How to Tackle Churn and Retention in SaaS
When talking about growth, most businesses develop a strong love for finding new and exciting ways to acquire users. Retention is the less pretty but far more effective stepsister in the growth marketing family.
Churn can break your business even if you have great acquisition numbers. Even if a lot of us know it on an intellectual level, very few digital professionals actually have a retention-first mindset. And one of those few is Andrew Michael - our guest in the new installment of "Hypergrowth Talks".
Andrew's work is focused on churn and retention. He is the host of the Churn.fm podcast, a founding member of Startup Cyprus, a former business intelligence manager at Hotjar, and the founder of several startups. His latest product, Avrio, will help you solve churn issues.
From founder to podcast host on the quest for retention
Andrew's focus on churn stems from a personal pain point. He founded 3 companies and developed 4 different products. "I sold them for peanuts and one of the reasons was that churn and retention was a big killer for them," he says.
All throughout this journey, he was interested in the topic of churn and wanted to learn about retention. But the information available was simplistic at best. "I really just got sort of frustrated reading blog posts of how you'll discover this magic number and solve for churn and retention because it's such a nuanced problem it has so many inputs that impact the output."
To scratch his own itch, he created Churn.fm - a podcast for subscription economy professionals that covers many different aspects and shows how different people approach churn. Obviously, this was a much-needed addition to the podcast space - Churn.fm now has more than 10 000 monthly listeners and the show's guests include Brian Balfour, Ryan Bonnici, HubSpot's Michael Redbord, Basecamp's Ryan Singer, and many more.
So Andrew came into our interview not only with his personal experience but the expertise of more than 100 retention pros he's interviewed already.
Focus on retention as you're building your solution
Andrew says that a mistake a lot of startups make is starting to focus on churn too late. "In the early days of hyper-growth when you're seeing numbers going up, it masks the problem. As your growth starts to slow and churn catches up with you you start hitting a growth ceiling."
Simply put, this churn-induced growth ceiling makes it hard for your company to scale over a certain threshold where you start "bleeding users" faster than you're acquiring them. Calculating your growth ceiling is a great exercise to convince a startup that they need to focus on churn from the get-go. You'll find an interactive tool for this in the full show notes of the interview.
According to Andrew, you need to start thinking about churn even before you start your business. You need to include building blocks that make your product sticky and irreplaceable. Ask yourself "Where does my product sit on the budget list when times are tough?" Are you the first to go or are you a product the customer can't live without?
Another question worth asking: "How does my product have stored value and how does that value increase over time?" How difficult are the switching costs? Does the value grow over time? Will customers be using the product with enough frequency to build a habit? These are all elements that go into building your solution. If you get them right, the job of retention becomes that much easier over time.
How to conduct pricing research?
Andrew recommends you start with price and packaging research. This will tell you if there is demand in the market. "It's a relatively cheap way to avoid pain and frustration down the line," he explains. Although it may sound counterintuitive to start from here, Andrew adds "Pricing and packaging are as much a part of your product as your feature set."
The process is simple. You give a 1-pager doc about your solution idea to a panel, ideally 500+ people. Then you ask them a few questions:
- How likely are you to buy this product? - answering on a scale of 1 to 7, you'll want to see a score of 5.5 or more to know there is actual demand.
- What would you be willing to pay?
- How much is too expensive?
- How much is getting expensive but still will be considered?
- How much is cheap or a bargain?
- How much is too cheap that you wouldn't consider it?
These key questions will help you measure pricing elasticity and the likelihood to buy. You should add some demographic and socioeconomic questions, as well. They will help you pinpoint certain segments of customers with higher demand - a great starting point to build your marketing personas.
Some tools and services will make your job easier. You can look for research panel services like Cint or Qualtrics to get a ready sample of potential customers. Survey tools like Conjointly and QuestionPro have special pricing question templates that make the questionnaire setup easier.
As for analyzing the results, there is definitely a lot of content out there that helps you understand the details. According to Andrew, it's important to learn this skill and be able to run additional surveys at later stages.
Cure churn with robust onboarding
Andrew shares that there are different reasons for high churn, but the biggest culprit is user onboarding. "Focusing on a good onboarding experience has a compounding effect over time," he explains. The better you get at helping people experience the value of the product and setting them up for success, the more engaged your customers will be over the long run.
The opposite approach - engaging customers close to the churning point - just doesn't work. "Trying to resurrect customers is almost always too late. Your energy and effort is much much better focused on how do we onboard customers, how do we make sure they establish the value prop? Let's look at successful customers, what are they doing, what's making them successful what are the key actions that they're taking?" Once you model this ideal behavior you can structure your onboarding around it.
Another high-risk point for churn Andrew mentioned is related to businesses with higher average revenue per account, mainly in B2B. This is when your product champion leaves and there's no one in-house rooting for your product. "A lot of customer success teams now realize this and what they are trying to do is spread the risk across the company. They are trying to build stronger relationships with more people within the company to alleviate the risk of one person leaving and them losing a whole company because there's no one there to fight for their product or service."
During the interview, we covered a few common mistakes that startups make. The first one we already discussed - that's focusing on retention too late and not factoring it in when building your solution.
The second common mistake is for churn to be handled by a separate team. It might seem that this is proof you treat churn as a priority. But it also means that you're not looking at retention as a holistic problem. "Ultimately retention and churn are company metrics that should be owned by everyone in the company."
To cure that type of thinking, Andrew proposes another exercise for your team: "You can almost tie back any metric within a SaaS business to churn. Figuring that out is a powerful way to align everyone behind one purpose. If you can build a KPI tree, each team has a direct understanding of their impact and it's a powerful way to align people."
The final issue comes from just blindly following external advice. Andrew's podcast interviews are full of examples where "common sense" doesn't work to the company's advantage. Counter-intuitive actions like dramatically shortening your trial period or adding friction to the onboarding process can improve retention - in our talk, he shared some insights from startup cases that are more than illuminating.
It's all about testing different approaches and treating retention with the attention it deserves. "There is no best practice. Every business is unique. You're going off to different audiences and segments, you're at different stages of growth. You can take advice, you can test things up, but don't take things for granted. It's really about figuring out how can you provide the most value for your customers."
We hope we managed to motivate you to spend some time and build a plan on how to tackle churn in your startup! Check out the full recording, links, and resources with free registration to the Hypergrowth Tribe community!