Jan '23 in General discussion
Your top focus of the year probably needs to be retention
Read a really good piece yesterday that talks about the 'churn snowball'.
I know we'd all like to think that really good marketing can offset churn, but that just doesn't work long term. Plus, it's embarrassing to market a turd.
Below are some of the most significant impacts of churn:
1) FOREVER Lost ARR
I added emphasis to the “forever” part because churned ARR isn’t something companies can magically make up for by selling more next year. A lot of people talk about churned ARR as if they can make up for it with more sales.
Yes, companies can add more ARR, but sales reps would have theoretically closed those deals regardless of the churn because they only have so much capacity. A sales rep isn’t going to say “Hey, we churned a lot last quarter so I am going to work a little bit harder and close an extra deal this quarter to make up for the churn!”.
ARR is a double-edged sword. It is recurring so the revenue can repeat for many years, but if companies churn a customer then that is multiple years of lost revenue that is lost forever.
2) Lost Expansion Opportunities
When a customer churns, companies lose the opportunity to expand that customer. Expanding existing customers is significantly easier and cheaper than selling to a new customer so churn means companies don’t get that efficient revenue growth.
For example, if a company’s annual expansion target is 30% then that revenue is also lost FOREVER.
3) Lost Second Order Revenue
Second-order revenue consists of:
- Sales that come from existing customer referrals
- Sales from customers changing employers and buying the product again at their new employer
It’s hard to quantify this but in the tech world, these costs are very real and likely more significant than most people realize.
As an example, if Bob buys SaaS widget from Company ABC and doesn’t have a good experience (deployment is bad, features were oversold/lacking, etc) then when Bob changes jobs there is a high chance he doesn’t purchase from Company ABC at his new company. Not only that, but Bob likely will tell his friends about his bad experience and that Company XYZ is much better.
Companies don’t fully realize the impact of these indirect costs, but I have been in many finance leadership groups where these vendor discussions happen. Referrals and word of mouth can significantly influence buying decisions for lots of potential buyers based on one person’s experience.
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Your top focus of the year probably needs to be retention
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