The Magic of Negative Churn
Let’s face it – customer churn is a reality for subscription businesses. Even with great product, amazing support, and top-notch training, some customers are just going to leave. Budgets dry up, companies go out of business, your internal champion moves to a new role, etc.
For a lot of companies, a lost customer drops additional responsibility on the plate of the sales team. One customer out means you better find a new customer to fill the gap, right? Wrong! The best SaaS companies can do the impossible: generate negative revenue churn despite losing customers each month.
In other words, they are generating more revenue from existing customers than they are losing each month. Let’s dive into exactly how they make that happen.
The Mathemagic Behind Negative Churn
Here’s a simple example to illustrate the point. Say we have a SaaS company with 1000 customers. Each customer pays $10 per month for the service. Despite their best efforts, the company loses 2% of its customers to churn each month. And worst of all, they are making no new customer sales. But they are extremely effective at getting customers to spend more with them – revenue per customer grows steadily at a 10% month-over-month clip. You can see the result of this trend below:
By the end of year 1, the company has lost 20% of its initial customers. Worse yet, it has acquired no new customers to plug the gap.
In most situations, that would be a recipe for complete disaster. However, steady growth in MRR per customer more than plugs the gap. In fact, the company finds MRR up 37% by the year’s end despite shedding nearly one fifth of all customers. As each individual customer grows more valuable, you can get away with having fewer of them.
Once you layer in some customer acquisition (hey there, sales team), the magic really begins:
In the new example, steady 7% monthly sales growth leaves the company with more than twice as many customers at year end than in the previous example. And with the increasing value per customer, that translates to 2.1x the revenue of the previous example too. So instead of 37% MRR growth at year end, the company reached 192%, a 5x improvement.
That is the type of crazy growth VCs drool over. So how exactly do you make that happen?
Three Paths To Negative Churn
The math behind negative churn is undeniable. But how do you actually make the dream a reality? Your business has three roads to the promised land.
If your company charges on a per user/per seat basis, then expansion revenue is the name of the game. You want to focus energy on driving adoption within an organization to drive self-perpetuating revenue growth.
Some adoption can be driven top-down via your account managers. By speaking with business leaders across different departments, you can gradually scale up pilots across the organization into an enterprise-wide deployment.
This slow & steady, human led approach makes the most sense when there is meaningful effort required to onboard a new set of users onto the platform (e.g., integrating new data systems).
If you have a simple SaaS solution with minimal integration requirements, a much better way to drive expansion is to build organizational virality directly into the product.
One way you can approach this is requiring all users to create an account before viewing data inside of your tool. As new enterprise users are brought online using company email addresses, you can quickly expand your user footprint and incremental revenue.
One final lever to consider is pricing. If you can charge more for the same thing, you can rapidly deliver expansion revenue rapidly.
Netflix did this masterfully last fall when they increased the basic plan price from $9.99 / month to $10.99 / month. This drove 35% percent revenue growth in Q4 2017, 10% higher than their subscriber growth.
While expansion revenue requires you do more of the same, upsells present a different challenge. The focus is now on uncovering higher value use cases for your solution and getting the customer to buy them. That typically means layering in additional features to drive the incremental benefit.
Just as before, there are a range of sales & product tactics you can use to generate upsell revenues.
On the personal side, customer success managers can use their deep understanding of a client’s business to identify gaps and suggest higher value service offerings that can meet the need. But be warned – if customer success is seen as “pushing” product, it will lose its status as a trusted advisor committed to client success. And damaging that relationship will increase the risk of churn in the future.
On the product side, “hidden” free trials can be powerful tools. Here’s how they work. Provide a customer access to all the features she has paid for, as well as a few that she has not. Once the customer starts using the “free” features regularly, push an in-app message notifying her that one of her favorite features is not included in her current plan and will be expiring in a few days. Include a link to the “Upgrade Plan” page and voila! Upsell revenue acquired.
The key to making this strategy work is giving the customer time to really play around with the feature and see the full value before taking it away. So rather than offering a standard 7 or 14-day free trial, you should examine your product usage data to understand the typical time required before the customer has an “A-ha!” moment with the feature.
The last strategy for negative revenue churn is based on product cross-sell. If your company has a big portfolio of solutions to offer customers, there is a big opportunity to layer in cross-sell revenue into your mix.
Of all the negative churn strategies, cross-sell is definitely the most “sales-y”. That’s because it usually requires probing hard and outside the scope of your current work to find new sales opportunities. So you’re better off making this the responsibility of a dedicated sales team rather than giving the responsibility to your customer success managers.
When it comes to building a cross-sell strategy, one critical metric to keep in mind is the product attach rate. That represents the frequency with which one product is sold in conjunction with another.
To highlight how this works, let’s look at an example for a SaaS company with three products: sales automation, email marketing, and social media monitoring. The table below details the respective attach rates:
In the above example, you can see that there are two identified cross-sell opportunities. The first is selling the sales automation product into existing users of the social media monitoring tools. The second is selling the social media monitoring tools to existing users of the email marketing product. That’s because both have a very high organic attach rate to each other.
This suggests that there is a certain use case/value proposition that resonates within these customer groups. To confirm what the common link is and develop a refined sales strategy, effort should be taken to speak with those customers who purchased both products (as well as those who did not) to refine the target profile.
The Positives of Negative Churn
When growing a subscription business, negative churn provides you a vital lifeline. It reduces the pressure on your sales team to continually hunt for new customers, enabling revenue growth with minimal net new acquisition.
As SaaS becomes more mature, negative churn is the key to driving amazing results. Now is the time to open the door.
Surveys have found that a dedicated Professional Services team can lead to more enterprise deals and lower churn. But, these resources need to be used wisely and should be differentiated from Customer Success. Here’s why.