Understanding churn and building an action plan to fix the proverbial “leaky bucket”

Gabe Miller-Smith shares why net retention should be your North Star metric, frameworks for measuring churn, and how to improve retention programmatically as a team.

Some people mount inspirational quotes above their desks to motivate themselves. When Gabe Miller-Smith served as SVP of Global Customer Success at Procore, he tacked up an age-old statistic many SaaS executives have turned into a mantra: It costs some 5-25 times more to acquire a new customer than retain an existing one. Hanging above his workspace, it acted as a constant reminder that fighting churn was his most important responsibility. 

It’s no big secret that acquiring a new customer is more expensive than keeping an existing one, but fighting churn isn’t always a priority, especially for growing startups. “It’s so easy at an early-stage company to focus on the prospect because the new revenue you’re trying to close is bigger than your recurring book of business,” says Gabe. But neglecting churn at these early stages can set you up for big problems down the line. If you can’t hold on to customers, you’ll never be able to grow. 

That’s why reducing churn and increasing net retention is some of the most valuable work you can do for your business. At a startup, it’s paramount. And addressing churn should be at the top of the list when the numbers are “smaller” since the problem only gets worse with scale. 

If you can’t hold on to customers, you’ll never be able to grow.

For example, if you have a $500M ARR business with a churn rate of 20%, the business will lose $100M of ARR due to churn. The first $100M of new bookings will just go to “fill the leaky bucket.” Ideally, when a company is successful, its renewable book of business dwarfs the new bookings target. 

But retention is not just something for customer success teams to worry about— addressing churn and improving retention is a “team sport,” according to Gabe, and requires the support of the entire organization. 

We sat down with Gabe to better understand the fundamentals of navigating churn, how to set up your team for success, and how to programmatically tackle the proverbial “leaky bucket.”

What does “good” retention look like? (And how to know if you have a churn problem) 

We’ve established that increasing net retention should be a key priority for your team, regardless of what stage you’re at—but what goal should you be aiming for? In reality, a company might never be able to retain 100% of its logos (though net dollar retention should be 100%+), so what’s a realistic target? 

What your net retention goal is depends on a few factors: Who are you selling to (ICP vs non-ICP)? How much account whitespace do you have to pursue upsell/cross-sell opportunities? 

That said, there are rules of thumb you can follow. For instance, Gabe has a very clear standard when it comes to selling to your ideal customer profile (ICP): A 10% churn rate is too high. “This might freak out some portfolio companies, but I’d say if your churn is in double digits, there’s room to improve,” says Gabe. “At Procore, I never had a churn target that was greater than 9%. I’m not panicking if churn is at 15%, but it tells me there’s work to be done across the organization.”

Churn rates for SMB vs. enterprise

Typical churn rates always depend on which market segments a business is selling to—leaders will typically see lower CAC and higher churn in SMB businesses, and higher CAC and lower churn in enterprise businesses.

For lower CAC markets like SMB, churn rates could look like:

  • Good: 15-20%
  • Better: 10-15%
  • Best: 5-10%

However, given that Gabe’s teams primarily sold upmarket, those rates looked a little different.

Here’s what he considers reasonable rates of churn when selling to your ICP:

  • Good: 10-15%
  • Better: <10%
  • Best: <5%

But what about for early-stage companies who haven’t fully figured out their ICP yet, or who might be selling to non-ICP customers?

Churn rates for non-ICPs

“When it comes to non-ICPs, the risk thresholds can be higher,” he says. “In that case, 15%-20% churn is normal and even to be expected—as long as you have a roadmap that acknowledges you’re at an early stage and only solving a couple of use cases for your customer.” Once you get into 20-30% churn, however, he recommends having a closer look at the problem, even if you know it’s not your ICP. 

That’s where your data reporting comes into play. To be able to address churn, you first need to understand who’s churning, why they’re churning, and when in their journey they’re churning. 

“It comes down to how you are codifying and categorizing customer churn,” says Gabe. “Sure, you can have an open text field in your business intelligence (BI) tool for the CSM, AE, or billing team to leave notes, but it’s more valuable to bucket customers who have churned by category so you can see patterns.” 

He recommends creating a drop-down list to capture the most common reasons customers are churning—this may vary by business, but typically comes down to five main causes: 

  1. Price
  2. Lack of adoption
  3. Missing features 
  4. Switching to a competitor 
  5. Going out of business or merging 

“To capture this data, it’s useful to have some survey capabilities,” says Gabe. “Not everyone is going to be willing to get on a phone call with you and talk about why they decided to cancel.” 

Even if customers are willing to chat, it’s sometimes helpful to get a third party involved, since sales and customer success teams might be too close to the customer to be objective. “We gave our billing department the role of closing out a customer—so they’d get on the phone with them and ask a few questions about why they’re leaving,” says Gabe. Since they weren’t as personally invested, they were able to be more fair and impartial about why the customer churned. 

So how do you address a churn problem, once you’ve identified it? That’s what we’ll get into in the next section.

How to build a cross-functional steering committee to tackle churn

“Customer success is a team sport—any program to reduce churn has to be a company-wide initiative,” says Gabe. “The executive sponsor will probably be someone in customer success and so will a lot of the people involved, but you need support from other teams to be successful.”

"Customer success is a team sport."

The first order of business is getting specific about what you want to accomplish. The problem you’re facing might be obvious, or it may require you to go back and do some data analysis. Look at your data and see whether there are common reasons for churn coming up with certain segments, industries, or geographies (this comes back to the categories you created).

It’s also worth looking at timing—are customers canceling in their first year with you or later down the line? “If you’ve got a lot of year-one churn, it often means you’re discounting too much at the outset or it’s taking too long to get customers to value,” says Gabe. “Whereas if you look at years three and beyond, it’s usually that you’re not upselling customers effectively and delivering more value—or in the case of something like Covid-19, not understanding where their business is at and being open to downselling.”

Case study: How to reduce time to value to address churn

One problem Gabe dealt with at Procore was delayed time to value. “When I first started, it was taking customers 60 days to get to value—first value, not full value,” he says. “A customer would land on our app and have no idea what to do without having a kickoff call, a formal implementation plan, and five hours of training.” Not only was it taking a long time for customers to get value out of the tool, it was also sucking up valuable hours that customer success could have been spending on more impactful work.

The team set the goal of cutting that time to value in half, from 60 days to 30 days. To accomplish that, they’d need to build new tools and training—and for that, they’d need support. “We realized we couldn’t do this on our own, so we recruited folks in product, engineering, sales, and customer marketing to join our churn steering committee,” he says.

Here are the three big things they focused on:

  1. Automating processes: “Before, it was all manual processes—it would take us seven days to give customers access to their account,” says Gabe. Working with sales, product, and engineering, they create processes to automatically provision new customers’ accounts, no manual setup required. They also created a setup wizard that would allow customers to begin using the tool and customizing it to their use case right away.
  2. Building certificate programs: While Procore did have generalized education programs before, it wasn’t specific enough to people’s roles, meaning that customers relied heavily on their CSM to get them up to speed. “We built out a better certification program that had badges that you could get based upon your role,” says Gabe. Now, customers could educate themselves at their own pace.
  3. Setting up drip email campaigns: Working with customer marketing, they also set up a welcome email drip campaign to be sent to new admins setting up their Procore accounts, which covered the seven most important things they needed to know as new users. They later expanded this to drip campaigns throughout the customer lifecycle, including preparing customers for renewals 120 days out.

All these initiatives allowed customers to start getting value out of Procore faster—plus it freed up customer success from spending hours on orientation and training. Meaning that when a customer became at risk for churn, customer success was more available to provide added counsel and support to get them back on track through reimplementation, executive business reviews, and success plans.

How AI will play a role in customer success

For Gabe, the next logical step for customer success teams is predictive analytics. While the widespread adoption of generative AI post-dated his time at Procore, he thinks it’s going to be huge for teams today and in the future. “If I’m a CSM, I need to know: When are customers going to churn and what’s my next move?” he says. “There’s so many different playbooks you can run, but if you can get to a point where your tool can tell a CSM, ‘this customer is in danger of churning, we recommend you send this email, or invite them to this webinar, or implement this playbook,’ that’s pure gold.”

Final thoughts for CS leaders: Keep your eye on what matters—and don’t be afraid to give up on unprofitable customers

Not all churn will be obvious—and it’s worthwhile to dig deep into your data. “I think the biggest mistake that teams make is not looking at deep enough cuts,” says Gabe. “If you’re doing a good job selling to your ICP, maybe you only have 5-10% churn and it looks good. But then you start analyzing by geography, vertical, segment, or spend—and that's where you're going to uncover issues. You could have a leaky bucket where certain segments are dramatically underperforming, but they're being masked because it's a small percentage of your customer composition.” 

“Throughout my career, there were times where we steered away from selling to a certain segment of customer, because we didn’t have a path to profitability,” he says.  

“We looked at our sales and marketing costs and our churn rate and the numbers just didn’t make sense,” says Gabe. “Bessemer wouldn’t invest in that company. No one would invest in it. It was just a distraction to the business.” 

Knowing which customer segments to abandon gracefully is just as important as which segments to go after. Part of addressing churn is realizing that some segments are not worth the distraction, focus, and energy from your team. All the work you do in addressing churn helps refine your ICP and determine which customers are actually worth your time. 

For CS leaders, net retention should be your North Star metric. All your workflows and priorities should be focused on making an impact on that KPI. That might mean working with finance and corporate strategy to develop a topline score card, scheduling more regular check-ins, and improving forecasting so you can make proactive changes.

And, if you need the reminder, put the stat right above your desk where you can see it: It costs 5-25x more to acquire a new customer than retain an existing one.