The True Cost of Customer Churn – Part 2
Customer churn costs far more than lost revenue. Learn 3 hidden costs — negative referrals, lost brand leadership, and forfeited second-order revenue.
TL;DR
- Beyond lost revenue, churn carries three more costs: a negative network effect from referrals, lost brand leadership, and forfeited second-order revenue.
- A dissatisfied customer tells between 9 and 15 people about their experience, and around 13% tell more than 20 — a serious problem given that 67% of new business comes from referrals.
- Second-order revenue is the future renewals, upgrades, and word-of-mouth a happy customer generates, including bringing your product to their next company; churn forfeits all of it.
- The full true cost of churn spans six factors: lost recurring revenue, lost expansion revenue, higher acquisition costs, negative referral effects, lost brand leadership, and lost second-order revenue.
For innovative customer success leaders, preventing customer churn while increasing retention, revenue, and renewals is already top of mind. There are a myriad of ways to leverage your customer success team to decrease customer churn and help combat the negative costs associated with attrition.
In our previous post “The Trust Cost of Customer Churn: Part 1”, we discussed 3 major components of churn cost including the loss of recurring revenue, the loss of expansion opportunity revenue, and increased marketing spend. While those 3 factors are critical components to the cost of churn, they shouldn’t be considered alone.
The True Cost of Customer Churn – Next 3 Factors
In this post, we’ll explore 3 more components of churn including negative network effect and the impact of referrals, negative impact on brand leadership, and potential loss of second-order revenue. Let’s explore:
- Negative Network Effect & The Impact of Referrals
According to the White House Office of Consumer Affairs, a dissatisfied customer will tell between 9-15 people about their experience. Around 13% of dissatisfied customers tell more than 20 people. That means between 9-15 prospective customers have heard a story about why a customer chose to leave your organization. Multiple this number by the number of lost customers throughout a year and you are left with some pretty severe brand equity implications. Think about this impact when you remember that 67% of new business comes from referrals. Your current customers are your biggest advocates, and their opinion is akin to gold in the networking world.
The perceived credibility of an organization always plays a huge part in attracting and gaining new customers. Losing customers to churn (and having these customers tell their networks why they left) can cause severe negative effects to your brand and, frankly, make potential customers afraid to do business with you.
- Impact on Brand Leadership
The concept of brand leadership is an oft-overlooked consequence of churn that can sometimes have the longest-lasting impact. Not only does your organization have to make up for the static ARR from churned customers, but you also have to think about the expansion revenue lost. This means less recurring revenue, and fewer chances of any ARR expansion.
The root of these implications are all tied to brand leadership or “brand equity” as it’s sometimes called. Brand leadership is a belief that if a company or product has a better reputation, or is more well-known in the marketplace, then it has a better product or higher value in general. An organization’s brand is such an important concept that some researchers actually argue that it is one of the most valuable assets a company can have—even over physical investments or revenue.
Brand leadership also becomes a factor if personnel changes occur and a current customer champion leaves the organization. A customer is less likely to bring your product or services with them to their new company if they were unsatisfied with your service in the past.
- Potential Loss of Second-Order Revenue
Finally, Jason Lemkin of SaaStr brings us our final point to consider when calculating the cost of churn. The most important concept Jason found in his company was a concept called “second order revenue”. A recent Kissmetrics article explains Jason’s viewpoint:
“Sales is great at booking new customers, but that is only the tip of the iceberg. There are two things that occur. The first is that successful customers on annual plans are more likely to renew for the 2nd, 3rd, and 4th year. The second thing is upgrades – after a few years the customer is likely to be paying more for your software than in their first year. Even more important is the true second-order revenue. This consists of two parts – customers of your product (the champions for your product) changing companies and bringing your product on board with the new company. The other is word of mouth revenue. This system relies on customer success.”
As Jason explains, another true indicator of customer success lies within second-order revenue. When a customer leaves your company due to churn and then becomes responsible for bringing on a new system or are part of the evaluation process in their new company, it’s unlikely your product will make the list. However, if they had a positive experience and saw solid results, then it’s probable your product will at least make the short list, if not become the vendor of choice. Losing a customer to churn can cause decade-long side effects—many of which, like second-order revenue or word of mouth revenue—may not even be realized due to a missed opportunity.
Customer churn can quickly have a negative impact on your business. After reviewing that costs of churn, you can also see how fixing churn can have a positive impact on your business. To recap, here are the factors that contribute to the true cost of churn that we have discussed in this blog and The True Cost of Customer Churn – Part 1.
The True Cost of Churn – 6 Factors
- You lose recurring revenue
- You lose expansion opportunity revenue
- You have to spend more marketing dollars (increase cost in customer acquisition costs)
- You will start seeing the negative network effect that will impact referrals
- You will lose brand leadership in your competitive market
- You lose second-order revenue
You can, however, proactively combat these churn challenges with simple habits that you can implement across your customer success team.
Frequently Asked Questions
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