At Pardot, in late 2012 at the time of acquisition, our monthly customer churn was 1.4% (meaning, we lost 1.4% of all our customers every month). Why do I still remember that number over four years later? Well, because it was seared into my mind by being one of the top five questions asked by investors. And, we pitched over 35 VCs through the years, making it a popular topic of conversation.
Now, in some SaaS businesses, 1.4% monthly churn isn’t that good, but we were a month-to-month solution for small-to-medium businesses (SMB). In that market, with that type of no-contract situation, that was considered a great churn rate. Only, it wasn’t always that way. In fact, most startups have high customer churn in the early days and then get better with time.
Here are a few reasons why customer churn is higher initially:
- Customer Consistency – Early on, the ideal customer profile isn’t well defined as the goal is to get early adopter customers in the door and to work towards product/market fit. Inevitably, bad-fit customers get signed and contribute to a higher churn rate.
- Contracts – Many startups, like Pardot, start with little or no contract, as a way to remove friction to adoption. While it is customer-friendly is some regards, it makes for customers that sign when it’s really a short-term paid trial in their mind, makes for more volatility when customers hit hard times and leave with no notice, etc. Contracts, at least annual deals, help minimize some of the churn potential in the first few months after the sale.
- Product Maturity – Software products always have bugs. Always. Early on, products aren’t very mature and will have more bugs resulting in greater potential for customers to have a bad experience that increases the risk of churn.
Entrepreneurs would do well to work towards a low a churn rate and keep in mind that it’s always higher in the early days.
What else? What are some more reasons why customer churn is higher early in the life of a startup?