I’ve seen SaaS and productized service companies operate with anywhere from net-negative revenue churn to 45% monthly customer churn. In this post, I’ll share the underlying causes of churn and suggestions you can use to fix this frustrating problem.
Forcing a subscription when you’re solving a one-off, project, seasonal or inconsistent need
It’s easy to fall in love with a subscription model for a service or SaaS business, even when there is no recurring need. If your product has less than a 12-month average subscription term, you probably aren’t truly building a stack of recurring revenue. Here are some ways I’ve seen people force the subscription model. They:
- attempt to provide recurring service delivery where there’s an existing and complex one-way workflow with lots of revisions and touchpoints, e.g. copywriting
- cut their service into chunks to be delivered over time, rather than solving an actual time-based need e.g. drip-feeding ad-hoc tasks into an ongoing support model
- apply a complex series of plans, credits or rules to a product, e.g. cutting a copywriting project into credits
If you’re facing these problems, you have a structural issue. Your product is being built on an unstable foundation and it is unlikely you’re going to retain customers past a twelve-month lifespan. It seems obvious, but it happens quite a lot.
You haven’t made yourself an integral part of your customer’s business process
Let’s say you run a productized service for podcasters. You deliver transcribed show notes, edit the podcast audio and share their episode. Right now, your scope is a small chunk of the overall business process. You’re easily replacable. If a competitor comes along with a product that does the work cheaper or better, you’re in trouble.
To mitigate this, you can look upstream and downstream from your customer’s problems to find more opportunities in their business process. This makes you a more valuable provider because there’s more at stake if the relationship ends. Put bluntly, if you can figure out a way to become part of the plumbing of your customers business, it’s really painful and annoying to rip and replace. Customers will do it, but won’t really want to go to all of the effort unless they are going to save a lot of time or money by doing so.
For example, Wix doesn’t just care about hosting your website. They want to be the one-stop shop for all of your online needs. This includes your domain, your website, your e-commerce store, your payment gateway, your email marketing, your social media and so on. Once you start building a website, they gently nudge you towards using them for more and more of your business needs. So how do you get there?
Talk to your customer and ask them about their adjacent pain points. This will help you come up with new problems you can solve and ways to expand your plan offerings.
If you truly can’t extend your product offering or increase the value of your product, then you go even further upstream in your own business to refine customer acquisition. Apply your focus on how to acquire customers as cheaply as possible. You might get there by creting a content flywheel, nailing a paid ads strategy or building a simple viral loop in your product. The working assumption with this approach is that your contract length and you’re trying to address the other side of the equation. Once you’ve nailed acquisition, you can look to create efficiency in your business operations and tinker with other efforts that will give you a boost, like maximizing referrals from existing customers.
Losing contact with your customers
Do you have a customer base full of zombies? A zombie is a customer who pays you, but receives no value or has forgotten you’re charging them. The first time I heard the zombie term at a WeWork lunch and learn, I flipped out. It hit home. Apart from the philosophical problem with charging people who aren’t receiving any value, you’re also creating a brittle business.
Imagine if your payment gateway fails and you need to resubscribe all of your customers. If you’re heavily skewed towards a zombie base, then you’re going to be in big trouble because a lot of your customers will leave you behind.
Finding a balance of touchpoints can be difficult, because you don’t want to blast your customer and you don’t want to let them die on the vine. I recommend you contact your customer with something* at least every month. This can fall into a number of buckets:
- Education: share an article or resource that helps them be more successful with your product or better execute the business process your product is wrapped around
- Product update: don’t send this with a focus on how shiny your new feature is, rather how a customer can get the most benefit from it
- Up-sell / cross-sell: if you use these touchpoints sparingly and combine them with either
milestones(e.g. a trigger of term-length), then you will pick up some extra LTV
- Milestone: celebrate your customer’s loyalty to your service and if your ARPU supports It, do something nice for them. When a celebration is thoughtfully combined with social sharing, you can create a nice referral loop into your business.
Here’s a free resource [update link] you can download, it’s an easy spreadsheet with a few examples of emails from each bucket that can inspire your work. You can use it to visualize the touchpoints you have with your customers on an annual basis. If you zoom the sheet right out, you’ll see highlighted sections of what you currently do, versus what you will do.
Not offering a downgrade option
An off the menu or hidden downgrade option is a product tier you hide from your public plans page and only make available to customers who are a risk of churning. This strategy gives you a method to increase your customer’s lifetime value, improve your NPS and maybe even drive a few more referrals too. The success of this approach will depend on the market you’re in, how portable your product is and a number of other attributes we’ll dive into a bit later on.
Let’s do a brief case study on a product called Fancyhands. They provide a virtual assistant service where you pay a monthly subscription fee for tasks. The subscription fee buys you a specific number of task credits; $79 gets you five credits, $99 gets you seven credits and so on. The credits roll over from month to month, so if you pay for ten and don’t use them all, the remaining balance goes into your account. If you decide to cancel, you lose all of the credits. The credits cannot be refunded, redeemed for any cash value or transferred to another provider.
As a Fancyhands customer, I didn’t have enough tasks to use my credits for a few months. I was happy with the service, but I was never going to catch up to use my remaining credit balance. I was ready to cancel, but when I went through the cancelation flow, I was pleasantly surprised. I discovered I could keep my account open for $15 per month (an 80% discount to my subscription price) and continue to use the remaining credits. Downgrading to this option put my subscription in maintenance mode; so I wouldn’t gain or lose any credits, but I would still have access to the credits or the $xxx I had already paid. If I canceled, I would lose the ability to use the credits but more importantly, feel like I was getting the raw end of the deal.
The successful transition to the downgraded plan became the subtle difference between me telling my friends “Fancyhands was OK but I didn’t see long term value in it” to “Fancyhands is awesome, I’ve been a customer for three years and love the service!” It’s difficult to put a dollar value on what that means to your customer base, but you can roughly approximate a dollar value on what retaining the customer will mean to your business. How? For simplicity’s sake, we’ll assume that a canceled customer will never return and because you have excellent unit economics, an additional customer retained on a lower value plan will not become a financial drag on your overall business.
Here’s a downloadable spreadsheet [update link] you can copy and paste to help you visualize how this scenario will work for your business.
For a single customer, the numbers aren’t amazing. Initially, you will see a small lift in lifetime value, Average Revenue Per User (ARPU), subscription length and maybe a referral. But when you take these numbers and model them over the entire customer base over an extended period of time, then the downgrade option becomes even more interesting. When you increase your customer’s subscription length, you get more opportunity to sell them back up into their original plan, through education. An active customer is also much more likely to refer a new customer to you, too.
I’ve created an editable worksheet that you can copy and implement for your own business, here.
Now, we’ll get into the details of what you need to think about if you want to implement this in your product. First, some questions:
- Is there a way your product retains value?
- How transferable or portable is your product? For example, can a customer export their data from your product and leave without any friction? Or is your product very sticky and hard to unplug from?
- Can you offer a significant discount (50-80%) to a given plan type but remain profitable? What
areyour unit economics per customer? For example, can you serve an additional low occupancy customer with marginalcost?
- What is driving the request for cancelation? Is it a lack of usage (this makes it easier to transition to a lower-level plan) or is it dissatisfaction? If you’ve made a customer unhappy then desperately throw a discount their way, you might damage any goodwill you have left.
Answering these questions will not only help you figure out whether your product is ready for an off the menu downgrade option, it will also help you figure out what you need to put in place to get there.
A missing or half-baked onboarding experience
Imagine you buy a piece of Ikea furniture, you get home to assemble it and there is no instruction manual to tell you where the pieces go. The same effect happens when you buy a product that sends you a long email packed with confusing instructions, fire up an app that has no onboarding steps or pays for a product that lacks an intuitive UX that helps you move through the experience.
The golden few seconds post-purchase are a massive opportunity for you to create a positive first impression and cement yourself in your customer’s mind as a reliable provider. So, how do you create a helpful onboarding experience? Here’s a list of questions you can answer to make sure your onboarding is sufficient to get your customer up and running:
- Do you collect key data you need? This might be contact details or website credentials
- Do you help lock into their business process by connecting with other apps? I use a transcription service called otter.ai and it runs off the back of my Zoom account. I’ve had to look for the integration a few times, when it is the key driver of my usage.
- Do you walk the customer through a demo of how to successfully achieve value immediately? Better yet, do you guide them through their first experience in a light-touch way to achieve value? This might be setting up a templated task, creating something on their behalf or removing friction so they can move forward.
- Do you celebrate when the first milestone is reached, either in-app or via another channel?
- Do you provide them with specific next steps on what to expect as they continue to use the app?
- Do you kick off a usage loop, so the customer’s action kicks off an event where they will need to get back into the app within a specific window of time?
Here’s a brief walkthrough [update link] of an onboarding experience for a few apps and services. Notice the steps each product takes you through.
Enforcing a very rigid cancelation and refund policy that prioritizes short term revenue over a long-term relationship
I bought a pass to a Tony Robbins event. My circumstances changed and I was no longer able to attend. Instead of being able to refund the value of the ticket, I was only being able to transfer it to another event. I wasn’t entirely sure when I could commit or where I would be. After a lot of emails back and forward with the team and a failed credit card chargeback, my lifetime value quickly went from ~$5,000 of willing spend to $1,500 of forced spend.
The same rule applies to subscription products as well. Customers will come back, but if you’re more focused on short-term revenue than the long-term relationship, they won’t.
Pumping up term discounts to maximize LTV instead of figuring out how to deliver more customer value
Let’s take a productized service with an average subscription contract length of 3 months. You could
Your LTV will improve the expense of customer goodwill and future revenue opportunities.
Forgetting to educate your customer on how to use your service
If you see cancellation surveys that say ‘no longer used the service’, ‘don’t need it right now’ or ‘stopped using it’, dig deeper.
If you are solving a truly ongoing problem and your product/service is key to your customer’s business, then you might have an education gap. It’s quite common to expect your customer to understand how to derive value from your product without instructing them on exactly how they can get there. Notice the difference:
Purchase > welcome email > educational email > transaction email
Purchase > welcome email from founder with a question > segmentation into customer profile > targeted email 1 > targeted email 2 > report that highlights the value of the service > targeted email 3 > etc
Delivering too much value, too fast (say what?)
Yes, it’s possible to be too good at what you do. Take the example of a productized service that provides ongoing leads to a customer. The customer will be satisfied with
Leaving your customer in no man’s land, post-purchase
Going upmarket without the right process or team in place
Forcing your customer to jump through hoops, off-platform or otherwise
Incorrectly diagnosing a metric to improve, rather than a human problem to overcome
Making wholesale product assumptions based purely on intuition
Selling to the wrong customer type
Forgetting that you need to re-earn a customer’s business every month, quarter or year
Forgetting to show your customer the value they’re deriving from your product in either time, money or another metric
Overwhelming a customer with too much information, instead of drip feeding it over time
Not offering an off-the-menu option or downgrade
Forgetting to remarket to your churned customer base
Not becoming an integral part of your customer’s workflow