3 Kinds of Customer Churn and Why You Should Become Familiar With Them

A cloud security vendor was losing customers, and wasn’t sure why. They came to us and requested a series of buyer interviews to try to figure out what was driving their high rate of customer churn.

When we started talking to their customers, we realized that the signs of their unhappiness had been loud and clear for a while.

One interviewee told us there was “no way” the company should have been surprised when they left, given the hours of phone calls on product problems. Another said their low rate of adoption of the company’s product had been a clear signal of dissatisfaction. And another told us the company simply “missed the boat” on understanding users and their needs.

Customer churn is a big deal in the subscription-based revenue model of SaaS. This model is growing fast: global revenue in the SaaS industry topped $43 billion by mid-2017, up 23 percent from 2016. Along with this rapid adoption comes a need for product managers and product marketers to re-imagine their roles. We used to focus on customer acquisition, and thus on buyer personas. Now it is critical that we expand our lens to include the buyer journey over the course of the entire customer life cycle.

In short, the “as-a-service” model depends on keeping customers happy for a long time. The model is built on the “land and expand” strategy, in which the majority of revenue for a product line depends on long-term customer retention along with expansion of the initial engagement. It takes time to achieve an ROI: The median SaaS startup spends 92% of its first-year revenueon customer acquisition and takes 11 months to pay back that customer acquisition cost. Each business and product line will have its own timeline to profitability, but retention and expansion are critical to success in the SaaS model.

Bottom line: Don’t let your customers churn!

My firm, Eigenworks, has been studying customer acquisition, retention, success and churn for 10 years. We’ve taken a thorough look at buyer decision-making as it relates to customer success and churn, and—based on insights gathered from thousands of buyer interviews—have identified three species of churn that will help you get a grip on this challenge and contribute to the conversation with customer success at your company.

Broadly speaking, churn can be broken into three categories:

  1. Failure to Thrive

We’ll start with the churn variant that is easiest to see coming. It’s called failure to thrive, and it goes a little like this: From the moment the customer buys the product they seem to regret the decision. Their health scores consistently remain red for one reason or another; their onboarding starts slow and gets slower, or their usage rates remain terminally flat. These are the clients who never stop reporting problems: something keeps breaking, something never worked in the first place, or the problems aren’t problems so much as complaints. The product and the client have always been a poor fit. The writing has been on the wall from the get-go. The client has failed to thrive with your product. When they finally drop you, you’re disappointed, but hardly surprised.

  1. Green Churn

Unfortunately, churn isn’t always so clear-cut. Our next variant, green churn, is more perplexing. On the face of things, everything seems great. Health scores are green, onboarding went well, usage rates seem healthy, the inboxes at customer service are gratifyingly void of complaints. The future looks good, but for some reason you’ve started to see some worrying indications.

Before you know it, the client is gone. Your first response may be along the lines of “Was it something I said?” But the problem doesn’t lie with what you were saying—it’s where you were looking.

Take another look at that green health score: If it reflected reality, your customer wouldn’t have left. You weren’t measuring the right things. Whatever informed your green health score was not enough. For example, you might have measured usage but not satisfaction. If the client uses the product 15 hours a day, but every other hour is spent in frustration, your product isn’t building goodwill. Had you considered this, you would have a more accurate health score and a better sense that something was wrong. Green churn happens when you keep your focus too narrow and don’t consider the full picture of your client’s engagement with your product.

  1. Sudden Change

The third type of churn is the one that can only ever blindside you: sudden change. As with green churn, your client’s health scores are good, but rather than a puzzling decline of the relationship, the end comes almost overnight. You don’t have time to react. One moment you’ve got a satisfied client, the next moment they’ve canceled. 

Something happened, and it happened on their end: a sudden shift in IT policy, a desperate need to cut back expenses, a singular event no one could have predicted but that made sticking with your product untenable. In the most severe cases, the client has gone under or had its funding pulled.

Sudden change lives up to its name. It’s unexpected, unanticipated and unforeseen. You can’t counter it—all you can do is remember that it’s the type of churn that happens to the best of us.

Failure to thrive, green churn, sudden change: these are the three types of churn we encounter in the SaaS world.

As a product professional, you need to expand your scope beyond customer acquisition to include the full journey of your buyer. Hopefully, the three types of churn I’ve described will give you some language with which to dialog with your peers in customer success. In particular, the three churn species should help you understand the buyer journey and where it can go off the rails. You can begin recognizing the signs of churn and act to address issues to keep your customers happy. And when it comes to customer acquisition, you can use what you learn about churn to identify the customers who are most likely to succeed with your product.

 

Alan Armstrong

Alan Armstrong

Alan Armstrong is founder and CEO of Eigenworks, specializing in win/loss and churn analysis for enterprise B2B companies. Prior to founding Eigenworks, Alan held senior director and vice president roles in three startups and participated in three successful exits including, Fortiva (to Proofpoint, 2008), Wily Technology ($400M to CA in 2006), and Canada’s largest self-funded exit of Sitraka to Quest Software, where he was director of new products and innovation. Alan has held VP roles in product management, sales and business development. Follow him on Twitter @AWArmstrong and learn more about Eigenworks at www.eigenworks.com.


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