The common refrain by SaaS experts that think business is just a math problem is that if a customer stays long enough to pay back the cost to acquire them (the metric is called Customer Acquisition Cost or CAC), they became a “profitable” customer (“unit economics” don’tcha know) and everything is great.
Just do more of that and you’ll be a unicorn.
But the fact that your customers churned out – even after becoming “profitable” – likely means you didn’t get all the value you could from them and they definitely didn’t get all the value they should have from their relationship with you (you didn’t help them achieve their Desired Outcome).
Those customers you paid to acquire – that your company put time, energy, resources, and money into acquiring – are leaving, and there’s a cost that comes along with that that you might not have considered.
Let’s explore this, shall we?
I know this might sound crazy, but there’s more than just a dollar cost associated with acquiring those customers that aren’t a good fit for your product or service; there are emotional and other intangible-but-valuable-resource tolls associated with that churn that negatively affect your business.
Churn hurts revenue – obviously – but have you considered these…
5 Lesser-Known Ways Churn Hurts your Company
I came up with 5 ways for this list, but I’m sure there are other situations where this applies, so feel free to share those in the comments below.
1. Churn Hurts Your Company Valuation
When you have high churn, potential investors or acquirers will apply what amounts to an arbitrary “discount” (some refer to it that way, some don’t… but that’s what it is) to your company valuation.
This could be due to a lack of faith on their part because something is clearly wrong with your business or your ability to lead, or it could simply be a way to get a better deal for them and their investors.
Remember, investors that are using other people’s money (VCs, institutional investors, corporate acquirers) are in the business of producing the biggest return possible for their investors and stakeholders so they will look for every reason to get the best deal possible.
This isn’t bad; it isn’t good… it just is.
And just so I don’t come off as too negative, sometimes this works in your favor if your business/sector is smokin’ hot and just being in the deal – even at a premium – might be enough to ensure (in theory) a great return.
Either way, just know going in that high churn (regardless of all the other great stuff) is a lever for them to pull to make the deal better… for them.
2. Churn Hurts Your Total Addressable Market
One of the reasons people (investors, buyers, etc.) might cite for “discounting” your company due to high churn is the simple notion that a churned customer is no longer part of the Total Addressable Market.
Where you’ve stated that your Total Addressable Market is “Restaurant chains with > 5 locations in North America” the reality is that it’s that MINUS the customers you already had that bought and bailed.
If you’re churning customers faster than new customers are entering the market, your TAM is shrinking.
Churning and burning customers just isn’t gonna fly any more, so you might consider getting deliberate and building your Ideal Customer Profile from Day 1 (you can always pivot, but this will ensure you don’t go too far down the wrong path).
3. Churn Gives your Competitors a Weapon
A customer churns out (or doesn’t renew) and goes to the competition; you think they won’t tell your competitor where they’re coming from and why they left? You couldn’t be more wrong.
There’s even some psychology at play there (detailed in Dr. Robert Cialdini’s book Influence) that actually dictates that they’ll do things that are consistent with – and enhance – the decisions they made to leave you.
So even if their experience with you wasn’t horrible, the more they talk about it and the more they re-live it, the more “horrible” it will become to them… and they’ll be reliving it with your competitor.
And your competition will bring these up with new prospects “XYZ company dropped that other product for our’s because of this, this, and that reason” … and since this is so valuable to your competitor (meaning they’ll really push for it), and their new customer is still in the consistency-and-commitment phase of their decision to move away from you, they’ll be willing to talk to new prospects of your competition against you.
It doesn’t take very many churned customers to give your competition a ton of firepower in their sales process.
Protip: you should probably find out if your competition is doing this and know how to 1) respond (“we had some missteps in the early days, but after time in market and helping x number of customers [achieve their desired outcome], we know what types of customers can be successful and we only work with those.”) and 2) turn the tables on your competition if need be. I hate stuff like that, but if they’re doing it… well, don’t just take it.
4. Churn Hurts Your Goodwill and Market Sentiment
Building on #3 above, your former customers don’t just tell your competition, they tell their colleagues at work (who’ve probably seen the fallout first hand), their peers in networking and professional groups, they leave reviews online, share war stories in online forums or LinkedIn groups, or answer anonymous (leading, probably asked by your competitor) questions about your product/company/pricing/etc. on Quora.
People that move on from the company that was your former customer leave that company with the bad taste of your product in their mouth and when they go to a new company, they bring that bad taste with them. When that company pops up on your radar as a lead to reach out to, you have a built-in obstacle to overcome now.
And all that hurt goodwill and negative market sentiment is the gift that just keeps on giving, because…
5. Churn Hurts Your Employee Morale
It’s not fun to work hard to get customers, to close deals, to do marketing, to onboard customers, or to support and serve customers that aren’t a good fit.
Frankly, it sucks to work for a company that has a lot of negative stuff being said about them, their product(s), their leadership, etc.
Yeah, it’s great to get a paycheck, but it’s also good to be proud of where you work… and companies that churn and burn customers – at least in my experience – tend to churn and burn employees (and very often leaders), too.
It’s hard to maintain a positive culture surrounded by constant negativity. It’s even harder to maintain a hypocritical culture where you claim to be customer-centric but have high (avoidable) churn.
And rest assured… employees that have to exist within that hypocritical culture won’t for long.
So yeah… churn can have a very real cost on your company beyond the simple math that says less revenue equals a lower valuation.