Are Customer Retention Benchmarks Increasing Your Churn?
June 20, 2018
Editor’s Note: This article first appeared on the StatusQuota blog here.
Competition is an unavoidable part of life. As people, we are constantly being evaluated and “sized up” by the competition. This isn’t limited to sports – our personal and professional lives are subject to the same scrutiny. Performance reviews in the office. Parents play favorites at home.
Maybe that’s why we’re all so in love with benchmarks. They satisfy our curiosity and spur our competitive drive. Knowing that you rank among the best can be extremely satisfying. On the flip side, discovering you’re low performer can be a motivating challenge.
Unsurprisingly, a whole industry has been built around this need to compare. Gartner’s Magic Quadrant has become a critical resource in the technology purchase process for many companies. Similarly, review sites like G2 Crowd allow you to compare how different products perform based on average user reviews (which are usually pretty worthless).
Churn and customer retention performance is not immune to this trend. Today there are tons of data points available for SaaS executives who want to benchmark their customer success efforts – just Google it.
To be clear, there are many good reasons to see how your retention strategy is performing on a relative basis. But there are a lot of risks to consider as well.
This article will dive into the biggest issues that arise when using benchmarks for churn and retention. We’ll also provide guidance on how to be smart when employing benchmarks to get the right insights out and get empowered to take action.
Bad Benchmarks 101
There are a few common mistakes customer success and growth leaders make when using external retention benchmarks.
Failure to benchmark your own company
The most common mistake you’ll make when benchmarking your own churn performance is comparing apples to oranges. Every company is different – that’s obvious. What is less obvious is how those differences impact your customer success strategies and results.
That’s why internal benchmarking is so vital. You’ll need to understand your own business inside out before turning to a third party report.
There are hundreds of dimensions on which you can evaluate your company. But when it comes to churn and retention, there are a few key areas you’ll want to include in your research:
- Your company size (total employees and revenue)
- Your customers’ size (total employees and revenue)
- Your customers’ industry
- Average deal size
- Length of sale cycle
- Average contract length
- Contract pricing metric (Number of seats? Usage volume?)
- Sales model (Inside sales? Field sales? Self-serve purchase?)
- Customer Success coverage model (How many accounts per CSM? What are the roles within the Customer Success team)
By investing time upfront in better understanding your own organization, you will be much more thoughtful about any comparisons made between it and superficially similar companies.
For instance, let’s compare HubSpot and Salesforce. Both companies sell sales and marketing software to other businesses. Both companies have a product portfolio encompassing CRM (customer relationship management) software and marketing automation tools. Both companies also generate significant revenue through a partner ecosystem that gets new customers setup on the software.
Yet the most important thing about these two companies is what makes them different – their target markets. HubSpot sells its product to small businesses and mid-market companies, which it defines as companies ranging from 10 to 2,000 employees.
In contrast, Salesforce targets businesses of all sizes. And it has many customers that are in the large enterprise segment. A recent analysis conducted by Salesforce found more than 10% of its customers had revenue exceeding $250 million.
They both have wildly different price points too. HubSpot gives away its CRM for free and uses a freemium model to price its marketing product, with $800 / month representing the “Professional” tier. In contrast, Salesforce CRM installations routinely cost hundreds of thousands of dollars for big sales teams. And its B2B marketing automation product Pardot has a list price ranging from $1,000 – $3,000 / month.
These companies have different customer types, price points, and go-to-market models. So you would expect them to have different churn rates too.
In HubSpot’s case, I would guess that they are more likely to suffer from higher customer churn (total loss of business) than revenue churn (which includes decreased spend within the same account) because they are selling to small businesses that have more risk of going out of business or having cashflow issues (more details here).
Whereas for Salesforce, the big deal sizes and high price points suggest it is a lot stickier with customers. That indicates that customer churn would be relatively low – who wants to rip out a big software system you’ve spent so much time and money installing? However, placating unhappy long-term customers may require heavy discounting, making revenue churn the bigger risk for their business.
Unfortunately – I can’t compare the two companies’ churn figures directly. HubSpot only reports out the dollar retention rate (dollar churn), whereas Salesforce shares a customer attrition rate (customer churn). Additionally, HubSpot reports on net dollar retention, combining gross dollar churn with growth in revenue per account from upgrades and account expansion (and showing negative revenue churn).
Given the fact that both companies have some discretion in choosing which metrics to report (churn is not a GAAP metric), it isn’t a stretch to imagine that each company has chosen to report the metric painting the most flattering picture of business performance.
Benchmarking yourself into complacency
Let’s say you’ve been extremely thorough in your benchmarking efforts. Many hours have been spent choosing the perfect set of competitors to compare with your company. And after all your analysis, you discover your company is a top performer with lower churn than most of the batch. Time to pop open the champagne and celebrate, right?
Wrong. Dead wrong.
That’s the other big mistake companies make when using benchmarks. When you use competitors as a ruler to measure your own success, you’ve given up control of your destiny. Instead, you’re allowing other companies to tell you what is achievable, what “good” looks like, what you should expect to achieve.
No company is perfect. There are always more opportunities to drive improvement and create more growth in the business.
Let’s take the example of monthly customer churn.
If you sell your product to small businesses, your competitors may have monthly churn rates exceeding 2% or even 3%. So if you’re clocking in at just 1%, you may feel quite happy with where things stand. But shaving off an additional 0.5% from your monthly churn would net you an additional 50 customers by the end of 12 months, 6% more customers than you would have otherwise.
Those customers could translate into hundreds of thousands of additional dollars. All that money can be reinvested back into the business for further growth.
Let’s put the numbers aside for a moment. Take a look at your company’s sales processes, customer onboarding, account management, and renewal tactics. You know there are a lot of things you could be doing better now that would meaningfully reduce churn.
Are you tracking important account health metrics for each customer? Do you even know the most important leading indicators that predict whether an account will see massive adoption or churn when the contract runs out?
That discomfort you feel is your conscience telling you there is still much more work to do. And no retention benchmark report is going to change that fact.
Benchmarks are a useful tool for quickly understanding relative performance among competitors.
Using them properly requires self-knowledge: you should only compare yourself with similar companies across a range of key business dimensions. Additionally, you shouldn’t let good relative performance blind you. There are always opportunities to improve absolute performance when reducing churn.
Benchmarks aren’t destiny. Exceptional companies don’t let their competitors define success for them – they figure it out for themselves.