Recession. The word has been buzzing around the news for the last few months. Talks of rising interest rates, increasing inflation, and a tougher fundraising environment dominate the headlines. For business owners, it’s not exactly music to the ears.
If you’re worried that the economy might head towards a recession, one of the highest impact, lowest effort things you can do in response is to curb churn. Reducing your churn can lead to steadier cash flow that can help you weather any downturn.
In this article, we'll show you why reducing customer churn is important during a recession and provide three concrete steps you can take to decrease your churn rate.
Why reducing churn is important during a recessionCash flow is king
Cash flow is the lifeblood of SaaS businesses. The more predictable your revenue, the longer your runway is and the higher your chances are to survive.
You may have heard recent advice from seasoned investors like YC
that due to changing economic conditions, companies should work hard to increase the amount of runway available. A common recommendation is 2-3 years of cash in the bank.
The more runway you have, the more likely you are to survive an extended economic downturn.
So, what's the easiest way to keep cash in the business that doesn't require drastic measures like cutting staff and slashing expenses? Reducing churn.Keeping a customer costs less than acquiring a new one
One of the easiest ways to preserve your runway is to make sure none of it gets lost to churn. In most businesses, it is many times more expensive to gain a new customer than to keep an existing one.
In fact, Bain & Company
found that a mere 5% increase in customer retention can lead to a 75% increase in profitability.
That's why it's important to keep your customers happy and to focus on reducing churn.Low churn rates allow you to plan ahead
A predictable churn rate makes financial forecasting and planning easier. If you know your churn rate will be predictably low, you can make plans much further in advance since you’ll know what your customer base will look like in the coming months and years with more accuracy. This makes it easier to craft long-term plans, invest in new products, or hire new employees.
In addition, low churn rates are appealing to investors. If for any reason you need to sell your business during a downturn, a stable customer base can lead to a higher valuation.
3 Steps to Reduce Churn
Now you know that reducing churn is important during a recession. Here are some concrete steps you can take to reduce your churn rate:Step 1: Analyze customer behavior
The first step to reducing churn is to understand why it's happening. The best way to do this is to analyze customer behavior for patterns. You can do this manually or with the help of software that tracks customer engagement and anlytics.
To do this, look through your best (and worst) customers and figure out:
Are there any commonalities between industries, company size, etc?
What features are they using or not using?
If you collect NPS or CSAT data, how happy are they?
What methods of engagement do customers respond to most?
For customers who churn, do you have cancellation data from them? If not, can you run a cancellation survey?
Once you know what kind of behavior is associated with high and low churn rates, you can take steps to prevent it.
Advanced teams can even use data from this analysis to create a metric for how at-risk an account is of churning.Step 2: Actively reduce churn through an improved customer experience
After you've identified what causes customers to stay or leave, use that same information to improve the customer experience and keep them satisfied.
For example, your analysis may have found that happy long-time customers engage frequently with your email newsletter, use feature x, and follow your Instagram account. However, new customers seem to interact only in your application and are not frequent users of feature x.
In this scenario, you could introduce newer customers to these higher engagement channels by sharing a snippet of your latest newsletter in a banner at the top of your app, call out feature x during onboarding, or include a link to your Instagram on your sign-in page.
Other ideas for actively reducing churn include:
Regular check-ins for accounts at risk of churning
Extending trial periods or offering coupons when a customer becomes inactive or wants to cancelMake pausing a subscription easyStep 3: Implement passive churn reduction systems
Not all churn is because of customers canceling. Some of it occurs because of missing or outdated credit card information.
Many payment processing systems like Stripe automatically attempt to update card numbers when a user receives a new card. If you have access to this feature with your payment processor, we'd recommend that you have it turned on.
However, payment processors cannot update all card numbers. For that, we'd recommend using a dunning service like Overdue to catch failed payments and make it easy for your subscribers to update their card details. This is an easy way to capture possible account cancellations - and it can run passively in the background.
To recap, reducing churn is important because it helps stabilize cash flow. That leads to improved planning and flexibility. Some tips to reduce churn include:
analyzing existing customer data for patterns
implementing active churn reduction strategies like communications and metrics
implementing passive churn reduction strategies like dunning
Reducing churn should be a priority for any business, but it's especially important during a recession. By taking steps to understand customer behavior, improve the customer experience, and implementing both active and passive churn reduction systems, your business can weather (and thrive in) any economic downturn.