I recently came to terms with a brutal truth about scaling a business.
We did an analysis of our company churn rate (client subscription cancelations) and the numbers came up pretty good.
The data showed 2.5% to 3% churn on average (we lose 3% of our clients each month).
If you’re not familiar with industry churn rates, under 5% is a good target, the lower the better of course.
If we can stay at 3% forever I’d be happy.
Low churn means our clients experience value and thus want to keep paying for our service.
Another way to put this is we don’t have a ‘leaky bucket’.
Leaky bucket syndrome is when you work really hard on your marketing and sales, get customers coming in, only for them to cancel and refund at a rate that makes it impossible to grow.
However, churn can be a deceptive number, even when it’s low.
For example…
I went on to crunch some potential future numbers to see how a 3% churn rate plays out as we grow.
With 50 clients, 3% churn = 1.5 clients lost per month
100 clients = 3 lost per month
200 clients = 6 per month
500 clients = 15 per month
This means that at 500 clients, we need at least 15 new ones just to not go backwards.
And this assumes we maintain 3% churn as we grow.
Right now I’m working to get us to a consistent 8 new clients a month.
We’ve hit that number before, but not stayed there.
15 would be a major breakthrough.
Yet as we get bigger, 15 simply becomes maintaining the status quo.
If we are to continue to grow, we can’t just rely on today’s growth rate.
When we get 4 new clients and churn is 2 lost clients, we’re adding +2 net each month.
But as we get bigger, we’re going to lose 3 per month, then 4, then 5, etc.
Gaining 4 new clients won’t be enough to break even.
Our growth rate must continue to outpace our churn.
How To Stay Ahead Of Churn
In order to beat churn there are two options –
1. Find new marketing channels as a never ending process.
We can improve existing campaigns, but they will hit a ceiling and they will deteriorate eventually.
We will always need a new marketing campaign breakthrough, then another, and another.
This is why you need a marketing department that never stops working to find the next improvement, and the next breakout campaign.
2. Rely on referrals to keep us in positive territory.
Word of mouth is at the heart of most companies that scale.
This is because word of mouth has a built-in positive reinforcement loop.
Each client you get refers more, which refer more, and so on.
This assumes a strong referral rate, which ideally stays above your churn rate.
Leaning Into Referrals
Coming to terms with this made me realize I need to adjust priorities.
Increasing word of mouth referrals needs to be priority one.
I believe this is the only path to take our company to where I want it to go (8 figures and beyond).
Advertising campaigns work, but without enough referrals we’re going to struggle to reach each new milestone.
If you’re wondering why this is, it’s because referrals are just better on all levels.
- People who are referred convert at higher rates.
- It costs nothing to generate a referral (not to be confused with affiliate referrals where you pay a commission)
- Referrals are generally better customers who churn less because they come from your best clients
Advertising costs money, is up and down, degrades in performance over time and can bring in clients who churn more quickly.
What Triggers A Referral?
I’ve been thinking deeply why we don’t get enough referrals in my company.
As you decrease churn you are increasing client satisfaction, but it may not be enough to trigger referrals.
Here’s a simplified scale for client satisfaction:
Unhappy clients = high churn
Satisfied clients = low churn
Delighted clients = word of mouth
Clients who are satisfied may not cancel, but they don’t tell other people about your company.
Word of mouth only happens when a client is so happy they are excited to ‘brag to their friends/family/colleagues’ about what your product or service does for them.
They also need to be in situations where it makes sense for them to talk about your business.
If most of your clients are in one industry and they interact with others in the same industry, word of mouth opportunities surface more regularly.
If simply using your product exposes it to other people, that can make word of mouth very natural.
In our case, the problem we solve (email overwhelm) is universal, but not widely talked about.
We do get occasional word of mouth when a client speaks to a colleague within the same company.
We have also had word of mouth within coaching groups when the topic turns to productivity and roadblocks to growth.
This is why this year I want to double down on these two elements.
- Narrow in on one industry more than we have in the past
- Look to form relationships with entrepreneur coaching groups
Hopefully my thought process has also helped you think about referrals for your business.
Keep growing!
Yaro
0 Comments