Secondary Effects of Churn: Part 1 of 2

February 22, 2021

Brad Davis

Category: Customer Retention, Customer Success as a Service, Customer Success Strategy, Voice of the Team

Churn is a naughty word

Ah, yes. Churn. The dreaded kryptonite of all SaaS companies.

Churn occurs when the client does not renew their subscription with your SaaS company.

And if enough churn occurs among your subscriber base, then you don’t have much of a company left; therefore, it is prudent to understand both the first and second degree effects of churn on your company. In this post, part one of a two-part series, I’ll discuss the secondary effects of churn and their impacts on your brand and reputation. Part two will cover what you can do to mitigate these risks and set your organization up for success.

Secondary effects of churn on the company

The very first job I ever had was as a paperboy for my local newspaper when I was eight years old. My older brother and I used to ride in my parents Dodge woody van with the side door open, cruising at 5 mph and jumping out of the open side door to deliver our customers’ newspapers smack dab on their front porch.

I learned at that very young age that when my readers cancelled their newspaper subscription, I made less money. So, naturally, I did not like when they cancelled, and I understood that this first degree effect of churn meant less cash in my pocket.

It wasn’t until over 20 years later when I was leading a Customer Success department at a startup that I realized some of the secondary effects of churn.

You may be thinking “Secondary effects?! Churn is churn!” So, let me explain. Here are five of the secondary effects of churn on the organization:

#1 Perception of product

After years in customer-facing roles, from sales to Customer Success and service, I have gained a true and deep appreciation for the axiom that “perception is reality.” Whether we like it or not, people do not perceive our product and service offerings homogeneously or all at once.

For example, if a company churns enough customers in a particular segment or industry, you will come to realize that it becomes much harder to sell into that segment, as your product, and therefore your brand, has taken on a certain perception. Perhaps your product is seen as “too hard to use” or “takes too long to set up.” There are many negative perceptions that could (and likely will) be crafted by your ex-users when they churn.

#2 Negative publicity

Churn impacts more than just the dollars and cents of your financials. Behind every account that churns are people: users, decision makers, and influencers. All of these stakeholders now know that they have left your service, probably for your competitor.

Users will, of course, have an opinion about their experience with your platform or service, and in turn, will inform their bosses or decision makers about their experience. Decision makers and influencers then parrot what they’ve heard most of the time from other ex-users.

All of these people know other people and will move from company to company throughout their careers. So, you can see how the negative effects of churn can go viral. Negative publicity and rumors can create an uphill battle for your sales team, and potentially a game-ending perception in the marketplace.

#3 Employee anxiety

Employees at any level, and from any department, regardless of their relationship to your product or service, can become anxious and quit, or emotionally log out from the effects of a high churn rate. Poor performing SaaS offerings that churn at high rates don’t give employee the warm fuzzies about their year-end review or their career trajectory, and thus customer churn can lead to higher employee churn, fueling additional company costs.

#4 Loss of second-order revenue

Second-order revenue occurs when you are not just keeping your customers, you are delighting them so much that they want to buy more from you. Many companies, particularly in early stages, fail to account for this in their financial models, but these up-sells are directly attributed to Customer Success.

Jason Lemkin, ex-CEO of Adobe EchoSign, coined the phrase second-order revenue and attributes an increase of 50 to 100 percent of the Lifetime Value (LTV) of a customer to it. The theory is simple and logical:

• Sally loves your product and leaves Company A to join Company B and buys your product again at Company B
• Sally loves your product and tells three friends about it and some of them end up buying your product too

These two scenarios can be measured, and you should strive to capture them (given you have an adequate level of CS maturity in place to do so). Companies can also enjoy company reviews, positive press, references, and positive word-of-mouth due to the positive effects of delighting customers.

#5 Management attack

Management and leadership positions are largely about achieving results. There are all kinds of desired results, or outcomes, that the management professional is trying to obtain. However, I can promise you that losing company revenue is not one of them.

This point dove tails with number three above, about employee anxiety. When Management becomes anxious, those anxieties can play out as a deterioration of culture and political gamesmanship on who is at fault for the failing service.

So, now that you understand the impact that churn can have, not just on your bottom line, but on your reputation in the marketplace and organization, what should you do about it? Stay tuned for part two of this two-part series to find out.