Episode 15: Understanding Churn and How It Affects Your Business

After a quick Software Funnels update, we focus on the main topic for this episode, which is Churn.

We past experiences from our other companies and what we’ve experienced with regards to churn. It can have a big impact on your company and it’s definitely something we encourage you to pay attention to.

We are trying to make that even easier by including this in Software Funnels, through the Analytics tool.

When we first started we didn’t really pay attention to churn and if you listen to this episode you will see how much extra work it caused us in the long run.

We hope you are able to learn from our past experiences and avoid a few mistakes when starting up your business.

Be sure to subscribe to our podcast and automatically receive updates on each episode release. Thanks for listening!

Click here to read the podcast transcript

Scott Brandley: Welcome everyone. This is Scott Brandley here and I’m with –

Garrett Pierson: Garrett Pierson.

Lindsay Halling: And Lindsay Halling.

Scott Brandley: We’re excited to be with you today. We’ve got some really cool things to share with you. Garrett’s going to give you a little bit of an update on what they’ve been working on with Software Funnels. Then we’re going to go into churn and how that helps you to understand where you are in a business and what you can do to improve.

Garrett Pierson: We are moving forward. Wireframing is pretty much done and that’s exciting. I think there’s a couple little tweaks, but we are pretty much done. You’ve heard that from us for the past who knows how long, right? It’s just not getting done and that’s part of building software. Certain things take longer than you expect. Lindsay, where are we at on analytics?

Lindsay Halling: Analytics is pretty close. I’d say we’re probably about 70%, that’s just a guess, but he’s really working hard on the calculations and then we’ll really be able to start testing those calculations and seeing if they’re working right, displaying right on the tool.

Scott Brandley: Cool.

Garrett Pierson: Speaking of the analytics tool, that’s the tool that hooks into your payment system, the first version one will just hook into Stripe, and the reason why I’m talking about this is because we are going to be talking about churn today. We’ll explain what churn is. The analytics tool that is part of Software Funnels gives you your churn rate. Super exciting. I’m excited to see how all the analytics play out and how that version one ends up turning out. Help desk tool is on the move. I think he’s already got a lot of the first … We broke it out into two sections into design changes that we wanted design changes done and actual functionality. He’s 80% through the design stuff, I think. Maybe not quite that much, but he’s got a lot of the design stuff going and done. That’s help desk tool, the other tool is, help me out, Lindsay.

Lindsay Halling: The projects tool.

Garrett Pierson: Yeah, the projects tool, like Trello. The projects tool is moving forward as well. They’ve had a little couple hiccups hooking to the API and getting the user stuff, but Lindsay worked really hard this last week on making sure all that’s correct and working. A lot moving forward that’s still remaining is the team chat which, now that wireframing is done, team chat tool like Slack is going to be starting and they already started a little bit, so that’s already moving on it’s way. Then the last thing we’re actually going to work on this week is the services page, we’re going to design that out and [inaudible 00:02:54] it up. That one’s going to be really, actually, very simple, because there’s not a lot of programming, it’s mostly just design. We’ll get through that quick.

I went to a funeral for my step grandmother this weekend and my dad was asking me after, at the dinner, because he listens to these podcasts, and he’s like, “Are you guys going to make it? Are you guys going to make it?” It was awesome. He’s just like, “Are you sure you’re going to make it?” It was just fun to hear that people are … It’s almost like a reality TV show. Are they going to make it?

Lindsay Halling: What’s going to happen next?

Garrett Pierson: I said, “Yeah, we’re going to make it.”

Scott Brandley: “We’re going to make it, dad. We’re going to make it.”

Garrett Pierson: Yeah. I feel good, I feel like we made a lot of adjustments which is, that’s the game, making adjustments, making decisions. I think we’ll be fine. Even if we go over a week or two, it’s not the end of the world. We’re still sticking to that May 1st date and we’re going to keep pushing until we get there and then we’ll make some more adjustments.

Scott Brandley: So that’s it on the status update on Software Funnels and next we are going to talk about churn. Lindsay, why don’t you tell us, in your mind, since you’re kind of new to this world and maybe the churn term, what is churn to you?

Lindsay Halling: Well, the first time I’d ever heard churn was honestly when I was reading the software secrets book right when I got hired on. That literally is the first time I heard that term, kind of interesting fact there. For me, I try not to associate with a negative connotation, but I do. It’s basically when you lose customers, which is never necessarily a great thing. I do think that, along the way, I’ve learned that it’s okay to pay attention to it, too.

Garrett Pierson: Yes, actually, it’s vital to pay attention to it. Yeah, so, Scott, why don’t you give your take on churn? It’s actually new to us, right?

Scott Brandley: Yeah, so maybe I can give you a little bit of background. We had a company, the beginning of last year, that actually wanted to buy Shopper Approved which is one of our other companies and one of the things that they wanted to, one of their number one things, is they wanted to know what our churn rate was and we’re like, “What’s churn rate?”

Garrett Pierson: People in software industry wouldn’t believe that we didn’t really [inaudible 00:05:26] … We knew what it was, but we didn’t really pay attention to it.

Scott Brandley: The thing is, we had other things to do. We were focused more on on boarding and bringing in new business than the business we were losing. What that helped us to see, and the bucket analogy is the best analogy that you can possibly give, so picture a bucket, and picture water coming into the bucket, that’s new customers, new business.

Garrett Pierson: New sales, yeah.

Scott Brandley: And also recurring sales.

Garrett Pierson: Right.

Scott Brandley: All of the revenue that comes in every month into your company, that’s what we were focused on because we we’re a service, right? We’re a software service. We were looking at what can we rebuild, how can we make our customers happy, how can we get new customers in the door? But what we weren’t focused on was the holes in the bucket. Really, that’s what churn is. Churn is how many holes do you have in your bucket and how fast is the water coming out, or the cash leaving your bucket?

Garrett Pierson: Right. For all your analytical people, let’s turn that into numbers. Let’s say each month, your sales team is bringing in, let’s just make the number easy, your sales team is bringing in 10 sales, but that same month, you’re losing eight customers because they stopped paying you. You are in a heap of trouble because you’ll never catch up. Your net gain that month is, essentially, two new customers, but because you brought 10 new in and eight left, you’re not really progressing, you’re just kind of staying even. You’re going a little bit, but … Then, even worse, from a churn standpoint, if you look at those numbers again, let’s say canceling in a month. You are in the red. You’re not growing as a company, you’re losing a customer every month. Those are just, from an analytical standpoint, that’s what churn is. Then, for the visual people, the bucket’s a really good analogy. You’re pouring this water in, but there’s ten holes in the bottom and so you’re pouring this in, but you’re losing every single month.

Scott Brandley: So the reason why churn was important to the company that we were in negotiations with at the time, that we didn’t end up selling to, was that they had to project out if we didn’t make another single sale from the moment they bought the company on, they had to project out how long it would take for the company to become insolvent, basically. The lower the churn, the smaller the holes in the bucket, the longer the company could survive without any new business. They were very analytical. They ran numbers like you wouldn’t believe. That really opened our eyes to the potential problem. One of the reasons why we didn’t really focus on it is because our churn was never an issue. We always had a very high retention rate.

Garrett Pierson: Or so we thought [crosstalk 00:08:42].

Scott Brandley: But it opened our eyes to like, “Okay, here’s what our real numbers are.” We had to actually go to from 2010 til the beginning of 2000 and –

Garrett Pierson: 15.

Scott Brandley: The beginning of, was it 2015?

Garrett Pierson: It was 15.

Scott Brandley: From the time we started til the time we started those negotiations, every single sale we ever made, we had to find out if they were still active, when they canceled, and how much revenue they were bringing in. It was a nightmare. We spent a lot of time and effort going through there, but it gave us some really cool data that we were able to look at and allows us to go and see, “Okay, in this year, our trend rate was this, then it went to this, then it went to this.” At the time, when we were in negotiations, it was about 9% which is amazing for a software company.

Garrett Pierson: It’s actually pretty low, 9% a year. Essentially, .7, .8.

Scott Brandley: Yeah, .7 or .8 a month.

Garrett Pierson: A month, which is extremely low in the SAS world if you looked at what numbers are in the SAS world. It’s pretty low, actually. I mean, there’s lower. There’s company get lower than that. Basically, what we realized is it’s an important number. Even if our numbers are low, we’ve implemented in the Shopper Approved company, we’ve implemented with our customer care team, where they can get bonuses if they lower that because lower churn means more revenue and more customers, right? What we do is each month, they try and get below .8.

Scott Brandley: .7.

Garrett Pierson: Oh, .7, sorry. If they can get below .7 for that month, as the churn ratio, then they get a bonus. It’s something we’ve really tried to focus on because if you can plug up those holes, the more money you make, revenue you make, as a business.

Scott Brandley: Right. And if they get below .7, if they get to .65, they get a bigger bonus. And if they go to .6, then it doubles.

Garrett Pierson: Right.

Scott Brandley: We really try to emphasize that incentive because that’s where we want them to focus their efforts because every customer they save means we don’t have to get a new one the next month to make up for it. It allows us to have more water coming into the bucket and less holes leaving. The ultimate result is our revenues go up without any real additional work.

Garrett Pierson: So, Lindsay, listening to this, what are some of your takeaways? You’ve never really heard us talk about this either, so what is your takeaway?

Lindsay Halling: I think it’s actually interesting that you brought up the bonus factor because here you are trying to keep money, but you’re giving money to your employees by incentivizing that. It’s kind of an interesting concept because, if you think about it, it is more cost effective to keep a customer than it is to gain a new one. It’s a lot more expensive to gain new customers, so that totally makes sense to me. And, just kind of from the outside of the shopper approved team looking in, every now and then I’ll catch a conversation and I do hear them talk about it more, that customer care team, they talk about it more in terms of, “What can we do to keep this person?” That conversation is just more in the forefront of their minds. I think it’s cool.

Garrett Pierson: Yeah. That’s basically, from a tip standpoint, we’re telling you from right the beginning that you start your software company or if you’re listening and you already have one, you need to focus on churn. That’s why I brought up the analytics tool for software funnels because the analytics tool will calculate the churn each month. It’ll calculate the amount of customers lost.

Scott Brandley: When you’re a small company starting up, churn is even a bigger deal because you lose one customer and that has a lot bigger impact on your business.

Garrett Pierson: Yeah, so the reason we wanted to talk about this, and we’re going to give you some insight into one of our companies, which is Cart Rocket, and it’s a cart abandonment solution service for eCommerce stores and we’ve been growing it over the last three years now, close to three years. It’s had a little bit more of a churn problem than Shopper Approved and so we’ve focused a lot of time on … Why I’m bringing this story up is because it’s not just the customer care team, or customer support, or answering support tickets and all that, they play a vital role in lowering churn. It’s also showing your clients the value that your software is giving them each month because what happens in a software world, if you were charging monthly, which, generally, in a SAAS world you are. You’re charging monthly or yearly. These business owners are looking at their books every month, generally, or even if it’s three months from now, they’re going to look at their books and they’re going to see what software and what expenses are going through each month. Every time they do that, when they look at your cost, the cost to have your software, they have to justify every single time, “Is this worth the money that I’m paying?”

Scott Brandley: Right, so your business is basically on the chopping block every month.

Garrett Pierson: It is. And so what you have to do is you have to create something that’s sexy to get them into the service and sell them, then you have to create something that is sticky and we talk about that a lot.

Scott Brandley: To keep them.

Garrett Pierson: To keep them on. So that when they look at their bill from you, every month or every quarter, however your customers look at their bills, or when they do, you have to be sticky enough that they can’t let you go or they will churn. They will leave. This is a huge tip for when you’re building your software is to come up with ways. And a version one, you might lose a couple more clients than you would, but that’s where you keep improving, improving, building your software so that they cannot leave, or that they don’t want to leave.

Scott Brandley: Right, and so a part of the story that I think the direction you’re going is so we had a core set of tools in Cart Rocket for the first two and a half years, and they were really powerful tools, but part of having a good company is to continually innovate and make your software better. Recently, in the last six months, we’ve come up with two more key tools that help our clients to lower their cart abandonment.

Garrett Pierson: And they’re specifically sticky, we wanted them sticky.

Scott Brandley: Yeah, they’re sticky. Now, we have a suite of tools that helps from cart abandonment from the moment a customer hits the site, to going through the entire shopping cart process, through the shopping cart, and then after the customer abandons, we can bring them back through e-mail and through Facebook, even after they’ve left the site. We created this entire suite. We didn’t have the e-mail section or the Facebook section before. We didn’t have any tools to bring them back once they left and though we’ve added those recently, but what that does is it creates that stickiness so that we can lower our churn rate even more. It’s real exciting.

Garrett Pierson: Before we even did that, about six to eight months ago, we had a bunch of meetings with the customer care team, dedicated account managers … Before we even built these, and came up with these ideas, we met with them many times. “Hey, we need to focus on this,” and we realized that we weren’t showing the value to our customers enough. We totally redesigned and reprogrammed our analytics for our customers so that they can see the value more and that’s really helped a lot. In fact, since we implemented that, our churn rate in January, I think, went down a ton. It came back up, and so another story, not story, example, that we want to give you is two weeks ago, even with everything that we’ve done to try and lower churn, we lost a big client. This client was paying us $997 a month. That’s not small change for a monthly payment, that’s 12 grand a year. This client canceled. For whatever reason, we don’t even know all the reasons, basically what it comes down to is every month they’re looking at this $997 charge and we weren’t showing them enough value. That’s basically what it comes down to. That’s why somebody’s going to cancel.

That’s just part of business, though. I mean, some business go out of business, and so they’re not going to pay you anymore, some people like red shiny balls and so they’ll go and cancel and try a thousand different products. You can’t stop that. This was not any fault of customer care team, this was not any fault of the dedicated account manager, or anything. You’re going to have people that cancel. That was a tough one to swallow because that’s, essentially, a thousand dollars monthly recurring revenue that we lost right then. What did we do, Scott, did we panic?  [pause] A little bit [laughing]

Scott Brandley:  We cried a little.

Garrett Pierson: All right, a little.

Scott Brandley: Hopefully, we can bring them back, but we just kept moving forward.

Garrett Pierson: Funny enough, within seven days from that cancellation, our sales team closed two deals worth $1,000.

Scott Brandley: Right.

Garrett Pierson: But, again, we had to go find two new clients to fill that hole, that gap of that customer that fell. What I’m getting at is you are going to have people that cancel. It is not negotiable. You will have people that cancel. Churn is a part of software business. Just be aware of that. Don’t be scared of it, but be aware of it, and come up with ways that you can help reduce the amount of churn that your company has and you will be successful. So, yes, we lost a big client, but it wasn’t the end of the world. We are giving you, essentially, a word of warning that this is going to happen, you’re going to start your business, we’re going to start Software Funnels, and we’re going to have people paying us and they’re going to cancel. There’s going to be some churn there. We are just going to have to keep innovating and doing everything we can to make it super valuable for the amount of money that they’re paying and super sticky so that they don’t want to leave.

Scott Brandley: Right.

Garrett Pierson: Any last words before we end on churn?

Scott Brandley: I think one of the big things that really helped us, like you were saying, is showing the value, but also making sure that the customer knows that somebody cares about them. One of the thing that I really like about our Cart Rocket company is that we have dedicated account managers that really take the time to let every one of the clients that they’re in charge of know that they’re always there for them, they reach out proactively, they talk to them, they find out what their needs are, and that’s been huge for us. Our future companies are going to adopt that type of a model because it’s been so successful.

Garrett Pierson: Okay. Any last words, Lindsay?

Lindsay Halling: We’re just really appreciative of those of you that are listening because that’s a part of … We want you to not churn on us, too.

Garrett Pierson: Yeah. All you podcast listeners, what do we need to do to make this sticky? That’s a good point. What are some … And e-mail us, e-mail [email protected] and just tell us some questions you guys have, episodes you guys would like to hear about, and do that. Then, please go and leave a rating and review, that helps us a lot too, so you can do that easily by going to SoftwareSecretsPodcast.com. Thanks everybody for listening.

Lindsay Halling: See you next time.

Scott Brandley: Take care.