How to predict churn [Q&A with Netomi]

Customer retention is vital for business growth, and while it’s inevitable that some customers will call it a day, keeping your churn rate low should be top of your agenda.

Rupal Nishar, AVP of Customer Success at Netomi, outlines how to predict churn before it even happens by sharing key metrics, warnings signs, and actionable advice every SaaS organization should be tracking.

Q: Can you explain why keeping track of churn is so important for a SaaS business?

A: Customer churn becomes a very important metric very quickly because a lost customer generally equates to a loss in revenue. And if a company loses enough customers, let's just say it can have a serious impact on its bottom line.

No matter how fast the company is growing, it can be growing at a much faster rate if you don’t have a leaky bucket from a churn perspective. This is why churn ends up being the single most important metric that’s monitored outside of some of the growth metrics.

It certainly doesn't matter what the size of the organization is. You can speak to some of the smaller startups or some of the more established organizations, churn is still a key metric that’s closely monitored.

I will even go beyond saying that it's not just true for SaaS, but it's also true for other business models, like eCommerce, etc. It’s a measurement that gets looked at very closely. If I take a step back, and I start with just some statistics as to why keeping track of churn is important, there's been a lot of research that's been done.

Depending on what study you believe in, and what industry land you look at, acquiring a new customer can be anywhere from five to 10 times more expensive than retaining an existing one. Just think about that for a minute.

Acquiring a new customer is anywhere between five to 10 times more expensive than keeping an existing one. That by itself is a key metric right there.

If we look at both of these existing cohorts, the success rate of selling to a new customer is five to 20% healthier. In contrast, the success rate of selling to an existing customer, one who's already familiar with your brand, one you already have some influence over, the success rate over there is 60 to 70%.

So, churn impact is amplified and compounded not just by the point in time where the loss of revenue for that customer occurred, or ARR but also the future lifetime value of the customer. So to make your existing cohort of customers, and I think of this as how do we make them rainmakers, you have to address the churn factor. There's just no escaping that.

Q: What can you do to counteract churn?

A: There is no magical recipe, there is no formula.

If you were to take a look at your organization holistically, take a step back, and ask yourself - where are your investments today?

Think about it from a time perspective, how much time are you spending with potential customers? Or how much are you spending from a resource perspective to bring in net new logos or new prospective customers? And put that in one bucket and let's contrast that with the investment in relation to existing customers, what do your investments look like?

Are you as an organization spending the same amount of dollars, time, level of commitment to your existing customers? Probably not. So that's one key variable to take into account and to look at very seriously.

From a counteracting churn perspective, there are certain things that can be done to slow down the velocity of the challenge. One of the things I will say is that churn intervention cannot be done in a vacuum. There certainly isn't a silver bullet, no magical recipe on one department that you can essentially attach the goal to or apply to address churn.

It has to be a company-wide initiative. You have to activate and invigorate different areas within the organization to address them. It isn't one department, one team problem, it’s every department, every team problem. Your solution needs to be that way as well.

So the first thing or at least one of the most important things an organization can do is to understand what is driving the churn. An honest and unbiased, analytical view that tells you the diagnosis without sugarcoating it. Because we have a tendency to try to make numbers look good, and people have a skill set for trying to make numbers look good.

But that’s not an area you want to make sugar-coated, you have to be able to measure and see things the way they are. I think that's step number one, looking at it very holistically. I'm a firm believer in the fact you have to be able to measure because what you can’t improve, you don't measure.

If you don't know the root cause or the causes that are driving some of the churn then you’ll not be able to counteract the churn. I'm not saying you need to apply all the prescriptions but there are generally some antidotes that can be applied. That's one thing to think through.

When I think about churn in the broadest terms, thematically, I think there are some things that come to mind. Price is a very common objection, it's raised universally, no matter what size the organization is, or who the persona you're working with is, or the seasonality of things.

Price is normally a very common objection, even that happens at renewal and when it's a new logo. So understanding where your pricing falls from a competitive landscape perspective is crucial. This goes into the whole talk track of making sure you're selling things right.

If the customer feels they're going to get a better value at a different price point, they’ll evaluate it. So I think the price is one key consideration. The other factor I think is improving the end-user and the customer experience. That's another measure.

When I think about it, the questions that come to mind are is the product seamless? What is the level of effort for the end-user or the customer to maintain the product? There was a study that Oracle did, if I'm not mistaken the study showed that nearly nine in 10 customers abandon a business or the product because of poor customer service.

That’s huge, right? And here's the interesting fact in all of this, the study also found that 86% of customers would be willing to pay more for a better experience. That’s mind-boggling.

So when you look at some of these stats, it's very clear that customers are looking for better functionality, better quality of functionality, a better experience, and they’re willing to pay for it. So I think focusing on the end-user experience, and the customer experience is critical from a countermeasure perspective.

Then from a customer journey perspective, I think what an organization can do right from the get-go, is make sure you're selling to the right end-user. Is this the right customer profile? More often than not, if you're trying to meet your quota numbers, potentially, you end up selling to the wrong audience.

It could certainly trigger churn down the road so you have to ensure there's a good product-market fit, that's actually solving the customer's problem. I think it's important to train the sales team to recognize what the ideal customer looks like, then identifying them, weeding them out, and if they don't meet the criteria, that's fine.

Maybe it's from a maturity perspective, or you're not speaking to the right audience, and/or you're not aware of what the problem statement might be. So make sure how you sell is important as well. Not just what you're selling as a product. The 'how' also matters because that's where trust comes in.

With respect to the countermeasures, you can't always apply the same prescription to churn. Sometimes you do need a more targeted and tailored intervention and the treatment strategy can be slightly different depending on what the symptoms are.

You can't just say, “let's go and attach this strategy because it worked with such and such customer”, you have to learn to understand what the genesis of the churn is or where the unhappiness is coming from. So I think that’s something I would certainly advise taking a look at.

Q: You've covered it a little bit in that last question, but are there different kinds of churn?

A: If you ask some folks, or at least generally, churn is reflected in revenue loss. That's the more traditional metric one looks at, or the organization looks at.

But churn can materialize in different forms as well, churn also happens in the sales cycle if you think about it. When the customer you're trying to pitch or sell to picks a competitor, there's churn right then.

Another key metric to watch for is churn from an advocacy perspective. If you already have a customer that's happy, healthy, engaging, and is a champion and a cheerleader, and you lose them for whatever reason, that's another form of churn.

In some shape or form, they may still be using your product, but that's still customer advocacy churn. That's something to monitor and make sure you're actually measuring both from a quantifiable perspective and a qualitative way as well.

Q: What KPIs should an organization look at in a churn dashboard?

A: There’s a ton of different metrics and measurements from a dashboard perspective that one can be looking at. I think one of the key ones or traditional ones, is churn by revenue, what is the attrition by revenue? Churn over a time series, let's plot over a period of time and understand from a predictive perspective, what are some of those points that we can actually glean from?

Is there seasonality within churn that we can predict? Another key metric is if your organization has multiple skews or multiple products, then are you taking a look at churn not just from overall revenue, but from churn by product?

If there are specific areas within that product family or a specific product where you see a high churn rate, it's certainly beneficial to dig deeper into why that might be the case, especially if it's a flagship product. Another key metric is churn by number of users, or churn by number of customers, depending on how the organization is taking a look at it.

Also, I've seen certain organizations look at churn through different geographies, because that gives you an idea not just from a revenue perspective, but also from a percentage perspective if there's a miss.

There are certain areas from a geography perspective where churn can be more predictable, given the specific season it might be as well. I think it's also critical to look at what the reasons for churn are from a dashboard perspective.

One that gets overlooked, the most, I think, is the tenure of the customer. What’s the average tenure of the customer that's actually churning? It's important to see if it’s your customer that's been there for the longest period of time? Or is it more recent? And what might be driving some of that will give you some very good measurement, and KPI.

So it really depends on what the narrative is? What does your product family look like? What’s your go-to-market strategy? What’s your overall organization's motion with regards to where you stand? So there are different KPIs I've seen being used and there's obviously a different rhythm for reviewing those KPIs as well.

Q: Can AI be used to identify churn patterns? And do you think that's a tool that will become more widely used within SaaS businesses?

A: Absolutely, I think different organizations use different methodologies for churn. I've seen organizations monitor churn on a quarterly basis, or a monthly basis. And then some that I see take a look at it from an annual perspective, although that's not optimal.

You want to be taking a look at it more frequently. Then there are some that are more mature from that perspective, they're super sophisticated, they're not only measuring churn on a much more frequent basis but they've also developed more predictive analysis on churn.

If they understand the past performance, if they're looking at the data from a rearview perspective and know what’s driving some of this or have the right, what I call, listening posts along the way, this can flag for potential future churn. I've seen some organizations do that. Most organizations that are looking for a competitive edge in their area are absolutely investing in building out these predictable engines and models.

Applying these AI principles to solve many of the traditional business challenges can create valuable insights. When I think about it, they're trying to basically identify what these behaviors are for these high-risk clusters. I think that's certainly where the industry is heading towards.

The key is building out velocity and momentum while you're identifying some of this. It's not just about the identification strategy, what your identification strategy algorithm is today is going to have to develop and change as there is more AI implemented. ou will then glean more analytics and identify the behavioral economics of some of these high-risk clusters.

And on the flip side, it’s not only about preventing churn, it's also about applying AI to understand what are those behavioral fingerprints of a successful and healthy customer. Can those be replicated from this successful cohort into the risk cluster? And can you create more personalized experiences?

Personalized experiences seem to be the buzzword but I think about it as smarter experiences across the customer journey. Organizations are doing everything such as having a great data strategy, or great data hygiene strategy, so they can start diving into these metrics.

I think that's really where I'm seeing the industry headed towards. And I'm seeing organizations that have a much smaller cohort of customers as well, and some that have in 10s of 1000s, as well, that are on the same journey. I think the industry is certainly headed that way.

Q: What are some of the biggest mistakes people make, or the biggest misconceptions people have regarding churn?

A: I think one of the biggest things I've seen over the years is organizations fixing one thing, one process, or one part of a process, or a smaller slice, versus addressing the overall customer experience.

Churn does not necessarily occur randomly over one episode. It's not that one customer that's not happy with a certain outcome that’s going to churn. There’s generally a sequence or series of things that lead up to causing that customer to churn.

One of the biggest misconceptions I've seen is folks trying to address it as a point-in-time solution, versus understanding the events pre-churn that are accumulating, which could be a byproduct. Whether it's frustration around the service or a product-related thing, poor expectation setting in the sales process, or external implementation – there could be a number of things that are going into this.

It's diving into what those root causes are that's going to give you an idea of what the tipping point is that can push a customer over to churn. So it's looking at these incidents, and putting it in the context of the narrative, I think that's one of the biggest misconceptions I've seen done repeatedly over the years.

Another misconception I've heard is it’s too late, the customer's beyond saving, etc. I don't know if I'm behind that. You can't know that unless you've applied every single playbook to save the customer. I don't know if I'm a big believer in giving up.

Historically, I've been able to bring customers back to the negotiation table, even after they've declared they're ready to go. "We're out the door, we've already picked the other guys, blah, blah, blah", I've been able to change some of that narrative. So I believe it's never too late to intervene and one should certainly not wait for things to get too complicated to intervene as well.

The sooner the intervention and the remediation, I believe the better the probability of managing that churn. And then on the flip side of that, the other misconception is that all churn is bad. There is I believe some churn that’s good. Sometimes there are external factors that are truly forcing the customer to churn.

Even if they're happy with the product, there could be other circumstances that are driving them to churn in spite of having great adoption. In some cases, I've seen customers leave and come back if it's a financial implication, and/or in certain cases, they've seen a new economic buyer that's coming in and although the folks are using it, it takes a certain level of re-engaging the economic buyer.

So in certain cases, it may make sense. But purely from an example perspective, there are certain cases where I've seen churn, it makes sense if the churn is good if the customer was sold the wrong product.

If it's not a good fit, and there is no alignment, you have to let that take its course. Or you figure out if there are other problems that can be solved within your product, in that organization, or within the product portfolio you have. So I think the misconception that all churn is bad isn’t actually terrible.

I do feel that there are some elements of churn that teach you to be more reflective and help you understand what you need to change internally, within your organization from a people, process, and technology perspective. And the other aspect is that there are certain things that will churn and it's not always terrible.

Q: Do you have any final words of encouragement or words of advice for customer success managers?

A: Operate with authenticity, design processes for simplicity, and be reflective. I think those are the principles that apply no matter what I create. That's always helped me or guided me towards a better spot.