Ryan Floyd, co-founding MD of Storm Ventures, explores how to create a strategy to tackle customer churn for a tech startup
‘One of the biggest challenges for fast-growing companies is that because of all of the growth and spending, some of the issues causing customer churn can be hard to isolate and understand, which compounds the problem.’
You might think you’re onboarding plenty of business and making customers happy, but churn can strike unexpectedly. Some churn is normal but if it results in a 15+% loss of annual revenue, something is wrong and needs attention. The best companies have negative churn — that is they are expanding in their customer accounts so that growth in existing accounts is greater than any churn or contraction. As an investor in SaaS, here are some thoughts on how startups can deal with churn.
Firstly, it’s worth pointing out that you are not alone. I have been investing in SaaS for a long time and I can tell you some great companies have had churn problems — and were able to fix them. Churn is an extremely common problem for SaaS companies. The differentiating factor will be your ability to acknowledge it and approach it analytically to find solutions.
While you are fixing churn, stop trying to grow. Your business is a bucket with a hole in the bottom. Spending money to build a bigger bucket won’t stop the leak. It’s hard to acknowledge the problem and get off the growth focus — but just adding new customers who will just ultimately churn to build the business is fantastical thinking.
It might be tempting to assume that churn is the result of a customer success function not doing their job well, but the reality is usually more complex. Churn usually has many causes. If it was easy to fix — you likely would have already managed to find a solution. Whatever the cause is you need your whole team on the same page to work through the problem. You need a war plan. Assess the terrain, set objectives, move fast, and stay flexible. Each of your divisions should work the problem from different angles — which I outline below.
Don’t focus on placing blame and pointing fingers — there will be time to look into execution later. Your house is on fire and you need everyone putting out the flames. If you want the team to work — you need to focus on the future and not the past.
Customer success team
A common reaction for the customer success team in a high churn situation is to be defensive. Now is not the time to hide information or fudge details; customer success needs to be open and transparent with the rest of the company. This in part happens by not laying the churn problem solely with the CS team.
This is especially important because you need the rest of the company to become part of your customer success initiative. Encourage everyone in the company to make calls to your customers, especially the executive team, who you should assign to your most important accounts. Your aim should be to find out what your customers are happy with and what they think could improve. Did your product meet their expectations? If not, where did it fail? In addition to gaining you invaluable data, the act of reaching out might stop some customers from churning.
Once you’ve built a picture of the situation that everyone can see and agree on, you can all move in one direction as an organization.
Engineering and product
Product issues are a common problem resulting in churn and it’s usually because:
● Integration into existing customer workflows is too difficult or time-consuming;
● Onboarding or documentation is inadequate or confusing;
● The product has a design/feature flaw that makes it hard to use.
With the information you gathered in your all-hands customer success effort, you should know where your customers’ pain points are. First, assess whether there are any short-term fixes or services you can implement that will help? Now is the time to push those through while you work on any deeper issues you’ve uncovered. Until you fix the product, any other fixes in other areas won’t be as effective. You may be able to focus sales efforts on customers that do not depend on a particular feature or potentially have less complex onboarding requirements while you solve any product issues. Develop strategies to re-ignite growth while solving the product problems as often these can take a great deal of time to resolve.
Sales and marketing
It’s worth saying again: stop trying to grow. Don’t hire more sales reps. Put a pause on that big campaign you were about to spend a lot of money on. No billboards. Burning $2–3 to get $1 of revenue isn’t a smart strategy and if you haven’t fixed the existing churn problem it’s likely new ones will churn too. Churn results in sales efficiency that is far worse but can often get lost in the calculation.
This doesn’t mean you have to stop selling. Continuing to build the business is fine; just don’t stomp on the accelerator. In fact, the customer success mission you just made everyone participate in might have given you new sales angles. Your reps may be one of your best sources of new information on new customer targets and positioning.
For sales and marketing, the takeaway from the all-hands customer success effort is information. Ask if they can establish whether one customer profile is churning more than others, or whether a certain price point leads to more churn? This analysis can help sales and marketing make informed decisions on where to allocate budget.
Now might be a helpful time to look at your competition, too. Are they having similar issues? If not, what are they doing differently?
When your champion leaves
One typical cause of churn is when your champion leaves at your customer: after they’re gone, the customer maybe stops using your product but more often, your direct connect and advocate is no longer helping you which can be enough to lead to churn especially if you have a product that can be easily replaced. You might think the first point of failure would be customer success: why didn’t they expand the scope of your engagement there? But look at it from the other direction: why wasn’t there more widespread adoption of your product? Was it too hard to communicate its value to the rest of the company? Ask your sales and marketing teams how well this one correlates with their ideal customer profile. Is there a pattern of churn emerging? Without question — broadening the value proposition inside the customer is one of the best ways to not only reduce churn but to drive further account expansion.
Churn isn’t a deathblow, but it is something that needs to be addressed; you’re not likely to spend your way out of it. Use all of your resources to focus on the customer and their experience. In SaaS, customer happiness and retention are absolutely critical if you want to grow over the long term. Find out whether your product/happiness ratio makes sense: are you causing unforeseen pain? Does your value proposition even hold up?
One of the biggest challenges for fast-growing companies is that because of all of the growth and spending, some of the issues causing customer churn can be hard to isolate and understand, which compounds the problem. Don’t be afraid to tell your investors about it, but make it clear you have a get-well plan. Your plan should be ready for them to review. They can even be a sounding board for you, maybe they have had some experiences with other companies that you can apply to your own — maybe they can make an introduction to other founders or executives that have been through similar challenges.
Hope is not a strategy. Talking to your team and your customers and together responding to your findings are key to solving churn challenges.
Written by Ryan Floyd, co-founding MD of Storm Ventures, which invests in B2B tech across the world, and is the host of the #AskAVC podcast and video series. Originally published in the Information Age.