A Free Chapter From My New Book

Hiya guys! Patrick (patio11) here. You signed up for periodic emails from me about making and selling software.

I recently wrote a book about conversion optimization, SEO, and related topics for software companies. It collects approximately 20 essays of best previous writing on the subject and four brand new ones.

I thought I'd share one of the bonus chapters from the book. (Merry belated Christmas and thanks for letting me occasionally visit your inbox.) This one is about practical advice for decreasing churn rates, a topic of key concern to SaaS businesses. (Props to my publisher for letting me do this -- many wouldn't. Minor disclaimer: I copy/pasted the text from my final draft prior to the final editing, so there might be a typo or two in here more than the final published copy. Mea maxima culpa.)

Save Money On Taxes (A Brief Commercial Interruption)

Obligatory disclaimer: I'm not your tax accountant. That said: many of you folks run cash-basis businesses like I do, which means that you've got two more days to book business expenses for 2012 to deduct them from your taxes. Consider buying one of the following if you've had a particularly good year, to offset some revenue and thus save your marginal tax rate.

My video course on lifecycle emails for SaaS companies (discounted 20% through the end of the year), which has increased sales, customer LTV, and customer happiness at several software companies.
Sell More Software (my book on conversion optimization and related topics for software businesses), which you can buy for $9.99 directly from the publisher or or on Amazon -- continue on for the excerpt.
Do you use any SaaS, hosting service, or other company with a predictable monthly charge? Take a look at ones which have a "pre-pay for a year of service in advance" option, and pre-pay. This frontloads the expense for tax purposes, and you can often get a straight-up discount. (Again, if you doubt you can do this, talk to your accountant for authoratative advice on your situation.)

Book Excerpt From Sell More Software

This would ordinarily be the portion of the book where I thank you for reading it and then leave you with some fairly vapid “Now go get ‘em, tiger!” motivational phrases, but that strikes me as boring, so a) thank you for reading the book and b) let’s talk churn rates.

Churn Rates Dominate LTV of SaaS Businesses

The churn rate of a SaaS business is what percentage of users (sometimes calculated as a percentage of revenue, instead -- either way works) stop using the software in a given month. This number will tend to bounce up and down a bit but we’ll treat it as static for purpose of illustration.

If your churn rate is 5% per month (you’re doing well), 95% of users paying in month 1 will pay for month 2. Roughly 95% of users paying in month 2 will pay for month 3. And so on and so forth. If you remember high school math, this suggests that the LTV (lifetime value) for a particular user or cohort of users can be approximated by the sum of an infinite geometric series. I’ll do the math so you don’t have to: the number of months someone remains signed up is the inverse of your churn rate, which means that LTV = PRICE / CHURN RATE. So, for example, if your average plan is $20 a month and you have a 5% churn rate, your LTV is $400.

There are two immediate consequences to this math:

If you have a way of predictably acquiring quality customers for a fraction of your LTV (quick rule of thumb: under a third of it), then you should buy as many customers as your financial situation will allow. If, for example, you have an AdWords campaign that can reliably get new customers for $100 each, $100 is less than $133, so you should scale that campaign up (while ensuring that the unit economics don’t suddenly go to pot, which can happen in real life). Each of these new users will be cash-flow neutral after the 5th month of paying and after that it is pure profit for you.
Any improvement which you make to churn rate is multiplicatively effective for your bottom line. If you halve churn rate, you double per-customer revenue. This makes it one of the easiest places to squeeze out huge value for a business, particularly a business which is already operating at scale. (Doubling per-customer revenue might not be a huge priority when you only have 10 customers paying $20 a month, since your overriding goal would be getting to 100 customers and anything that doesn’t help you with that is wasted effort. After you have 1,000, it is very worth your time.)

Causes Of Churn

You can ask people why they stop paying for your application. Do so. It’s the world’s simplest programming task: any time they hit the Cancel button, immediately a) cancel their account and b) pop a free-form text field saying “We canceled your account. It would really help us help our customers if you could tell us why you canceled. We’re a small business and listening to our customers is our lifeblood, so please, be as specific as you can.”

But since you haven’t actually done that work yet, here’s some reasons you’ll typically find:

Some churn is involuntary. The customer would, if you asked them, not want to cancel, but they cancel anyhow, typically due to a billing problem. For example, it is very common in B2B settings for the user (call him Bob) to be distinct from the person who pays for the software (Jane in accounting). If Jane’s company card expires, Bob’s subscription can lapse without Bob ever knowing about it.
Some users buy things they do not need as a sort of pay-for-trial or to pay-in-advance-of-need. This is common in business situations where a combination of “it isn’t my money!” plus “if I don’t spend my budget by X it gets taken away” can counsel getting into billing relationships easily and getting out at a later date if necessary.
Some users will have a business/life need for your project which has a natural expiration date: they need your event planning software for their wedding, but not on an on-going basis. They have a funded project with Client X until next February, but after that they have uncertain prospects with X and are using a different system with Client Y. They may stop paying you for your software after their need expires.
Some users will migrate to new systems, replacing the need for your own.
Some users will go out of business / cut back on expenses / etc etc.
Some users will simply not be happy with your software, and stop using it. (They may or may not decide to stop paying you at that point.)

Quick Interventions To Decrease Churn

The quickest ROI you’ll get is by decreasing involuntary churn, which means that basically you’re going to aggressively assist your users in organizing their own financial affairs. Given that most businesses are on roughly 3 year cycles for credit cards, in any given month approximately 2.8% or so of your customer base will have cards expire. If half of them are lost as accounts, that’s already half your “churn budget” to make the magic 3%, even if your application delivers fantastic value to all customers.

So, send people email telling them their cards are about to expire. Generally, I’d recommend sending this about two weeks in advance of need.

You should also accompany email to the account administrators with in-application messaging to the actual users. For example, if Jane in Accounting doesn’t take immediate action on your email (not that unlikely: she doesn’t need your app to do her job, after all), ping Bob the user within the application and tell him to go put a bug in Jane’s ear about it. You can even give him an in-app way to send an email. (A subject line like “Action Required: Bob needs credit card details updated here to do his job” might successfully get her attention.)

You should also invest effort into contacting expired accounts. Most B2B app price points trivially justify actual human effort to call expired accounts and ask if they really meant to do that. This is one of the easiest sales to make, since a) you know they’re willing to pay for your app (they are already) and b) they’ll be impressed that you, despite being an Internet company, went out of your way to call them.

If you can’t call or successfully reach a decisionmaker, email instead.

Don’t Wait For Cancellation To Save Accounts

But wait! If calling people is a good idea if they stop paying, why not call people when they stop using the software? Why just get in touch when we want something for our own selfish purposes? If they stop using the software, that is an opportunity to a) figure out what we’ve done (or not done) that prevents them from getting value from it and b) get them back onto the happy path, prior to them cancelling some months down the line when they do an office mini-poll and find no one logs into this thing that costs $100 a month.

I have consulting clients who literally have halved churn rate (again, doubled revenues) just by having the sales team call inactive accounts right when they go inactive. If you don’t have a sales team, no problem, make the calls yourself.

You can also blend this approach with automated lifecycle emails, for example sending less active users an email every month reminding them of everything new in the software and suggesting ways how they can get (re-)started with it again. Quick Start Guides are great for this purpose. (Note that you will typically have much higher uptake if your email suggests it is specific to their activity as opposed to being the generic monthly newsletter.)

Billing Terms Influence Churn, Drastically

People very rarely churn when you don’t give them the opportunity to churn.

That sounds vacuous, but it implies something important: if you have people on annual billing cycles (or “contracts”, but the two are not co-extensive) for the product, they will very rarely churn mid-cycle. (This is true even if you do very customer-friendly policies like doing pro-rated refunds of unused time.) Most churn events happen within about two weeks, plus or minus, of a billing event. Either the upcoming bill gets someone to evaluate whether they want to continue using the software, or a credit card statement reminds someone that they’re still paying for your software and gets them to cancel. Decreasing the frequency of billing events thus decreases churn rate.

You might think this is a negative for customers, but in many cases that isn’t true. For example, many of your clients at BigCo have to fill out paperwork every time you bill them. In many cases it is easier for them to buy your software if they have to fill out that paperwork once a year versus once every month.

Accordingly, getting people switched to annual billing is a priority for you. In addition to decreasing churn rate, it helps to get you a lot of cash up-front, which you can use to e.g. buy additional users if you have a scalable marketing channel, or pay employee/contractor salaries to build out the product or your marketing channels.

Most companies just put annual billing as an option on the pricing page. That will, indeed, help you. (Go visit Olark.com and check out their implementation. It is genius.) But you can do substantially better than this.

For example, if you wait for accounts to become seasoned, sending them a five sentence email such as:

Subject: Get A Free Month of $SERVICE_NAME By Switching To Annual Billing

Hiya Bob,

Thanks for being a loyal customer of $SERVICE_NAME. Since you’ve been using the service since $DATE we wanted to extend you a special offer: if you pay for a year of the service in advance, we’ll give you your next month for free.

Current monthly price: $200

Yearly price: ~~$2400~~ $2200 (one month free)

Click here to switch to annual billing and claim your free month. (If you’d rather continue with monthly billing, you don’t have to do anything. We’ll only mail you about this once.)

If you’ve got any questions, we always like talking to customers, so just reply to this.

Regards,

$YOUR_NAME

Founder

$SERVICE

The conversion rates you’ll get from this email are absolutely unreal. I thought I was pretty hot stuff with moving 10% of my customers to annual billing… until my consulting clients started hitting 25%+. I’ve seen companies basically raise Series A rounds just by emailing their existing customer list once. No protracted negotiations, no dilution, just several hundred thousand dollars magically appearing in the bank account. Gadzooks right? This takes minutes to implement; go do it now.

Scheduled Touchpoints With Customers

In general, people make decisions based on emotions and then sometimes look for facts to justify those emotions. Accordingly, you want your customers to a) have a feeling of happiness with regards to your company/product and b) have a ready source of hard facts to justify that if they need to. One way to kill two birds with one stone is to send them a You Are So Awesome email.

The You Are So Awesome email is just a scheduled weekly or monthly report about their business or activities, ideally aligned in some way with your application. For example, Appointment Reminder tells them how much staff time they’ve saved with having their clients phoned automatically as opposed to doing the phone calls themselves. Brennan Dunn, who sells software to freelancers to help them do project management, sends out a weekly report on how much money they made freelancing in the previous week.

Customers love feeling good about themselves. The open rates and click-through rates you’ll get from emails designed to make them feel good are astronomically better than emails designed to promote your product. Then the next time they have to make a decision about your business relationship, they’ll remember that you’re making them feel awesome.

If that sounds a little squishy and emotional to you, we need to talk, but I do understand where you’re coming from. If you can’t countenance sending someone an email just to give them the warm fuzzies, send them an email demonstrating hard ROI for using your software, and ask them to explicitly request recognition inside their company/organization for making the decision to use you. Any customer you get promoted is a customer for life.

(A corollary: if your software isn’t important enough that adopting it could get someone promoted, maybe you should be writing something else. There’s virtually limitless problems to address with software, but many of them are too small to justify making a business out of. Keep in mind I say that with love, since I cut my teeth on bingo cards for elementary schoolteachers. Given that you’re smarter than me and have unlimited flexibility with niche selection, though, I’d pick a problem which was of such burning concern to a potential customer that solving it would be a career-making move for them. These problems are legion.)

Thanks For Reading That Excerpt

I hope you liked it. If you'd like to read more, you can buy the book directly from the publisher or or on Amazon . It is available in all the common e-reader formats -- mobi, epub, PDF, etc etc. You'll probably be offered $9.99 as a price, but as the author I can only suggest that, not enforce it.

Thanks for the encouragement to actually go through with writing this, by the way. The book came about entirely because people asked me for one -- I certainly wouldn't have considered doing it otherwise, since books are a terrible way to make money. (If you're considering writing a tech book, pop me an email and I'll tell you why I went with Hyperink over a traditional publisher or one of the newfangled tech presses.)

Until next time.

Regards,

Patrick McKenzie