Spooky Sales Story: Churn, Baby, Churn
It was a spooky night on Oct 31st, at the headquarters office of Disco Flex. Everyone but the CEO went home to take their kids Trick or Treating, or jump into an adult costume and head to a Halloween Party.
Spiders, skulls, ghosts, and ghouls decorate the usually plain, square office architecture. All the office lights are off except the few above the CEO, Corey’s, desk. One bulb shines across her organized clutter of papers, another draping a retro record player in 150 watts of light. A SaaS startup in the DJ and entertainment space, Disco Flex revolutionizes the way clubs and bars play music through automation and artificial intelligence.
Corey is just about to finish her day’s work, and then an email from the company’s accounting firm comes in… subject line reads: “Results from Quarter Ended Sept. 30th.”
The CEO reads the financial statement, line by line. Eyes go from left to right, down and back to the left. She mumbles aloud to herself as she reads, “Revenue, good… Profits, good… 10,000 accounts added, great… 1,500 accounts lost, @#$%!.”
The office silence is interrupted. The retro record player screeches, “Churn, Baby, Churn, Customer Inferno.” “Churn, Baby, Churn, Churn the Financials Down.” Scrrrrrractch, goes the record player. “Churn, Baby, Churn,” the record player repeats. The once-decorative ghosts and ghouls awaken to the tune, chanting the horrific line, “Churn, Baby, Churn.” "Churn, Baby, Churn." "Churn, Baby..."
“STOP, STOP,” Corey screams. The sardonic chant continues -- until she jumps out of her chair, lunges over, and throws the needle off the record.
Wait, that isn’t right. Doesn’t the tune go “Burn, Baby, Burn?”
“Burn, Baby, Burn, Disco Inferno.” Maybe The Trammps were talking about burning up the dancefloor with their hot moves. Maybe they were talking about the sensation in their hamstrings after dancing so intensely -- and so greatly -- at the discoteque.
Or, maybe they were talking about burning cash, or frying revenue growth to a crisp. Well, probably not. But, when your business sings the fearful tune, “Churn, Baby, Churn,” that’s exactly what happens to your balance sheet. And there’s a slight possibility of your office being haunted.
Okay, that explains the song. But what is churn?
Here’s our definition of churn:
Churn (noun): The amount of customers that stop doing business with an organization within a given time period.
Churn Rate (noun): The rate at which a business is losing customers, often expressed in a percentage.
Churn (verb): A violent motion that produces volatility.
Churn (verb, pertaining to business): The act of losing customers.
Okay, I get it now. But why is churn so terrifyingly scary?
Because it means losing customers. It means losing revenue, and profits. It means your competitors are stealing from you. It means the reduction of growth rates, or even outright shrinking. It means the possibility of layoffs and cost cutting. It means the failure to meet or exceed goals, and realize visions.
It means that your sales and marketing teams have to work harder to on-board new customers. It means their hard work is less effective and productive, as it yields less return. It means all the hard work the sales and marketing teams did; all the money invested in salaries and training; all the capital allocated to advertising and CRM technology; all the time spent nurturing prospects and gaining new customers; is all made less impactful -- at the very least -- when a business is a victim of churn.
Yikes, that is scary. What happens to Corey and Disco Flex?
Freddie Kreuger, Jason Voorhess, Michael Myers, and an army of creepy dolls may as well have sprung into Corey’s office and terrified her into a catatonic state. What a violent word… churn. All that slashing to growth rates, all that capital gushing out of the balance sheet’s veins. The screams of complaining customers, the vulnerability of obsolete product features, wanting for attack like a horror movie actor that breaks an ankle. The death of jobs, and endless fear of what customer is waiting around the next dark corner, jumping out at you to announce they’re leaving.
One of her worst fears came true: Churn.
Disco Flex hired 5 new salespeople to meet its sales targets. It reinforced the new hires with a retargeting campaign run by its marketing team. After a successful onboarding and training period for the salespeople -- and a thorough investment of time and money on the retargeting campaign -- Disco Flex exceeded its sales targets.
It’s well into six figures when accounting for salary, commission, outsourcing design for marketing content, and buying digital media space. The marketing team spent countless hours perfecting content and tweaking its retargeting strategy to generate leads for the sales team. The sales team spent countless hours demoing, emailing, following up, and sweet talking every decision maker that needed to check the approval box.
A large investment for sure -- an investment in time and money that resulted in 40% growth sequentially, q/o/q, and 67.7% y/o/y.
Okay, that sounds great. Why is Corey as terrified as a nine-year-old watching a Stephen King movie?
Because her company lost 1,500 customers in that same time period -- a churn rate of 6%! For Q3 alone!
Now Disco Flex nets an addition of 8,500 customer accounts -- a 15% cut in its gross account growth. This also translates to sequential growth of 34%, and annual growth of 57%, compared to 40% and 67.7% before accounting for churn.
If Corey’s average account size pays $50/month, she gained $500,000 in monthly recurring revenue (MRR), and $6 million in annual recurring revenue (ARR) when accounting for new accounts added.
But due to customer churn, Corey lost $75,000 in MRR and $900,000 in ARR. Now, her company only nets $425,000 in MRR and $5.1 million in ARR.
Losing customers due to churn is like pouring concrete on a track when you’re in mid sprint.
While her growth strategy resulted in exceeding revenue targets of +$450,000 in MRR by 11%, churn rendered the growth strategy red with a net miss of 5.6%.
Now Corey has to go to Disco Flex’s Board of Directors, shareholders, and hard-working team with the disappointing news. Eek. This was her Pennywise -- the manifestation of her greatest fear.
It’s the first quarter she missed revenue targets as CEO. Seeing that the growth strategy is working, the Board of Directors doesn’t even consider ousting Corey as CEO. But the board is insistent that she address the churn rate issue. The board wants to see a significant reduction in churn rate in the next 2 quarters, while maintaining a consistent growth rate. Essentially, she needs to keep the engine running while patching up some holes in the exhaust.
In this edition of Give Yourself Growthbumps -- whoops -- Give Yourself Goosebumps, will Corey be the star in a sequel to this horror movie, or will she escape alive on her road to growth?
It depends on the strategy she builds to reduce the churn rate, and effectiveness in executing that strategy. Find out Corey’s fate in our next blog on churn.