Keeping customers is crucial for any SaaS business's growth and profitability. But measuring and analyzing customer churn can be tricky and overwhelming (just do a Google search for "best customer retention metrics" . . . 👀)
Plus, simple metrics like churn rate, NRR, GRR, etc only give you part of the picture.
To really understand what's driving customers to leave (or stay, which is more important IMO), you need a much more accurate way of diagnosing your churn.
In this post, we'll explore why cohort survival curves are a game-changer and how you can start using them.
Is Your Churn Getting Better or Worse?
How do you know if your churn is getting better or worse? By measuring churn rates? Looking at Net Revenue Retention (NRR)? Logo Retention?
Here's an actual Monthly Logo Churn Rate graph from a $75M+ ARR tech company:
What do you see? Churn gets worse, then better, then worse, better, worse, etc. etc.
This is typical with a monthly churn rate, and it's even less prominent if you look at a monthly revenue churn rate graph.
So ask yourself a question here - if you were to try and build a Customer Success strategy from looking at this graph, could you?
I wouldn't be able to. But SO many people are using graphs like this to help them build the their strategy to improve retention.
Prescription without diagnosis is malpractice.
How many companies are using the wrong "Diagnosis" to prescribe the a treatment for churn?
The Right Way to Diagnose Your Churn
Let's take a look at the exact same tech company, but this time, look at their Cohort Survival Percentages:
Now, what do you see in this graph?
Let me tell you what I see:
2018 and 2019 Cohorts were the worst performing cohorts
Then, something big changed in 2021 (in a good way)
They have annual contracts, but let customers out of contract early
Churn is getting better every single year
I know exactly where to focus my efforts in building the right retention strategy
How did I get all of that from this one graph? Let's walk through a few points:
Early Cohort Churn
First things first - this type of graph might be new for a lot of you. The TL;DR on how to read it is that this takes a group/cohort of customers and tracks how they survive over time.
The x-axis is showing the overall survival percentage. Each cohort starts at 100% when they are sold.
The y-axis shows how many months have passed for each cohort, with steps at 12-month intervals to show "renewal" periods for the traditional annual contracts.
So, if we were to look at the 2018 Cohort of Customers, we see that they have a steep cliff at the 12-month mark where they drop down to 61% survival percentage:
This means that of the 2018 cohort of customers, they were able to retain 61% of the total cohort at the 12-month mark for each customer. With 2019 being only marginally better at 63%.
But the largest cliff for the 3 earliest cohorts is at the 12-month mark, and you can clearly see how detrimental it is to lose those customers within 12-months as it creates such a large gap in overall survival percentages when compared with the other three cohorts.
A Better Story? Churn is Improving Each Year
You can probably see this one now - with each new cohort of customers, the survival % is improving.
But wait, how is churn getting better if our churn-rate is getting worse?
👉🏻 Because churn is still happening and arriving from the the older cohorts, and how we calculate churn-rate makes it VERY difficult to see that.
So if you look at each cohort at specific milestones (12-months, 24 months, etc), each year is getting better
Here are each at the 12-month milestone:
2018: 61% survived
2019: 63%
2020: 71%
2021: 88%
2022: 92%
2023: 94% (so far)
Here's an example story you could tell with this graph — a story that is much more truthful of what is actually happening, and helpful to explain to your executives (which is a very similar story this company told to their Board and prospective Investors):
"Our churn rates might be higher than what you like to see, and that's because of old cohorts that are still churning. However, our ability to retain new customers going forward is world class.
First-Year Renewal Problem
Knowing that this company has annual contracts with each of their customers, it's easy to see that the largest cliff happens at each of the renewal periods (12-month, 24-month, etc).
But that doesn't mean this is when customers decided to cancel and churn. It's simply the first available opportunity they had to get out of their contract.
(NOTE: Sell monthly deals rather than annual contracts? Great! The concepts here are the same, but your churn will present itself sooner in your survival graphs 👇🏻
In the above graph for month-to-month contracts, see how the majority of customers were leaving at or before the 12-month mark?)
When we see large cliffs at or before the 12-month mark, its overwhelmingly because of two things:
We've closed a customer that cannot get meaningful outcomes with our product and/or services (selling a bad-fit customer)
We're not getting our customers to do the necessary things in onboarding to achieve measurable outcomes early (poor Sales-to-CS alignment and onboarding)
Which makes sense why they would be leaving in droves at the 12-month mark. Why would the renew for a 2nd year if they're not achieving measurable outcomes?
What Had the Biggest Impact?
We know that they have a first-year churn problem. Which means, the main areas we need to address are how we bring on customers ins sales, hand them off CS, and onboard them—all with a heavy focus on the specific outcomes that drive for those customers.
Looking at the 12-month milestone for this company, there is a minor improvement in 2020's cohort, and then a large improvement 2021's cohort.
Here are the steps that we took with this company in Q2 of 2021 to see these improvements (at a high level)
Aligned all teams to the correct outcomes they drive for your customers
(specifically sales & CS)
Aligned with all customers on which outcomes mattered most to them
Prescribed the specific actions the customers needed to do to achieve these outcomes
Measured the outcomes with each customer throughout onboarding and going forward
This is why GTM motions and revenue teams need complete alignment around the outcomes you actually produce for your customers.
Get your cohort survival graph built for you, for free! No gimmicks.
Strategies To Improve Customer Retention
Cohort survival percentages are SO incredibly helpful in telling us what strategy will have the biggest impact on customer retention.
Why? It all comes down to when your customers are leaving, and where the cliffs are in your graph.
First-Year Churn (Most Common):
This is the most common type of churn, and the easiest one to solve. We've already covered this above, but the two main reasons for first-year churn:
Selling to customers that can't get outcomes
Poor Onboarding processes that don't get customers to achieve outcomes
Strategies to Deploy - get to first outcomes:
Identify which outcomes you drive for your customers
Align with each customer what outcomes matter most to them
Don't sell to a customer if you can't help them achieve these outcomes
Craft your onboarding so that you're prescribing the right customer actions that will lead to them getting the right outcomes quickly.
Mid-Stage Churn
If customers are mainly leaving at the 2nd and 3rd year milestone, it usually means you're getting them to outcomes in the first year, but they're not able to measure, envision, or achieve more outcomes going forward:
Strategies to Deploy - more outcomes:
Identify which outcomes you drive for your customers
Build proactive engagement models for each customer
Measure the outcomes you've helped them achieve
Build expansions and upsells into this playbook for each customer
Late-Stage Churn (Least Common)
If customers are mainly leaving after the 3rd year milestone, the biggest culprit here is the lack of new product expansion pathways for the customers.
They achieved outcomes, they may have even expanded and are paying you more now. But there aren't opportunities to get new outcomes from your products or services
This is the least common type of churn, and the most difficult one to solve. But, still solvable.
Strategies to Deploy - new outcomes:
Identify which outcomes you drive for your customers
Build product features that allow you to charge more for new outcomes
Deploy professional services that enable you to charge for you new expertise
Measure the outcomes you've helped them achieve for each product/service
In Summary:
Churn is the true way to indicate the health of a company and its ability to see growth.
Using churn-rates, NRR, GRR, and other month-by-month metrics can help, but they don't give you the full picture, and they certainly don't help you tell the right story.
Building cohort survival percentages will let you see your customer churn in a new light. And once you've seen that light, its really difficult to go back.
Whenever you're ready, there are 3 ways I can help you:
The Renewal Operating System: This is the ultimate set of playbooks for tech-founders and revenue leaders. This system aligns your teams to the outcomes you produce, improves customer retention, fixes your customer handoffs, and doubles your expansion opportunities.
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