosts revenue per customer
2. It usually lowers the cost of customer acquisition. 

According to one critical SaaS metric - Customer Lifetime Value/Cost of Customer Acquisition - up-selling is a formula for success.

But selling to existing customers isn’t always easy and there are few ways it could go wrong.

Unhappy customers

Before you can sell new services to an existing customer, they need to be happy with the old services.  That sounds obvious, but it’s easy to see how companies can get it wrong. 

Imagine a sales team that’s not connected to the support team.  In that instance, the sales person may have no idea that a customer is in the midst of a long unresolved support issue.  When the sales person calls on that account to sell add-on services, that might not go so well.

Bad timing 

Sometimes the up-sell effort is simply mistimed.  There's both a good time and a bad time to try sell new services.

I purchase services from one particular SaaS company that insists on pitching me new services every time I call in to their support people about a problem I'm having with their service.  I’ve just called with a complaint, and you want me to buy more stuff?!  Not right now, thank you.

Hidden cost

Customers don’t react well when the additional service you’re offering really ought to be part of the standard subscription fee.  If it's something that’s fundamentally necessary to make the solution function effectively, the customer rightly expects it to be included... not an add-on that they need to pay extra for.

I’ve even seen SaaS companies that charge extra for an add-on service... and then require the customer to buy it. That doesn't sound like the way you want to treat new customers.

Wrong offer

Offering to provide an add-on service to an existing customer is usually most effective if it’s targeted to their particular needs.  If the add-on is best-suited to your larger customers, for example, focus the up-sell effort on your larger customers.  Offer something else to your smaller customers.

This is one of the advantages of offering a SaaS solution.  You actually do know quite a bit about your customers and how they use the solution.   You should be able to target precisely those that might be most interested in particular add-on services.

In fact, trying to up-sell everything to everyone can backfire on you.  When you present them services that aren't appropriate for them, your customers get the impression that you really don’t know much about them.  That's not good for a long-term relationship.