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What Is Churn? SaaS Churn Prediction EXPLAINED - YouTube
Channel: Dan Martell
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hey there dan martel here serial
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entrepreneur investor and creator of sas
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guide me in this episode i want to share
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with you
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what is churn simplified and explain
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and how to reduce it probably the most
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important thing because i think if you
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want to grow a software business it's
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really important to understand
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how to measure it how to structure it
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and more importantly how to capture
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the cancellation and be sure to stay at
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the end where i'm actually going to
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share with you my exact
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six screens literally i'm gonna give you
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the mockups of the six screens that i
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use when any customer goes to cancel
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their subscription on my sas business
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but let's get into it
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so a long time ago i was having a board
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meeting and it was one of the first few
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board meetings we had for my company
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flowtown which was a venture-backed
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social marketing platform
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that my co-founder ethan and i had built
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and uh
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one of our investors asked us what's
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your churn looking like and you know we
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kind of thought we knew how to measure
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it so we just kind of said you know it's
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about 14
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right now uh but it's getting better we
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feel good and he was like wow is that
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per month and i was like yeah at first i
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was like that's
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that sounds pretty good because you hear
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these numbers and you're like okay well
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you know we're retaining customers
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they're paying us every month and what i
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discovered
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uh through that conversation because
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obviously is a very seasoned investor
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and what i've just you know
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now that i've now coached hundreds of
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sas founders try to
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improve their churn to increase their
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monthly reoccurring revenue
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i've realized that there's so many
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different dimensions if you've ever felt
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confused about
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understanding how to measure churn
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understand the difference between logo
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churn net revenue retention
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gross retention like all these different
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aspects of the equation
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i'm gonna simplify it today so that you
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can get your your head wrapped around it
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realize that there's only two different
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kind of dimensions to look at it and
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with that you'll be able to understand
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how to predict it
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and how to reduce it in your sas
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business so number one
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calculate churn or sometimes called logo
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churn so we're going to simplify it
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there's revenue churn so how much money
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we lose every month from customers that
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cancel and we also have just like
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logos or accounts so if you have
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individuals as a consumer type sas or
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a pro or business sas that's like the
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account level churn so right now we're
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just going to keep it simple to wait
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to measure this is at the beginning of
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the quarter or week because you can
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measure churn on a weekly monthly
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quarterly annual basis
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is you want to look at the total number
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of customers so the beginning of the
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month if you had 100 customers
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and at the end of the month you now have
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90 customers from that same cohort not
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any new ones you've added just that same
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group of people you have 10 monthly
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churn simple
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and easy so you can do this on a
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quarterly basis et cetera
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but for right now just go calculate your
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last month's churn and maybe the last
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previous 12 months okay you're trailing
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12 churn
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on a logo basis but that's how we
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calculate the beginning
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same group of people how many are
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sticking around at the end of that
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period divided by
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um across that period and that is the
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number
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number two net negative chur now this
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term
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sounds so weird because net negative
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churn sounds like a bad
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thing churn's bad negative's bad but
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it's actually a positive thing if the
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number
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is is positive right so what net
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negative churn is more like
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revenue retention you might hear people
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say net revenue retention to me it's the
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same thing
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if i have a group of 100 customers at
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the beginning of the
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year and they spent a hundred thousand
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dollars in that same group of people
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end up at the end of the year having
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spent a hundred and thirty thousand
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dollars then i have a thirty percent
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net revenue retention or 130 percent net
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revenue retention meaning that it went
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up okay and the way that goes up is by
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expansion revenue
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cross sells upsells add-ons so this is
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the thing about sas a lot of early first
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time sas founders don't understand is
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that
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your business is predicated on your
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ability to move
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customers through your plans expand
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their usage through some kind of value
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metric
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or use an add-on to sell them to
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increase what's called the average
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revenue per user per account arpa
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or poo but that is what net negative
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churn means is
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is do you have a scenario where the
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longer customers stay with you
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their spend is more than the amount of
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money you've lost through
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cancellations or downgrades number three
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acceptable churn by market
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now if i didn't lose you on the second
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bull i apologize
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there is some math involved here but the
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big idea is you have logo true and you
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have revenue churn
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now i'm going to talk about logo churn
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your accounts what is the norm people
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always say well what should i be aiming
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for what's the point of diminishing
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returns in regards to like if my churn
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is
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x per month am i serve this type of
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market is that okay so i want to break
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it down for you
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first is smb on average because you got
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to think about small medium businesses
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they're going out of business every year
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so you can't there's certain forces
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against cancellations uh that you'll
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never be able to overcome because it's
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just
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in the same vein of business failure
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rate so three to seven percent on a
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monthly basis for logo
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is where you want to be now previous
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point that i meant the net negative
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retention or
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net revenue retention that same even
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though you're losing those logos if you
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have a product that has really well
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designed pricing
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and expansion revenue like a value
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metric and add-ons you'll be able to
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overcome that cancellation force
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by expansion revenue so that's why you
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have these
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smb sas companies that are very
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profitable that continue to grow
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even though they're losing three to
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seven percent of their customers every
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month because the way they
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monetize that base of customers allows
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them to grow the revenue
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uh base so that's the smb space mid
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market
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you're looking at about one to two
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percent on a monthly basis that's good
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and then on the enterprise level
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0.5 or 1 and it's very
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normal and not uncommon to have
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enterprise customers
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with like no churn on an annual basis
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because they're selling these
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big integrated platforms that are
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incredibly hard to rip out
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for a business so the stickier it is the
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lower your churn's going to be and on a
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monthly basis
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when you get to that level like focus
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right now to get there but once you're
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there
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you also want to start looking at ways
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to monetize better because that's really
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going to help you
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increase your average revenue per
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account so mid market
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enterprise and smb that's the way you
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want to look at it you might serve all
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three so make sure you segment out your
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customers
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in churn by uh segment so that you know
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what they are individually on a monthly
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logo and just
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multiply by 12 to get your annual
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numbers number four
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churn prediction so how do you know
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ahead of time before the customer
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actually cancels that they're gonna not
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renew
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great question so the way we do that is
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a customer success strategy called the
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customer engagement score the ces now i
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teach a framework called
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the member at risk monitor which is
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essentially the same concept but if you
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think about it
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if you look at your users and you look
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at what happened
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prior to them canceling you'll probably
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see certain activities
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that were true maybe they stopped
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logging in so often maybe they
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had a change this is a big one i had a
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customer that i coach
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they noticed that when the person who
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was the account owner changed
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jobs there was like a 70 chance that
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they weren't going to renew on their
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next renewal cycle
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duh because the person that made the
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decision to buy that software
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had moved on so they built in a
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monitoring tool that actually told them
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if the account owner changed
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reach out to the company find out who
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took over the role build the
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relationship
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and not only retain that account this is
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the kicker they would actually go and
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reach out to the person on linkedin that
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changed to the new job to see if they
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could sell their software into that new
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customer that's the level of thinking
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that you need to have
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to make sure that you can start to
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reduce and really predict your churn so
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customer engagement score
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i have another video that's all about
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the different tools that you should be
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using to measure
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this you can do it yourself very simply
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i mean honestly if it's logins if it's
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usage whatever
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data tells you if they're red green or
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yellow
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that'll help so the way i stack it
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though i want to give you this is reds
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bad yellows
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trending bad green is good but then the
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top level is purple
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so you have these four colors and purple
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means referenceable meaning if you want
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to refer customers for testimonials or
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prospects to talk to customers et cetera
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that's purple and what you do is you
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create a playbook a customer success
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playbook a documented strategy to say
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if somebody ends up in red here's what
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we do and we execute we call them we
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set up a scheduled kickoff we do
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whatever we need to do to engage them to
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get them to yell if they're yellow we do
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this we try to get them to green if
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they're green we try to get them to
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purple so we ask for
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uh if they're willing to do testimonial
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be interviewed on our podcast et cetera
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et cetera but that is
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at a high level how we not only predict
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it but we overcome it
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number five limit churn so how do you
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limit your turn well the reality is is
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people might be canceling your software
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not because
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they don't have the need and they don't
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think you can solve it maybe they're
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just frustrated maybe they had a bad
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customer support experience maybe
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they feel like there's a feature that's
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critical for their business that you
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don't
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serve or you don't offer but you
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actually have it they're just not aware
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of it so there's
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there's six dimensions of doing this and
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the big idea
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is i want you to capture the
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cancellation okay i want you to monitor
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using the the different uh traffic light
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systems you know red green yellow purple
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but i also want you if somebody actually
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goes to cancer i want you to capture
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their reason
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and figure out if there's a way to save
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them sometimes people cancel or
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really just want to pause their account
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because there's a downturn in the market
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but i want you to capture that feedback
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and feed it back to your product team
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because all those reasons are probably
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product opportunities to improve the
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gaps
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in your roadmap so that you can retain
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more customers pretty much
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i would say you know 20 of your
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engineering time should be fixing bugs
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and fortifying the platform
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60 should be built on reducing churn and
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adding features that are missing to keep
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the customers you have and the other 20
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should be on innovation and new kind of
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product strategy so that you don't be
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left
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you don't get left behind by your
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competitors so
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quick review of the hot principles of
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churn and how to
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make it predictive number one we need to
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calculate our churn number two we need
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to ensure we're heading towards net
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negative churn
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number three benchmark our churn by
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acceptable churn by
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markets the percentage is there on a
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monthly basis number four
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churn prediction uh using software or
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coding it ourselves and number five
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limit churn by capturing the
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cancellation as i mentioned in the
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beginning this episode i want to share
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with you an exclusive resource it is
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called the cancellation capture system
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it's the exact framework wireframes that
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i use in all my software companies all
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my coaching clients
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implement it to not only save the
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cancellation but more importantly
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learn from the customer that's leaving
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as to where the gaps are
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in our product to be able to not only
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save them but potentially reduce
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the amount of future cancellations from
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our current customers so make sure that
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you download that just click the link
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below
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download your copy with the wireframe so
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you can implement that just give it to
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your product team and they'll write up
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the code
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and be sure if you like this video to
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smash that like button
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subscribe to my channel and if there's
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anybody that you care about that you
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think this could serve feel free to
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share with them
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and as per usual i want to challenge you
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to live a bigger life and a bigger
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business and i'll see you next monday
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ready to rock
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