Want to Accelerate Growth and Value? Slow Down to go Faster
This is customer retention (part 1 of 2)
Customer churn = Number of customers have have left or unsubscribed over a period of time.
Churn rate (%) = (Lost customers / Customer at the start of the period) x 100
In subscription-based business models, customer churn (leaver/unsubscribe) rates tend to be relatively high, particularly in consumer markets with non-essential goods or services, sensitivity to price changes and high ease of switching providers.
Given these market dynamics, keeping new subscriber volumes high is important and something to be aware of is how different customer churn scenarios impact overall growth for your business.
This doesn’t necessarily mean that you need to change what you do, but perhaps how you do it. By shifting your attention and mindset towards relevance and quality across your customer touch-points, this approach will help you create sustainable and long-term growth.
Break down the problem into smaller parts
A useful technique to identify the root cause of a problem comes from the founder of Toyota Industries, Kiichiro Toyoda and it’s called “The 5 Why’s Technique”. Here is an example of how it works in practice:
Problem statement: For every 10 new subscribers; 3 or 4 cancel within six months.
Why did they cancel? Because they didn’t make active use of the subscription.
Why did they not make use of it? Because they didn’t see any value in it.
Why did they not see any value in it? Because their needs and interests were different.
Why did we sign them up if their needs are different to what we offer? Because [you tell me]…
The above is a hypothetical example and designed to entertain the thought that it’s possible that customer attrition is the mirror image of acquisition.
The paradox of growth
If there is a fundamental flaw or mismatch in your business offering compared to customer needs, chances are that a good chunk of your newfound growth is going to end up as either silent or passive attrition (i.e. customers who are not and never will use your product but can’t be bothered to close their account) or active or actual attrition (subscription ended).
Depending on your industry and business model, there may be significant upfront cost to consider when acquiring new customers (marketing, sales, onboarding costs etc), whilst the revenues trickle in more slowly (e.g. monthly fees). These dynamics mean that your financial break-even point per new subscriber may be some time away.
When faced with a high customer churn situation, it may seem intuitive to try to grow your business out of this situation. A common misperception is that things will get easier by growing quicker. They do not. It will add more complexity and pressure on cashflow, resources, customer experience etc. This is the paradox of growth.
Data is king (or queen)
You may already have a rough idea of why customers are unsubscribing, but you’ll want to make sure that you base business decisions on real customer data and insights.
Here are 3 simple steps to help you to lay a solid foundation for getting a handle on customer churn:
Start logging subscriber reasons for leaving and group these into categories as they emerge.
Measure unsubscribe volumes by category and continue this exercise over time until you can see a clear pattern.
Where possible, capture verbal or written customer feedback about your product or service.
Also, pay close attention to the number of customer complaints compared to your overall customer / subscriber volumes and the reasons why customers are unhappy. This is an opportunity for you not only put things right, but also to capture valuable insights for your business and to prevent similar future reoccurrences.
“Your most unhappy customers are your greatest source of learning”
- Bill Gates
Keep doing all of the above over the course of time and you will soon have quite detailed feedback on customers’ reasons for leaving and you can start mapping this back to your other activities and offerings to figure out how to build back stronger.
Aggregate marginal gains
Sales to new customers is often seen as the natural way to drive business growth, but what about activities relating to existing customer management: customer service, engagement, retention and so on.
To understand how this is interrelated, let’s have a look at a visual example.
In the diagram below, we have a fictitious company that is growing quickly and adding +10% volume of users per month over the course of 24 months, but they also struggle with a very high churn rate of 5% per month. We measure the difference (10-5=5%) as a growth rate index over time, starting at 100 at month zero (the bottom green line).
Each coloured line above this represents a scenario where the company is keeping the new subscriber growth rate constant, while managing to reduce the existing subscriber attrition by 1% at the time.
Notice how the growth curve starts climbing increasingly steeper as time goes by. This is because the aggregate impact of month-over-month growth is not linear, but exponential.
This illustrates the concept of how many small incremental and consistent gains leads to dramatic improvements on overall growth over time, by focussing on factors beyond new sales.
A few questions for you
Before we close, here are three questions for you to consider:
What is the customer churn rate in your business?
What are the main reasons why your customers are unsubscribing / leaving?
If you could reduce the leaver numbers by X, what would this mean for your business in terms of revenue and growth?
Also, I have a small home-work assignment for you. Thinking about all of the above, can you identify ONE improvement or change that you could make to your business right away.
That concludes today’s newsletter and I hope you enjoyed reading it. Please let me know what you thought of it and feel free to ask anything in the comments below.
If you want more content like this, please subscribe to my publication. I will continue expanding on this topic and will be posting part 2 on customer retention in my next post.
Until next time,
Jens