Welcome back to our series ‘Cutting Churn’ where we interview founders of successful startups and find out how they have been keeping their churn rate low.
After talking to a few founders and doing some research on customer churn prevention, my understanding is that 3% monthly churn rate is an industry standard. Anything above that is worrisome and anything lower is a good sign of a healthy startup.
What if there was a startup which has churn rate below 1%? That would be quite impressive, right?
I searched high and low for such a startup. I managed to find one rather quickly: Help Scout. Help Scout is a customer help desk software with over 3,000 customers. While most startups at such scale find it difficult to keep churn rate below 3%, Help Scout has managed to keep it below 1%.
We are excited to have Nick Francis, founder of Help Scout to share his insights on how they have managed to achieve this feat.
So, lets get straight to the interview.
1. What were the things that caused the cancellations and churn?
At Help Scout we put all churn in two different buckets: customers that were paying for less than 60 days, and customers that were with us for longer. Companies like Moz track metrics similarly with a term called “Qualified Customer”, which means they stuck with the product for more than 90 days. I like this distinction a lot and we’ve found that separating the two buckets is important if you want to optimize your churn rate.
If a customer churns in the first 60 days, we’ve essentially failed to onboard the company properly. They either can’t get team buy-in or aren’t seeing enough value to justify continued use of the product. In any case, it’s much easier to optimize for churn in this bucket.
After 60 days, onboarding isn’t a problem. Churn happens due to internal business changes we can’t control, one or more features they need as the business grows, or ongoing challenges with the product. Churn in this bucket isn’t really something you can optimize. It’s merely a byproduct of other things in the business that could be improved.
2. What was the impact of the churn and cancellations on the business?
Thankfully, churn has never been a huge problem in our business, but reducing it by the smallest percentage can make an impact because the revenue is recurring. Early on we saw around 2.5% of our monthly revenue churning and now less than 1% of monthly revenue churns. For us, that 1.5% difference represents over $20k in MRR annually, which adds up really fast.
3. How did you identify the specific things that were causing the churn?
We learn everything we need to know by talking to customers. Pre-sales, support, pro-active email, surveys, phone interviews… we’ll use whatever method it takes to empathize with our customers and try to solve whatever they are struggling with.
4. Which actions did you take to deal with these specific things? Did they work?
We’ve spent a ton of time optimizing our onboarding process, which in my opinion directly correlates to churn. By onboarding people the right way and helping them see value early on, it impacts churn. I can’t point to any one product improvement, but improving the tiniest details on a daily basis for over three years has had a tremendous cumulative impact.
5. How much time did it take for those actions to start showing results?
The great thing about onboarding is that you can see the impact almost right away. With product improvements, you are always chipping away. Reducing churn is a byproduct of doing those things right and you can see it go down over the course of a few months.
6. Were there any surprises along the way?
We’re not surprised by much because everything we do at Help Scout is grounded in customer feedback. If you empathize to the point of being able to finish a customer’s sentences, nothing they do in Help Scout should come as a surprise.
7. What advice you would like to give to founders who are dealing with similar issues?
Your product won’t be a good fit for everyone, but there’s a subset of people/companies that are an absolutely perfect fit. Who are they? Do you know?
I tell a lot of founders to spend time understanding their ideal customers. We call them personas, and have written about our process quite a bit. Done properly, they will unify your team, guiding both product and marketing decisions on a daily basis. Without personas you are just guessing.
That’s all from Nick!
Help Scout’s Long Ball Strategy
Based on Nick’s answers here and in other interviews such as on Mixergy & InspiredInsider, Help Scout’s churn prevention ability can be attributed a lot to the way it acquires customers. During one of his presentations, he mentioned their Long Ball strategy.
Help Scout doesn’t use traditional methods of acquiring customers like paid ads. Instead, it focusses more on creating great content that adds value to potential customers. The result? It has more than 60k subscribers on its mailing list. And the marketing is strongly supported by great experiences at the conversion and retention stages.
You can view the full slideshow here.
Customer.io’s experience tells us that customers acquired via organic channels tend to stay longer. In Help Scout’s case, this proves to be true as well.
Beside keeping churn rate low, acquiring customers via organic channel has other advantages as well. That is, low CAC (Customer Acquisition Cost). At one point, Help Scout had a CAC of just $40 which they recover in the customer’s first month.
This tells us that if you want to keep your churn rate low, go for the organic acquisition channels. Though it tends to take longer to acquire a customer that way, your chances of retaining those customers are way higher than the ones that were acquired via inorganic channels.
Here are couple of takeaways we learned from talking to Nick about keeping the churn rate below 1%:
- To optimize your churn rate, separate your customers into different buckets based on the time they have been using your product.
- If a customer churns in the first 60 days, then it is likely that he didn’t see enough value in using your product or that you simply failed to onboard the customer properly.
- Even the smallest percentage of change in monthly churn rate can have a significant impact on your revenue.
- Talking to your customers, via whichever medium it takes, is the single biggest way to control your churn rate.
- Onboarding your customers the right way and helping them to see value on can substantially reduce the churn rate.
- Spend lot of your time understanding your ideal customers. They will have a profound impact on your daily decisions, both on the product and marketing sides. Otherwise, you are just guessing.