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AskAVC #2 - SaaS Churn: what is it? - YouTube
Channel: Ask A VC
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hey everybody
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Ryan Floyd managing partners forum
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ventures here with another video part of
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my video blog series on giving you some
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advice
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someone might give you if I was an
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investor in your business or on your
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board or just what you'd like to hear
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from a venture investor today we're
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gonna be talking about churn I've
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actually broken into two part video as
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well first talk about you know turn what
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is it and then the second part of video
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series we'll talk about what to do about
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it but today we'll talk about the
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dreaded the driven churn
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he works so hard to get all these
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customers and then they leave and what
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do you do about it so let's get into
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churn so what what is churn well churn
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simply put is loss of customer revenue
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some people look at low go turn and low
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go turn can be interesting in terms of
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loss of numbers of customers but really
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when you look at what impacts your
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business certainly an enterprise b2b
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businesses you're really looking at
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dollar churn in terms of what's really
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important to be looking at because
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there's probably going to be a variance
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in customers in look of all customers
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are exactly the same amount of revenue
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that they're paying you
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then customer logo churn and revenue
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turn will be virtually identical but in
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this case we're going to be looking at
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dollar churn and why that's really
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important in in the way to sort of think
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about it in SAS is that it cuts both
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ways with these SAS business models the
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good news is people sign up for a
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subscription and you kind of get these
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annuity that pays overtime so long as
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you're delivering value obviously the
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downside is is if you fail to deliver
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that value they have the ability to
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potentially leave and with the cloud and
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api's and people becoming much more
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digitally literate it's getting easier
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and easier for many people to decide to
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move on if they're not getting value out
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of what you're delivering first let's
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talk about perspective the way to look
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at churn is it's really your opportunity
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to improve another magical thing about
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SAS this constant feedback loop where
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customers can leave if they're not
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getting value so I tend to be kind of a
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glass half-full kind of person and so
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the way I sort of think about churn is
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this really your ability to improve
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improve your processes your product
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and everything you're doing with your
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customers and the reality is everybody
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has churn so don't fret because you're
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gonna have periods of high turn that
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things are gonna happen and it's okay
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because it happens in every business but
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come up from the perspective of you know
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it's your opportunity to figure out how
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to do a better a better job in terms of
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selling so there's really you know once
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we move on past logo turn there's really
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two kinds of churn to really think about
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gross churn and net churn so gross churn
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is looking at your cancelled business
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against the air are over that same
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period in terms of what you know will
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come up for renewal and you might want
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to look at it over an annualized period
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over a longer period of time because you
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may only have had some contracts that
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came up for renewal in any given period
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so looking at monthly numbers especially
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if you have a business where people are
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paying annually in advance doesn't make
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a whole lot of sense
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you need to sometimes look at it more on
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aggregate or an average number a
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trailing average things like that just
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think about really where your churn is
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headed but it's looking at again sort of
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what your overall business is cancelling
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against what your ARR base is the other
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important metric in churn is to think
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about what's called net churn what's
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different about net churn is net churn
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takes into account the concept of not
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only your renewals your base but also
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your expansion and then also you know
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any contractions that you might have had
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as well the reason this is important
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especially with respect to the upsells
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is that in any SAS business really one
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again that's what's magical about SAS is
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the compounding nature of SAS and if
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you're not focused on churn not only in
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terms of cancellation but upsell it'll
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be very hard to grow and obviously if
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you've got lots of customers that are
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canceling it's pretty unlikely that
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you're gonna be driving a lot of upsell
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so the two go usually very much
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hand-in-hand not always but often very
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much hand-in-hand but it's important to
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look at them separately because if you
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have a lot of expansion in some accounts
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you may miss some of what the gross
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churn is it well and may present
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different issues to sort of look into so
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both numbers
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are important to be looking at so let's
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talk about really what was acceptable in
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terms of churn how do I really think
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about am i doing a good job am i doing a
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bad job obviously if you can drive your
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gross churn to zero that's how you want
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to head to it's unrealistic nobody's
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perfect
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you're always going to have some
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customers that are going to churn maybe
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they go out of business
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you lose your champion all these sorts
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of things they're going to happen from
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time to time and so an expectation of
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having zero gross turn just simply
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unrealistic we're only going to talk
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about benchmarks though with respect to
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grow stern why because it's very hard to
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compare at least for me when I look
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across our portfolio in general
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benchmarks when you try to compare net
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churn because there's so many other
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factors there does your Bendis does your
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business lend well to upsell maybe it
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does maybe it doesn't if it doesn't then
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comparing those numbers are much harder
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so but if we just talk about gross churn
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generally speaking you're going to see
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higher churn rates when you have lower a
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CVS and lower churn rates when you have
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higher ACB's why is that well you can
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imagine if you spent a lot of time and
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energy gaining a customer who invested a
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lot with you in terms of dollars the
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value proposition ought to be pretty
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significant you invested a lot of time
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making them successful they've invested
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a lot of time trying to make the product
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successful in an organization and likely
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churn rates are going to be lower versus
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if you're in an organ or in a situation
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where the a CVS are smaller call it five
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10k a year and then the customer maybe
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doesn't have the same investment in you
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and your product it's much easier for
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them to make a decision to churn and
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similarly just because of the volume
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that you have to do at those price
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points you just don't get the same
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amount of time to invest on a per
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customer basis so with that haven't been
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said what should you expect well in the
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SMB small medium business market you
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know it were a Seavey's annual contract
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values are gonna be much smaller you
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probably are gonna see gross churn rates
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20% or more but the customer acquisition
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cost in in your your marketing cost to
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gain those customers is probably gonna
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be should be much much smaller so all of
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the math still works in the mid market
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you might see 15% churn
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those customers and again you know that
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the investment on sales manga site it's
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greater but it's not as big as it would
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be for large enterprise customers so
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you're gonna see you know sort of a 15
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maybe a 15 percent turn number a grosser
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number in it for that band of companies
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once you move into the enterprise you
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really want to be looking at 10 percent
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or less and and the reason is you know
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kind of the the opposite reasons for the
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SMB category you've invested a
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tremendous amount money gained these
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customers you've probably flown somebody
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ought to go visit them to God knows
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where
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you've probably invested you know three
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six months in a sales process you
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probably spent a whole lot of money on
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sales and marketing and maybe you had
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webinars and all these things to get
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those enterprise customers interested in
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what you had boy you don't want to lose
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them because the dollar value is very
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high and so if you've got churn rates
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that are greater than 10 percent in that
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enterprise category you just think about
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all that investment that you made ah
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it's kind of caught up in flames
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so there's something missing on the
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value side in terms of how you're
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thinking about those enterprise
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customers also if you think about it too
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you don't have as many likely as many
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customers at the enterprise level and so
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you've probably got people who should be
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able to spend time in those accounts
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making sure those accounts are happy and
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seeing value with your product and value
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is what we'll talk about in the second
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video in terms of really thinking about
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how to solve your turn problem which is
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what we'll talk about next but for now I
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hope that gives you a good sense of how
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to think about churn what some of the
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benchmarks are why it's so critical to
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your business especially around the
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compounding nature of SAS please leave
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me comments down below subscribe share
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with your friends I really enjoy this
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look forward to seeing you next time
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thanks
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