

Customer churn can kill your startup - tomblomfield
http://tomblomfield.com/post/81105143223/customer-churn-can-kill-your-startup

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mikepmalai
From what I've seen, low churn businesses tend to have 1 or more of the
following characteristics:

1\. Network effects: Your product is a key (or highly integrated) part of an
industry's value chain.

2\. Process lock-in: Your product is a key (or highly integrated) part of your
customer's work flow/process.

3\. High ROI and/or Low Cost of Ownership for the Customer: Use of your
product generates compelling economics for the customer.

4\. Behavioral lock-in: The network effects are eroding, the work flow is
changing, and the ROI is shrinking, but the customer still uses your product
out of habit/familiarity/convenience/culture/loyalty/etc.

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zeeshanm
Great article. Validates the point that it is super important to rather have a
few users who love your product in the early days. Massive churn rate in
addition to killing startups can also impact more established companies. For
example, Zillow has been having over 30% churn rate annually. But at the same
time they have been able to acquire new customers to keep the momentum going.
More than 10% of total realtors in the US have subscribed to Zillow's premier
agent program at some point. Needless to say only startup are not prone to
underestimating churn rate. Zillow's stock price doubled in last one year as
their revenues "grew." But I suspect they are soon going to hit the glass
ceiling with this high of a churn rate.

~~~
k8thegreat
I definitely think loyalty is key. Proving yourself in those first few months
is going to determine (for the most part) your success as the company grows
and gains more popularity.

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socrates1998
This is a really interesting article. The graphs really illustrate the
differences.

I always had a problem with Groupon's model, but I couldn't explain it as well
as the author did.

I think people often lose sight of the most important part of a business, that
your customers really enjoy and like it, this makes sure they stick around.

Groupon's problem is that no one really gets a lot of value out of it. The
businesses that use Groupon often don't see the customers returning and they
usually lose money from the Groupon promotion.

Even people who use Groupon often complain that the business can't handle the
massive rush that Groupon causes, so they usually have a subpar experience
when they actually try to use the discount.

Groupon is only really good for one party, Groupon. Everyone else is left with
a bad taste in their mouths.

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wdewind
This was a super interesting article, Tom. The two graphs you have really tell
a clear story, and I really enjoyed how you laid out different strategies for
different market types. This makes it very obvious what customer acquisition
levers you're talking about, as well as what happens when you pull on them.
I've been very impressed with your writing, between stuff like this and the
Grouper Rails Missing Parts series. Please keep it up!

~~~
TheCowboy
I really enjoyed this piece as well. The two graphs are exceptional in
providing clarity.

I'd be interested in knowing what he used to create these graphs, and if they
have a special name.

~~~
tomblomfield
Thanks for reading.

It's a form of cohort analysis, and I've heard the graphs called "Cohort
Revenue".

It's pretty simple to construct - you can download the Excel file I used at
[http://www.filedropper.com/churn](http://www.filedropper.com/churn)

~~~
thibaut_barrere
I really love this chart as well because it seems to convey the evolution
quite naturally - I will implement a version for my payment provider. Thanks
for sharing!

EDIT: I downloaded the cohort data for my SaaS from Recurly and injected all
this into a google spreadsheets. With maybe 10 minutes of work I had my data,
and it's pretty good. Thanks again :-)

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elohesra
The article states that some startups succeed because "they’ve found some
viral loop, the crack cocaine of startup-land". My question is whether these
things actually exist? The only kind of business I can think of where
something like this really applies is media-styled companies aimed at young
people. But this type of company doesn't really seem to be the kind of company
the article is talking about. I can't think of any business-to-business
companies (as 'upselling' implies) that have any kind of viral loop, so it
seems to me that the article conflates high-growth media-companies with high-
revenue business-companies, and then argues against a hypothetical business
company working on user acquisition as if it were a media company.

Am I wrong here? Is there some sort of viral concept for business-to-business
companies?

EDIT: Just to clarify what I mean by the fuzzily defined term 'media
companies', I mean companies whose product is in one of the low/no fee media
spaces, like social media or digital media.

~~~
tomblomfield
Whatever kind of company you run, dig below the top-line growth numbers. Look
into churn and revenue by cohort.

There are b2b companies with very high churn (Groupon's merchant acquisition
is arguably an example) and those with very low churn (Stripe, GoCardless).

As an aside, there are some b2b companies with a pretty high viral
coefficient. B2B invoicing platforms are a good example - a business might
bring all of its suppliers/customers onto a platform. This is basically
Tradeshift's strategy.

~~~
elohesra
Thanks for that information, that's interesting. Either way, I thought it was
an interesting article, and it was well written too. I also agree with the
core point that growth without retention is meaningless. I suppose I just take
issue with the term 'viral' here, although your point stands even with
business-to-business: if you've had a sudden influx of customers, then you'll
need to fight to keep them rather than just considering them an unchanging
constant of your business forevermore.

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avelis
This article is true for any business with paying customers.

A great way to see how you can reduce customer churn and increase customer
loyalty is actually asking if your customers would recommend your business to
a friend or colleague. Since word of mouth is very valuable, knowing where you
rank on a scale of 0-10 can be insightful in understanding how to improve your
business.

One system to manage such engagement is called Net Promoter Score
([http://en.wikipedia.org/wiki/Net_Promoter](http://en.wikipedia.org/wiki/Net_Promoter)).

Note: I work for Promoter.io which provides a service to do this.

~~~
thibaut_barrere
I think you are kind of firing a promotion bullet for nothing here: you should
definitely explain what NPS stands for, otherwise you're losing people.

~~~
avelis
Yes, you are right. I wish the article had more ways to tackle reducing churn.
I know one way is to engage your customers to see if they would actually
recommend your business to friends/colleague's.

I amended my comment to better explain my position.

~~~
thibaut_barrere
My favorite way is to measure my customer's engagement then work at increasing
it.

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dmourati
I think he stole those graphs (or at least got the inspiration to them) from
Phil Libin at Evernote:
[https://vimeo.com/11932184](https://vimeo.com/11932184) @13:25.

~~~
tomblomfield
I'm not claiming to have invented these graphs - they've been around for a
while!

They featured pretty prominently in every investor pitch deck we wrote at
GoCardless.

------
sqrt17
Summary: \- If you chase your customers away, it's bad for business \- You can
chain them to your business using anti-competitive tactics

Is it just me or is it just a myth of the startup world that a good product is
a sensible idea for businesses?

For some reason, many business people seem to take a bad (or at least
nondifferentiating) product as the default assumption. Maybe because that's
where you need them the most, and companies creating good products are most in
need of good engineering talent.

------
Sindrome
Everything can kill your startup

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k8thegreat
It's interesting to read about all these statistics and metrics and to think
about Groupon's strategy in customer acquisition and retention. I heard about
a startup that is focusing on the social side of acquisition and retention a
lot more than just pushing out deals. It's pretty interesting; I'd like to
hear what you all think. www.spendingkarma.com

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alexatkeplar
A few tell-tale signs that a B2B company may be dying from churn:

1\. A homepage which seems over-optimized for new customer signup ("how do I
get past this splash screen?") versus supporting existing customers

2\. An over-emphasis on committing to a year/over-generous discount for an
annual commitment

3\. An extremely short trial period

~~~
johlindenbaum
Define short trial period. <14 days?

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Mikeb85
Who'd have thought that retaining customers is important to a business?

~~~
jacquesm
_Lots_ of startups that are funded make these mistakes.

They fail to account for cost-of-acquisition vs life time customer value
because the VC money keeps the snowball rolling forward fast enough that they
think they're doing it by themselves. As soon as you shut off the marketing
the whole thing crashes straight into the ground because of churn.

Modeling churn is a very important activity and modeling it correctly allows
you to decide whether your ugly duckling is really a swan or actually just an
ugly duckling.

What I do come across is that such insights are not welcome and that they make
you an 'unbeliever'.

~~~
Mikeb85
Hmmm, having worked for and run many non-tech based small businesses I guess I
took it for granted that repeat customers and customer retention is important.
Maybe the difference in insights is due to seeing the customers face to face.

Funny little culture this 'tech startup' culture...

