Over the last few weeks, I’ve been talking about how we collect and analyze the numbers that tell us how well we’re doing. This week, I want to look at customer retention.
When it comes to your existing customers, there are two related metrics to watch. But as always, you have to take the time to listen to the stories they tell you.
We’re a subscription-based business, similar in some ways to a mobile phone service or a magazine. When we get a customer, they sign up and pay us a certain amount of money each month in exchange for our services.
In any given month, there are three things that can happen with an existing customer.
- Nothing changes: They continue with their service as before. This is revenue-neutral.
- They upgrade, for example by subscribing to additional features, thereby bringing us more revenue.
- They leave, and thereby cut our revenue.
If we want to grow, we have to make sure the number of customers we bring in and retain is greater than the number of customers cancelling the service. No surprise there, but as you grow this simple math can unravel an otherwise solid company. From that perspective, keeping existing customers is as important as getting new ones.
Companies that really grow are those whose customers not only stay, but also expand or upgrade their service so the same number of customers is generating more revenue. And if you keep adding new customers as well, you’ve got a chance to really take off.
So that means there are two ways to look at customer ‘churn’ (the number of customers who cancel): You can look at the number of accounts on the one hand, and their dollar value on the other: Are you losing lots of small customers, individuals who were paying you only $20 a month? Or are you losing a few big accounts, the ones that represent a bigger chunk of your monthly income?
It’s worthwhile to look at both figures – both the individual number of accounts that are cancelled each month as a percentage of the customer base (that’s the first calculation to make), and the total dollar value of the accounts cancelled, as a percentage of monthly recurring revenue (that’s your second calculation).
When you collect the numbers over time, you start seeing trends.
We noticed, for example, that the accounts most likely to be cancelled were the ones associated with a single user. In other words, there might be one person in a firm who found our product useful. And when that person moves on, the account gets cancelled. In our case, these single-user accounts cancelling pushed our account retention lower than we wanted, but from a dollar point of view, they were less significant than the numbers suggested.
From what I’ve read, if more than one per cent of your customers leave you each month, there’s something wrong.
Customers can leave for a variety of reasons:
- Maybe the product is not valuable to them anymore.
- Maybe it costs too much.
- Maybe it’s too difficult to learn or use.
- Maybe they’re getting poor service.
- Maybe they’re not the ‘right’ person in their organization, the person who would get the most out of the service.
- Maybe the primary - or only - user left the company.
When we started looking at our own numbers, we found our churn rate – the percentage of customers leaving each month – was above one per cent. That was an indication there was a problem.
So we have to ask ourselves: Can we improve our product? Can we make it easier to use? After all, nothing is ever perfect, and we believe we should strive for something exceptional. And while Klipfolio’s product works for a great number of people, we are working to make it even better, so that it will appeal to a greater number of people.
The lesson from all this is that a company can’t put all its energy for growth into sales. It’s got to continue to devote time and effort to the products and services it sells. Truly think about customer success, and your retention and expansion rates will climb.
Look at your numbers and do the calculations. Make sure you hear loud and clear the stories those numbers are telling you. And act quickly to fix anything that isn’t quite right.
Allan Wille is a Co-Founder and Chief Innovation Officer of Klipfolio. He’s also a designer, a cyclist, a father and a resolute optimist.
Originally published June 19, 2015, updated Jun, 12 2019