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Anyone managing a SaaS or subscription business is aware of customer churn. You may not be an expert, but you are at least familiar with the idea that your customers are only with you for a finite period of time.
That means achieving any essence of “growth” requires replacing lost customers faster than the rate at which they churn.
Managing churn is much like a constant game of plugging holes in a bucket so that you can eventually have a “rising tide” of water. When your water is rising, you’ve reached the point that I consider growth efficiency, where regardless of speed you at least know that the water will continue to rise.
This is when the good stuff starts to happen within a subscription business 🙂
In this post I’m going to share the strategy and steps we followed to reduce our monthly customer churn by over 70%, and explain how we positioned Nudge Coach for efficient, long-term growth.
The Problem
In January of 2020, we realized that one of the major problems holding back our company was a customer churn rate of 19%.
The graph below, taken from our Baremetrics account, shows our customer churn throughout January 2020.
In the sea of data and decision making that we all wade through everyday, this stood out to us as an indicator that something needed to be fixed.
The benchmark customer churn for SaaS for SMBs is 5%. At 19.20%, we were dramatically off-base.
We knew if we wanted to keep our business growing, we needed to figure out why so many customers were leaving, and provide the value-add they need to stay.
At that moment, we made it our goal for 2020 to reduce customer churn to 5%.
Fast forward a year, and by the end of 2020, we had reached an average monthly customer churn of 6%, with some days dipping below 5%.
It wasn’t easy.
It took us 10 months, including additional efforts being made all the way up to 2021.
Let me tell you how we did it!
Our Situation
Before we get into our strategy, let me give you a little more background on our situation and how we got there.
Transitioning to SaaS
On January 1st 2020, we transitioned the company out of a strategic partnership (we were operating the platform under a non SaaS business model!). We were looking to relaunch the user-driven, SaaS side of our businesses.
A year earlier we’d launched the MVP of the model allowing SMB customers to input a credit card to get access to the platform, but we hadn’t had a chance to dedicate time or resources to optimizing a proper SaaS onboarding funnel.
As a budding SaaS offering, we had some things in place, but a lot of the older design remained. Our smallest self-serve plan was basically a revolving door, and users couldn’t upgrade or downgrade their plan without calling a sales person.
Revenue churn vs. customer churn
Up until January 2020, almost all of our growth over the past 5 years had been generated through a pretty traditional sales-led growth strategy. Site traffic became leads, we nurtured leads to the point of booking calls with our sales team, and then we let the sales team take prospects through the point of conversion. Due to this style, the customers that we converted were very loyal. This means that our revenue churn was very low.
But what about all of those new leads coming into the funnel, that we didn’t have time to talk to, who kept churning at a rate of 19%? We saw this as a big missed opportunity.
Key situational stats
Even with the high churn rate we saw some other really promising signs:
- Through our funnel we regularly acquired 400-500 new leads per month and were consistently signing dozens of new customers each month.
- Churn was largely isolated to the small accounts, so revenue churn and volatility was quite low.
- Even pre-COVID, our industry (online coaching) had matured drastically since 2018, and those trends were poised to continue.
To describe further our product’s situation, here’s what we already had in place:
- An email onboarding sequence for new customers that walked them through key steps of getting set up on the system. We educated them on key functionality and attempted to get them to book a call with a member of our team. I’d be the first to admit this wasn’t very effective and needed an overhaul.
- Live chat and support ticketing through Helpscout
- Dunning system through Baremetrics to prevent soft churn and collect failed credit card payments
Finally, we realized what we needed to do … and it wasn’t going to be pretty.
I’m generally known as “the metrics” guy, so needless to say there was plenty of analysis on the front end surrounding customer churn to see how heavy this lift was going to be for us.
Spoiler alert… there was plenty of work to do, but the encouraging signs within the data gave us confidence that we would be able to reduce churn, and that it would positively impact business.
Our self-serve funnel was regularly acquiring new customers but most didn’t stick around very long or expand beyond the initial tier. But we have the leads, the market is big, and we have lots of loyal customers. All of this led to one profound realization…
To maximize the opportunity we’re seeing in the high rate of sign ups, we needed to completely reimagine how we acquired and onboarded customers.
We needed to ensure customers not only immediately understood how to use the system, but saw enough value to stick around and consider upgrading. If we could get a customer activated and expanded to a larger tier, then we had a far better chance of keeping them around at a much higher dollar amount.
For those more familiar with SaaS, most of our problems stemmed around user activation. The system was too flexible and didn’t provide enough guidance and structure for those going through enrollment. We didn’t provide any type of handholding from our team, resulting in a lack of engagement from our users.
Looking at the challenge ahead, we were confident we could accomplish what was required, but recognized that it would probably take us 9-12 months to complete the remodeling of our customer acquisition and onboarding method.
This would also mean shifting our growth strategy from a sales-led to a product-led approach.
We recalibrated and realigned the team’s focus on restructuring the platform in a way that would make it easier for a user to adopt without hands-on training, and identified the value gaps that we weren’t providing to the customer. This would enable us to increase the overall value of the system to customers.
Moving forward, the platform would become the foundation and building block for our revamped customer acquisition and retention strategy, and help us achieve our team goal of keeping our monthly account churn below 5%.
It took us over 9 months, but here’s how we did it.
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What Causes Churn
Before we get into the strategy it’s important to understand the factors that cause churn.
Being that we largely cater to SMB clients we are naturally going to have a higher churn rate than those targeting enterprise customers. This is because of the nature of SMBs occasionally pivoting or going out of business. It’s sad to see, but that’s unfortunately one of the big reasons we see accounts leave.
Aside from shutting down, churn largely results from one of the following factors:
- Ineffective onboarding → customers can’t understand or apply our value
- System is unreliable → platform is “buggy” or suffering from frequent down-time
- Bad support → a bad support experience is one of the quickest ways to lose a customer
- Product Fit → missing functionality and/or customers jumping to a competitor
- Soft Churn → failing credit card payments
Over time, our goal at Nudge Coach is to implement strategies and solutions that address all of these factors. If you have a small team, start with ensuring system reliability and providing great user support.
You’d be amazed what you can achieve with a great customer experience, even if your product is feature-light at that time. Failure in these two areas is the fastest way to lose customers, so treat these as the foundation and start building from there.
Mindset : Our guiding principles on churn
Our high-level strategy to reduce customer churn was built around 3 core principles:
Create a great product people love
I view this as a long term goal that you can strive for but never technically reach. We felt we had a value gap so we started putting together a list of shortcomings we felt were holding back our product from being great and we started addressing those one at a time. It’s not about releasing a flurry of features as much as constantly trying to improve on the experience… there’s a difference.
The customer acquisition process needs to be built around intent
In the SMB SaaS world, if you don’t have any type of trial experience you are going to see a significant number of 1-month accounts who sign up simply to see if the product fits their needs. We wanted to restructure our model to allow users to start paying when they were ready, which we anticipated would immediately reduce churn by > 25%.
Measure everything
I believe strongly in the build-measure-learn feedback loop and it’s something that we have relied heavily on over the past few years to optimize our marketing funnel to deliver consistent results.
The main thing to remember – you can’t optimize what you don’t measure. Tackling churn requires constant measuring and iteration. Try and address one item from your to-do list at a time, measure its impact, refine if necessary, then move on to the next best item.
Baremetrics allowed us to not only have constant oversight of our churn rate, but even more importantly it enabled us to compare data across plan types and monitor how changes impacted new cohorts of customers each month.
Prioritize
One of the main things to keep in mind is that the time and resources required to operationalize some of these strategies will greatly differ.
Some prevention measures may only take a few days while others may require months of team resources to properly address – it’s for this reason that I strongly suggest identifying where your weak points are and prioritizing which solutions to pursue.
Strategy: How to reduce customer churn to 5%
Most people don’t realize this but there are countless, well-documented methods to prevent customer churn – below are the stages and activities we followed. After a brief outline of the to-do list, we’ll go into an in depth description of each phase.
Phase 1 (initial 3 months)
- Update dunning email sequence to increase collection rate from failing payments
- Restructure cancellation process to funnel accounts through an offboarding form for additional feedback
- Change acquisition model by transitioning to Freemium Model (allow coaches to use system for free for up to 3 clients)
Phase 2 (months 3-9)
- Introduce Discounted Annual Plans (get people to switch to annual subscriptions vs monthly)
- Allow customers to seamlessly transition between plans (upgrade/downgrade when they need to)
Phase 3 (within 9 months)
- Launch a course called the Program Builder Mastermind enabling us to efficiently educate and collaborate with free and small tier accounts. More about this to come later!
Phase 1
When resources are limited it’s important to prioritize. Out of everything in Phase 1, we knew the transition to a freemium model would take the most time, so in the meantime we looked for some quick wins.
In general, Phase 1 items are items that can be implemented within a few weeks and will have an immediate impact on your churn numbers. If you don’t already have a solid customer support structure in place, I recommend you prioritize that in your phase 1. At Nudge Coach, our customer support was in good shape, so I left that out here.
Update Dunning Emails Sequence
While your customers may have every intention of paying you regularly, their credit card may have something different in mind.
Failed payments, or soft churn, is the killer of most subscription businesses – in fact, around 9% of your MRR is at-risk of loss to failed payments.
“Dunning” is the communication process used to systematically communicate to customers based on failed (or soon-to-be failing payments) so that they upgrade their payment details.
Luckily there are systems, like Baremetrics, that sit on top of your payment processor (i.e. Stripe) and trigger custom email sequences based on failed payments and expiring credit cards. This is very much a “squeaky wheel” situation.
The key is to stay in front of people to maximize your chance of getting updated details. Keep the copy succinct and to the point.
At the time, about 10% of our churn was soft churn, and we had been tackling it using Recover for multiple years. When talking to a Baremetrics rep last year, we realised we had been overly conservative with the number of dunning emails we were sending out.
We increased the count of emails so that each at-risk customer received 6 emails over a 30-day period. This made sure their card details were collected, and we immediately saw a slight reduction in soft churn.
We’ll talk more on soft churn as we get into upfront payments for annual plans later!
Add Strategic Friction to Your Cancellation Process
Early on it’s really important to understand why customers decide to leave – is your offering too expensive? Solution not working properly? Better products out there? It’s impossible to improve your numbers if you don’t have an idea of the problem you need to address.
For this reason I’d highly recommend getting away from a simple one-click to cancel button and adopt a system that allows you to easily implement an off boarding form that you can embed within a cancelation flow.
Why? People follow the path of least resistance, and early on the clarity you get for why people leave is just as valuable as the dollars they were paying you.
Not only will this help you prioritize your team’s focus, but the responses will also enable your team to leverage targeted email campaigns to retain a portion of customers on their way out.
We don’t expect to save many of the accounts that cancel but the feedback we receive is invaluable and has been critical for us to further improve the platform and our numbers each month.
Transitioning to Freemium Model
I can’t stress enough the importance of intent. In our previous structure, we had a number of coaches come into the funnel that were simply looking to explore different systems.
As I highlighted above, we knew we needed to restructure our process for customer acquisition, as most of our leads had little intent on actually becoming a long term customer.
Taking advantage of switching cost
While most everyone else in our industry had a pretty generic 14-day free trial, we see a lot of coaches struggling to get their business off the ground. Therefore we thought there was significant opportunity with a freemium model. Another major supporting logic for transitioning to Freemium is that our users will start to experience a “Switching cost”.
Although it might not cost a lot of money for our coaches to switch to a competitor in the future, we believe that if we can get them using our product for a while, there will be a significant time-cost for them to switch to a different provider.
Watching out for infrastructure costs
One common issue business owners experience when implementing a freemium model is the cost of actually hosting all of those free users. It eats up server space and can cause your expenses to sky rocket over earnings.
We needed to make sure our freemium model didn’t expose us to any extraordinary costs that would make things go sideways. To limit costs, we decided to build a freemium model based around the number of connected clients a coach had, giving them 3 clients completely free when they signed up for their account.
Assisted approach
I could write a full post dedicated to strategies for driving freemium conversion, but the main thing to point out is that we implemented an assisted model.
This means that we do everything we can through in-platform notifications and email sequencing to get free account holders to connect with our sales and client success teams. It’s not required to upgrade; but even so, it’s well documented that an assisted approach can significantly improve your conversion rate and customer lifetime.
Redpoint Ventures actually released survey findings from their portfolio companies which highlighted that “assisted” models convert about 3x more users than those who rely solely on their platform.
Freemium requires a lot of refinement so I’d recommend adopting an assisted approach for anyone considering freemium. This approach helps humanize the experience for new users, ensures the product is configured to maximize value for prospects, and identifies areas of confusion / friction within the onboarding experience.
The Result of Phase 1
That said, the phase 1 strategy had a massive impact on our core metrics. We immediately saw a 40% reduction in churn as new customers were now able to use the system, consider whether it was a fit, and convert whenever it was the right time for them and their business.
Phase 2
The MVP of our freemium offering that we launched in Phase 1 was admittedly raw. It checked the boxes for allowing a person to independently create a free account and upgrade to a paid account – but pretty much every other action, such as switching tiers, required emailing our team.
While this MVP made fantastic strides towards reducing churn, we still needed to improve our customer acquisition and onboarding funnel. Phase 2 is all about measuring and optimizing our customer onboarding experience.
Introducing the ability for users to switch between tiers
For the sake of time, we didn’t include this capability within the MVP as we were more focused on user activation and conversion. Once we felt comfortable with funnel performance we shifted to this as quickly as we could.
The concept is simple – if a customer needs to downgrade but can’t find an easy way to do so they will instead hit the cancel button.
We needed to make the account transition process as seamless as possible so customers can control their monthly charge. But, as I mentioned earlier, I’d suggest funneling those wanting to cancel down a separate user flow so you can take advantage of any cancelation prevention measures you have in place, such as offboarding forms, etc.
Don’t underestimate the importance of seamless account transition. If you take a look at the data below, you can see that after rolling out that update we immediately cut the account churn of that second tier down close to 0% per month (orange line below). Of course some of those accounts have downgraded, but I’d rather keep them around as customers than lose them completely.
Give Significant Discounts for upfront payments for Annual Plans
This strategy is one of the best things you can do for your business.
Shifting to annual payments will…
- Increase customer lifetime → ensure customers stick around for at least a full year
- Reduce soft churn → only need to run the card once during the year
- Improve cash flow → collect upfront for 12 months of service
- Maximize customer buy-in ensuring they spend the time to learn the system
For us, most of our churn was with our introductory plan which was $25/month ($300/year). We found that these users were either using the plan as a stepping stone to a larger tier or the account would churn within the initial 4 months.
Our next tier provides more value but with a marginal cost increase to the company, so we put together a special offer where a coach could purchase the higher value plan for $300 upfront. In this case the intro tier serves as a price anchor and makes the $300 upfront plan seem like a no-brainer to anyone planning on growing their business over the next year.
This offer is actually baked within our system at this point because it’s been so effective for us.
A great tip for other businesses out there: We technically introduced this concept several months earlier through our sales and customer support teams as something they could start using in conversations with both customers and prospects. This is a great way to get this done with zero development.
One important consideration: it can be difficult to pitch someone on paying upfront for the year if they perceive your solution to be “too new” or if they’re uncertain about whether the company will still be around in 3 months. Leverage your reliability and community reviews when doing this!
The result of Phase 2
In reviewing the data, the combination of the annual plan promotion and the introduction of the account transitioning mechanism within the system resulted in a further reduction in churn by > 40%, to a total churn rate of 6.5%.
Phase 3
At this point our average customer churn for our paid plans, not including free trial users, on any given day was right around 6.5%.
We’d felt like we’d thrown everything but the kitchen sink at the problem, but we still hadn’t reached our goal of 5%.
We knew over the coming months we would be filling some additional value gaps in the platform that our research indicated would improve the numbers further. But we knew we still needed to implement additional strategies to improve the churn rate of our smaller paid accounts.
No more product development, it’s time to educate
We’ve always been a brand built around education. Since our inception we’ve regularly produced content surrounding online and remote coaching through blogs, podcasts, and webinars and it’s been a significant differentiator for our company.
In addition, this year we started seeing a notable increase in demand for group coaching. We realized we can blend this together to further address our churn problem.
The Program Builder Mastermind
The end result was our course, the Program Builder Mastermind, which was a 2-week cohort-based, group program where we taught our coaches to digitize their programming and launch an online offering. Content was provided by a mix of our team and outside partners, and was delivered through a combination of in-person sessions, recorded videos, and on Slack.
Our initial thought was to only offer this to current customers with the idea that this would be a scalable way for us to work closely with our smaller account types, to ensure their success on the system. But after consideration we decided to open it up to all our free accounts as well.
We opened up the program to everyone because we were intrigued to see if it would help drive further free-to-paid conversion. We launched the program by advertising a webinar to our “all-community-members email list”. The email list has about 15,000 people on it, made up of mostly leads and free accounts.
In the webinar we promoted the Program Builder Mastermind, and we quickly booked about 40 participants for the first cohort of the course. The enrolment consisted of a pretty even split between users with free and paid accounts.
After running the initial cohort we realized the Program Builder Mastermind would become a mainstay as it strengthened relationships with our current accounts while at the same time built trust and further nurtured prospects who were still on the free plan.
The results of phase 3
We saw some very clear results of the Program Builder Mastermind!
The results of Phase 3 were:
- After we ran the promotional webinar, we were overbooked for our course within 48 hrs (and have a growing waitlist for the next cohort)
- 40 enrollees paying $99/person (put a price to it to ensure buy-in (although heavily discounted) but this wasn’t launched to be a big money maker)
- Ended up having multiple free accounts convert to paid accounts
- Upgraded at least one customer into a larger, white label agreement
- AND… we engaged with users and kept them onboard when they would have otherwise churned due to lack of understanding of the platform – a further reduction in our churn rates 🙂
This resulted in an additional 15% reduction in churn.
Pulling it All Together
Much like product market fit, churn is a constant you will deal with throughout the full lifecycle of your business. The key is identifying its drivers as quickly as possible so you can map our solutions to address each factor. Keep in mind that the returns will diminish over time as your product becomes more mature.
Looking through the data our progression was broken into 3 specific stages that saw the following improvements:
Phase 1 (initial 3 months)
- Update dunning email sequence to increase collection rate from failing payments
- Restructure cancellation process to direct accounts through offboarding form for additional feedback
- Change acquisition model by transitioning to Freemium Model (allow coaches to use system for free for up to 3 clients)
RESULT → 44% reduction in monthly account churn
Phase 2 (months 3-9)
- Introduce Discounted Annual Plans (get people to switch to annual subscriptions vs monthly)
- Allow customers to seamlessly transition between plans (upgrade/downgrade when they need to)
RESULT → Additional 42% reduction in churn
Phase 3 (within 9 months)
- Launch Mastermind Program enabling us to efficiently collaborate with free and small tier accounts
RESULT → Combination of hard and soft returns, but based on early findings we estimate that this will end up further reducing our churn by an additional 10-20%.
