Why Your Churn Rate Should Determine When You Scale

May 19, 2020

I wrote this blog post before the pandemic and then got sidetracked with more pressing matters, as many of us have. It's pretty amazing to think that just a few months ago, the top concern for many CEOs was, "How do I scale?", a question that inspired this series of posts. Today, by contrast, many of us are wondering how to preserve cash and simply survive.

I'm publishing this post now not because it's immediately relevant, but because I think it can provide a long-term perspective on why it's important to retain our clients, apart from the fact that they can improve our near-term cash flow. Our churn rate -- and the cost to achieve that rate -- is the key determinant of when we'll be ready to scale.

I hope that during this difficult time, companies can build a strong foundation of processes that help retain their clients, so that they can hit the ground running as the world opens up again.

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If you haven’t already read the first six posts in this series on “Scaling Your Startup…Through Your Best Nature,” check ‘em out now. They begin here.

As a recap, I shared a framework for thinking about the best and worst in our own natures -- the Primitive Mind (or ego) and the Higher Mind (or spirit) -- and why managing this duality is critical for scaling our business through the three stages of a startup journey. Then I covered five examples of how our ego can get in the way of us scaling our company, and how our Higher Mind can come to the rescue.

In today’s post, we’ll continue to discuss what’s required to build our Go-to-Market Playbook in Stage 2 of the startup journey. Recall that in this stage, we want to create a set of go-to-market motions that match the market. We’re looking to create the playbook for how to deliver and monetize value in a predictable way. Specifically, we want to create the qualification criteria, the elevator pitch, the website messaging, the slide deck, the demo, the pricing, the onboarding process, the customer milestones, the definition of value, the renewal process, and everything else that goes into creating a customer journey from the start to renewal and beyond. 

In this post, I’ll cover a third example of how channeling our higher nature can help us build the right Go-to-Market Playbook.

Example #3: How We View When to Scale

The Primitive Mind“We’ll scale once I find a sales leader who doesn’t screw it up.”

The Higher Mind“We’ll scale once we deliver real value to people in a repeatable way.”

The Primitive Mind may be looking for someone to blame. The Higher Mind recognizes that revenue comes easily when a system of predictable value delivery emerges, bolstered by the symphony approach that we discussed earlier. 

The Primitive Mind may be eager to prove a high growth rate in order to prove her own worth. The Higher Mind recognizes that patience is a virtue, that we need to “tune” our growth to the circumstance.

We can tell if we’re ready to “put the pedal to the metal” in expanding our go-to-market team when we’re able to achieve low churn without much expense. Our customers achieve their goals relatively easily. If we expand our go-to-market team, we know we’ll be able to leverage strong testimonials to secure new logos and achieve high retention rates for those. 

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If we experience high churn and have low post-sale costs, we may be inclined to conclude that we aren’t investing enough in customer success. That may be true – especially because not all startups have recognized CS as a revenue driver. But adding more CS team members may not solve the problem. It could be that our product doesn’t deliver sufficient value -- that we have a gap in product-market fit, perhaps because we haven’t created the methodology we discussed in Stage 1. Or, it could be that we’re doing the wrong things in CS -- e.g. we aren’t talking with the right people at the client. Do a root cause analysis to figure out what to do next.

If we have low churn but it’s costly, we should figure out how to automate the required work now through product improvements or in-app messaging. If the product can’t reduce costs sufficiently, then we should also pursue process improvements (e.g. one-to-many tactics) and organizational improvements (e.g. building a team in a lower-cost location). 

If we’re investing a lot in customer success and our churn is still too high, we have an existential problem. Our product might have solved a need in the market, but we haven’t been able to fit our business into our clients’ ecosystem. Maybe we don’t have the right partnerships; maybe a more powerful direct competitor or adjacent business is preventing us from taking share; maybe we are focused on the wrong market segment. Our CS team is propping up the business. The result is not only high churn but also a growing body of detractors. We should beware of expanding our go-to-market team, because they probably won’t make quota, and then we’ll have to let them go a few months later. The solution may be to join forces with a larger company that better positions us in the ecosystem.

Bottom line: Be strategic about when you decide to scale up. The combination of your churn rate and your post-sale costs can tell you if you’re ready.

In the next post in this series, we’ll discuss how to approach Stage 3, the “Scale” stage of the startup journey. Hint: There are only the humble and those who will be humbled.