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The obvious - and not so obvious - drawbacks of a high churn rate

Let's face it, whether or not customer retention is a major focus for a B2B SaaS outfit, there are a number of negative effects that a high churn rate will have on a variety of internal company aspects. If churn minimization is a key company goal, then perhaps a focus on further optimization for an even greater reduction is the way forward, to lessen the impact as much as possible. If churn minimization isn't really a focus, then it's probably at least time to shift some of your efforts into building a basic client retention strategy. Definitely something to consider, if not to at least meet competitive benchmarks (they have most likely given the subject of client retention some airtime internally). This is to primarily avoid losing the chance of being a key player in your market segment - due to stagnated growth and getting left behind by the competition - remember, scale is power! Below are a number of points explained on how churn will negatively impact your business - a number of the points are intertwined. However, they all bring their own distinct drawbacks, whose potential consequences need to be lessened where possible. Some of the points covered will have a more significant influence than others, depending on size of the company, size of market, revenue model etc. Here are some of the impacts to consider:

Lost revenue
I don't want to delve into too much detail on this one, as the impact of churn on revenue is an entire discussion in itself: perhaps the most obvious effect of a high churn rate will be the loss of potential revenue. What might not be immediately obvious after next month's revenue is the potential lost revenue over what could have been the entire potential customer life cycle. Even more to think about is the total revenue lost when you sum these lost revenues of all churned customers. Suddenly the scale of this lost revenue starts to seem a little daunting! Depending on the size of your company, this could range from the thousands, to maybe millions of dollars over the course of a few years.

Company Growth
Whilst this is directly related to company revenue above, it takes a slightly different observational point of view: but effectively, the company growth rate is lessened. The monthly revenue churn rate is essentially eating into your new MRR (monthly recurring revenue) rate, the result being a net revenue growth rate that is significantly less than the firm's new MRR rate - so actual growth will be less than the growth potential. Over the course of time, there will be a large delta between the company's growth, and what the growth could have been.

When a client churns, they are most likely not going to return. The reasons for churn are frequently due to a bad experience with your software (cheaper alternatives are a less important reason, as, if clients are satisfied with their experience, they are less likely to go to the trouble of moving away). If they are leaving because of a bad experience, they are also going out the door with a bad taste, that they won't quickly (or ever) forget. In an age of high customer service expectations, they are likely to share their bad experience, whether it may be, via word of mouth (most powerful medium), or on a review site (which is easily accessible to your potential customers via a browser search). In the long run, this will only have a negative impact on your brand, and could deter new potential leads.

Gifting the competition
Before a customer churns, they have most likely made up their mind that they are leaving for at least a number of weeks - it is unlikely a decision that was made the day before they churn. In that time, they are most likely going to be seeking out alternative solutions (your competitors). Without your competitors even having to exert a great effort into customer acquisition, your churning customers are actively seeking them out. If they begin trialling your competitors, they will most likely discuss their bad experiences with them. This has direct and indirect drawbacks:

  • Giving competitors a great conversational point with that individual customer to build up their strengths against your weaknesses to gain their business.
  • Over a number of lost customers that have moved to that competitor, you are providing strategic information on your weaknesses that they can also use to their advantage with their future customer acquisition

Impression on company employees
When customers churn, it stresses the CEO, the head of growth, the VP of marketing - the stats are looking worse for wear in lieu of next week's board meeting. Aside from this, what might be less obvious and more abstract, is the trickle-down effect that it has on a number of members in the organization. Think of the digital marketing executives - they have exerted so much effort into optimizing Search Enginer Optimization (SEO) and lowering the cost of Adwords CPCs to acquire new customers. When customers are being lost, some of their efforts are in vain and this can be quite disheartening. And contrary to popular opinion, sales agents care more about the commission. Without a retention strategy, paying customers are most likely to keep trying to track them down via phone and email for assistance after sale - and sales agents are judged on their sales, not their ability to nurture their growing paid customer base. Many of these paying customers will most likely churn, making the agent feel a little helpless after spending hours with this customer before the sale - "what was the point of all of that effort?". If there is a retention commission clawback, this likely won't help the morale situation. All of the above may have a negative influence on employee turnover.

Size of Target Market
If you are in the B2B SaaS space, it is likely that your target market is nothing more than a few thousand customers, or potentially a few hundred, depending on how niche your offering is. There is a high chance that the customers who have churned will never return, lessening your target market size. In addition to this, if the competitors share their negative experiences (if that was the churn reason), this information will likely somehow direct to your other potential clients in the same space, even further reducing your potential target market due to negative connotations with your brand. It's a vicious circle indeed.

Traitly uses powerful AI algorithms to analyze your user event data - providing actionable insights to reduce your churn, retain revenue and further drive growth. Feel free to contact us anytime if you want to optimize your user retention strategy.

This post is written by James (james@traitly.com). James is the Customer Success and Sales Lead at Traitly. Previously, he worked at xSellco, a fast-growing SaaS company. Given his background in engineering, he takes an analytical approach toward customer success.

James Moran

James Moran

James is the Customer Success Lead at Traitly. Previously, he worked at xSellco, a fast-growing SaaS company. Given his engineering background, he takes analytical approaches toward customer success.

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The obvious - and not so obvious - drawbacks of a high churn rate
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