Even the greatest companies out there are bound to lose a customer once in a while. It can be hard to pinpoint a single reason that your customers stay with you or leave. However, if there's one thing we know for sure, it's this: change leads to churn, especially in the SaaS world.
When services or products evolve, your new offerings aren’t always going to be the right fit for all your customers. Customer churn simply comes with the territory of doing business.
Since we know at least some churn is a given, is there any way for businesses to offset these costs?
This is where net negative churn comes in. Although the wording can be confusing (isn’t churn already negative?), this metric is actually an effective growth strategy to help you counteract churn and increase overall revenue.
Defining Net Negative Churn (+ How It Relates to Revenue)
Net negative churn means that over a given period of time, you lost customers but still grew your overall revenue.
How? It’s all about expanding your existing customer accounts. Although you may lose customers, you can make money each month due to additional spending from your existing customers. This SaaS metric focuses solely on existing customers and does not factor in any new customer revenue.
For example, even if you lose 50 customers that made up 5% of your revenue per year, you achieved net negative churn if your current customers purchased additional products and services valued at 10% of your annual revenue. Despite the fact that you lost customers, you came out in the green with 5% revenue growth. The additional revenue you generated from your existing customers offset the revenue you lost through cancellations and downgrades.
4 Growth Strategies to Help You Achieve Negative Churn
To help you take advantage of the benefits of negative churn, we’ve got four strategies you can use to increase your customer value and accelerate growth.
Cross-selling is when you encourage customers to purchase additional products or services that enhance something they've already purchased.
Successful cross-selling provides additional value for clients, and the best cross-sell offers are not only related to the initial solution, but also sold at a lower price point. You’ve probably seen this in consumer advertising.
For example, let’s say you’re online shopping and you purchase a single area rug. On your way to checkout, you might be prompted to support that purchase with a matching runner rug. You decline. Over the next few weeks, you might start seeing emails or advertisements from the company suggesting you purchase the runner rug, but now they’re offering it at a discounted rate, which makes you more inclined to consider it. They know you liked the original rug, and they know people often like to go with a theme for their home decor, so they’re making sure you know this product is available.
This cross-selling strategy can be easily applied to the B2B industry by offering related products or services that will complement a customer’s existing package.
2. Upselling + Upgrades
Upselling and upgrade strategies are when you offer customers a more expensive or upgraded version of a product they already own. The offer usually provides additional value, such as new features, modules, or updates.
For instance, when Hulu started offering a more expensive, commercial-free version of their streaming service for a 50% higher price, they were offering customers an upgrade. The additional value provided was saved time and improved user experience since customers wouldn’t have to sit through commercials.
You can upsell and upgrade your customers in similar ways by enticing them with an improved version of a product or service they have already purchased.
3. Resource Expansion
You can upsell and upgrade your customers in similar ways by enticing them with an improved version of a product or service they have already purchased – resource expansion. However, rather than purchasing a higher-end version of a product, resource expansion occurs when customers simply need to use an existing product more, like cell phone minutes, battery life, or miles per gallon.
DropBox’s pricing is a good example. Users that start with a free version may eventually need to expand their service to include more storage space.
For resource expansion, focus on creating different package levels, or tiers, and let customers expand their capabilities whenever they need to.
4. Seat Expansion
Seat expansion promotes additional, linear purchases within the scope of a product that your customer already owns. This is a common model in the software industry. If you charge a fee per product administrator or software user, then seat expansion encourages customers to add more seats to the table, by purchasing additional licenses for the additional people who need access to the system.
For example, maybe you’ve purchased access for two users, but then your team grows, and you need a third. That’s seat expansion. Sprout Social uses this kind of pricing strategy. Their plans are priced by the user – so if you want more than one user, you pay a higher monthly cost.
Companies using this type of upselling strategy will often add features that help people outside of their traditional user base. For instance, if you sell financial software for businesses, you could add features that help HR manage payroll and employee information, and add more users that way.
When encouraging seat expansion, be sure to clearly explain the benefits of additional users. How will adding seats to the table benefit your customer?
The Key: Use Customer Marketing Data to Improve Net Negative Churn
In order to send more customers down these sales paths and achieve net negative churn, you can't focus only on direct sales techniques. A significant portion of successful customer marketing and retention is understanding what your customers need, and when they need it.
If you encourage an additional purchase too soon, you risk alienating customers and turning them off of your marketing messages for a long time. If you miss an opportunity to secure a much-needed repeat sales when your customer is in the decision process, you risk losing your customer to the competition.
The key to avoiding these blunders is a criterion of any effective retention marketing strategy: collect and analyze customer data.
By learning as much as you can about your existing customers – whether through their purchasing history, their email open-rates, or their behavior in your online community – you can start to understand your customers' challenges.
This is why your customer marketing team and customer success managers are instrumental resources to utilize if you want to capitalize on net negative churn. When you can solve a problem or help your customers overcome a challenge by offering an additional product or service, then you've identified a prime sales opportunity.
Net Negative Churn Takeaway
While it's certainly best to keep as many customers as possible, your company is always going to face some degree of churn. Smart businesses reduce the impact churn has on their bottom line and actually increase revenue by implementing a negative churn strategy that’s grounded in customer success.
As with all strategies to increase your revenue, start with a concrete and comprehensive understanding of who your customers are and what they desire. It's only with a system in place to gather and analyze this knowledge that you can confidently lead them toward sales opportunities that add value to their customer experience and grow your revenue.
Next steps? Check out our free Customer Success Kit, which is all of our best resources on customer success in one place. No email address needed.
Editor's note: This post was originally published by Julie Dietz in July 2017 and has since been refreshed to make sure we're bringing you the latest and greatest.