Churn. Ever heard of it? Of course you have. But do you realise how much it actually impacts your company’s growth? Usually this insight is limited to a small number of people in the company. Depending on the size of the organisation the owner/CEO, MD and Commercial Director will know the churn rate. Probably also the Service Delivery Director, as the churn rate relates directly to their team’s performance.
But Marketing and Sales Directors aren’t always privy to the churn rate and the impact it is having. Even if they are, there is usually no performance related aspect in their job description that says they are responsible for reducing churn, or ensuring it is kept to a minimum from the start. Should there be? Perhaps, perhaps not. But that is not the primary point here. What is important, is to realise the impact even small churn percentages can have on your business and its ability to grow. There comes a point when sales and marketing-driven revenue growth are offset by churn.
What is churn?
Churn, also referred to as attrition, is a measure of the rate at which customers are leaving a provider or not renewing the use of a service. It is calculated for a period of time by dividing the total average number of customers for that period by the number of customers who left for that same period of time.
So what are we talking about here? Let’s take a look at an example:
As Tomasz Tunguz, Venture Capitalist at redpoint, explains a monthly churn rate of 2% – 3% translates into a requirement for a company to grow by 27% – 43% per annum just to make up for it. So if we assume revenue growth coming only from new business, the marketing and sales functions need to increase their revenue generation by 27% – 43% every year, just to make up for what fell off the back due to customers deciding to leave.
For many start-ups and companies in their high-growth-phase this should be easily achievable, but it is not good business. For one, it makes no difference to the sales team as they are still paid on winning new business, while the organisation is experiencing no or negative growth. But in the long run, as a company matures and no longer achieves three-figure percentage growth rates, you are creating a culture that accepts churn. Churn is never acceptable. It is always an indicator of issues within an organisation that need to be addressed as the prime threat to greater growth. Churn also means that your customers are leaving you for the competition. So not only are you losing business, you are giving it to your rivals. So should there be a correlation between churn and sales?
Churn and Sales
Sales might argue that they are not responsible for the loss of business after it has been won. However, there can be many reasons for customers deciding to leave, including some that can be attributed to the efforts by sales and marketing to win new business that are based on incorrect customer expectations. I.e. something was sold to a customer who didn’t need it or had incorrect perceptions of what it would deliver.
In this example, had sales been more accurate at selling the correct product or service to the right prospect, churn could have been reduced. The reality is, however, that all organisations have sales targets to hit and pressures to deal with. So the short term win is preferable over the longer-term possibility of that customer churning. In this scenario, sales may also point the finger at marketing for not delivering the right type or quality of lead.
Churn and Marketing
Pre-qualification is key, but so is a solid hand-over process for leads where marketing qualified leads are vetted and accepted by sales, ideally based on a formal sales and marketing SLA. There is no doubt that churn is not the sole responsibility of the marketing function. However, marketing is at the start of the acquisition process, and the quality of acquisition directly relates to the churn rate if the customer-vendor relationship starts off on the wrong foot.
In equal measure, the other functions like sales and customer service also have a stake in reducing churn. No department is absolved from retaining customers. After all, it costs five times more to attract a new customer than it is to retain one.
So what can be done to reduce churn?
Reducing churn is everyone’s responsibility. There will already be efforts underway in your organisation to retain customers, but crucially these can be extended to include marketing and sales.
- Better targeting
If nothing else, Marketing has a moral obligation to throw its hat in the ring. In growth marketing, one of the underlying principles is growth through better targeting. That principle affects both the acquisition and retention of customers. Better targeting identifies better quality leads, which are more likely to convert and contribute to revenue and stay a customer for longer. To be able to target better, your processes should include absolute clarity on your buyer personas, as segmentable contact database, and the tools to scale automation as much of this process as possible. Primary tools are marketing automation, sales automation and CRM.
- Better content
Led by marketing, the organisation needs to create high-quality content that is well matched for the expectations and type of your target audience. Content is typically a prospect’s first touchpoint with your organisation, well before a sales conversation, and should therefore set the tone for any ongoing communications around your offering. To improve content its relevance needs to be based on actual insight of your prospect’s needs and challenges (i.e. not just your own expertise or interests). It should also come in a form that is engaging and easy to digest, as well as reaching the prospect at a moment of receptivity. It can be hard to know when that moment is, which means your content marketing activity should be constant and consist of a mixture of evergreen and current topics.
- Customer marketing
The job of Marketing is not done after the leads have been generated. The work continues throughout the entire customer lifecycle. Marketing can help reduce churn by creating a customer-centric content that continues to engage and delight the customer. This part of marketing is much more of a conversation, as you have a captive audience, compared to marketing to prospects with whom you have not yet established a relationship.
- Change the Sales mindset
Sales, equally, needs to take responsibility. This needs to happen from the top down. Sales leadership has to decide whether to forego acquiring customers with a bigger lifetime value (LTV) for the sake of quicker wins that may not renew after the first year. The sustainable path is to lay the foundations for long-term growth and success and then build on this foundation.
- Better marketing and sales alignment
A long-term view and strategy also requires better alignment between sales and marketing, ideally with a formalised Service Level Agreement (SLA). Teams might shudder (or laugh) at internal SLAs, but until a problem is resolved why not formalise the way in which you intend to tackle it? Setting expectations between teams gives them a target to work towards. Crucially this then becomes measurable and can be reviewed and optimised over time. It also mitigates against any risk from changes in staffing.
- C-level support
The C-level needs to do its part to facilitate this type of alignment and approach in order to reduce churn. It needs to support sales and marketing leadership in what may well be a departure from long-held views into a journey of change and investment into new processes and expertise. The result is a more stable and profitable strategy in the long run.
There are, of course, many other aspects to churn and many other ways of addressing it. The important part is to realise that this should include marketing and other departments and should be implemented in a way that is appropriate for your business and its challenges.
How are you reducing churn? Why not share your thoughts in the comments section? We’d love to hear them.