5 Things Every Executive Should Know About the Elephant in Your Board Room: Churn
In the startup world, people talk about elephants quite a bit: Sales people go hunting for elephants; any time an issue isn’t discussed, there’s an elephant in the room; an uncoordinated team is like the story of blind men grasping at the elephant. Have you heard the rumors that Snuffleupagus is applying to YCombinator?
In the ongoing pursuit to assert a hyper-focus on new sales and “elephant hunting”, too many Boards are blind to the real elephant in the room: churn.
If you’re a seasoned board member, you’ve long accepted that the company’s value is a factor of growth. You’ve learned the important questions to ask your companies about new customer acquisition. But if the company has a business model (SaaS, pay-per-use, pay-per-transaction, cloud, etc.) where the customer pays over time, growth comes from new and existing customers. Driving incremental revenue from existing customers is the heart of Customer Success Management, and as the company grows, revenue from existing customers increasingly becomes a prominent part of the company’s economic value.
We all know how the new sales conversation goes in typical board meetings: What were bookings in the last period? How do we compare to other companies in growth metrics and share? What do our leads and pipeline indicate about future bookings? However, many Boards are still figuring out the right questions to ask in order to measure customer success.
To simplify this process, we’ve created a cheat sheet for you:
1. Calculate your churn metrics.
In the boardroom, you need an intellectually honest view of your business (not just making your metrics look high…although, you can. This is why every public company claims a 90%+ retention rate to Wall Street). Ask yourself the following questions:
- Are we including up-sells to offset churn in our retention number?
- Do we count price decreases or down-sells against retention?
- Is retention calculated as a fraction of total dollars or dollars eligible for renewal in that period?
While I’d recommend breaking out churn from up-sell as two separate metrics, the most important thing is being on the same page about what you’re looking at. For a sample board customer retention dashboard, click here.
2. Understand the health of your customer base.
Retention and churn are “rear-view mirror” metrics in that they reflect things from the past. How is the customer base doing today and what does that bode for future retention rates? As a board, you should have an understanding of the health of the current active customer base. This health can be measured qualitatively (e.g., red/yellow/green) or based upon some health framework. You could look at factors including product/service usage, contract length, customer relationship, invoice payment history and other variables. Whatever you do, make sure you have a sense of where you’re going, not just where you’ve been.
3. Benchmark your churn rate with other companies in the category.
While some customer segments (e.g., SMB) or industries (e.g., marketing) are naturally higher churn climates, others (e.g., financial software) are fundamentally sticky. It’s important to make sure you have a good sense of what your target is. Check out our published survey of 100+ subscription companies and their retention statistics here.
4. Monitor impact to customer health.
It’s great once you understand the health of your customer base, but what are you doing about it? Ask yourself the following questions:
- Do you have a customer success team?
- Are they intervening early with at-risk customers?
- Are they ensuring the onboarding process is smooth?
- Are they finding ways to drive production adoption and up-sell?
- Just like the company should have a strategy around marketing, lead gen and sales, it should have a plan around customer success and customer retention.
5. Study your customers through data. Lastly, and perhaps most importantly, Boards should be challenging management teams to constantly learn from customers:
- Why are customers not renewing?
- What’s the difference between our good and bad customers?
- How can we predict the future of our business based upon data?
The best Boards have strong processes to understand where the company has been, where it is today and where it’s going from the customer acquisition perspective. Similarly, Boards of subscription businesses need to develop comparable discipline around Customer Success.
Otherwise, you may quickly learn what it feels like to get run over by an elephant.