Accounting as a Start-Up Part 3: Understanding, Managing and Minimizing Churn

In medicine or anatomy, exsanguination is a term used to define the loss of blood — enough to cause death. Also known as “bleeding out,” this happens when a significant artery is cut and the body no longer has enough blood to operate properly. While a morbid topic, it also has a profound meaning for your business. For the startup, tech company or subscription-based business, revenue is your blood and churn is the process of bleeding out.

What Is Churn?

Also referred to as attrition, churn is the loss of customers — the process of customer turnover or transition to a less profitable product. One of the most important metrics for any business, churn reflects your ability to keep customers around. 

Retaining a customer is much more affordable than acquiring one, meaning that the higher your churn, the smaller your margins — if you even acquire a replacement customer at all. Alternatively, a decrease in churn can mean a huge increase in profits. According to research from Bain and Company, a 5% increase in customer retention can increase profits by 25% to 95%.

Why Customers Leave

There are many reasons your customers leave, and each reason is personal. However, according to HubSpot, there are four main reasons churn happens:

• Price: Whether you’ve needed to increase the price, or the customer’s budget changed, price is one of the most common reasons a customer leaves.
• Product Fit: Especially early on in your sales, finding the right customer fit is a big deal. Highly satisfied customers will recommend your product, while neutral or dissatisfied customers won’t be in your corner.
• User Experience: If a product is unusable or difficult to use, customers will leave. 
• Customer Experience: Keeping your customer base happy and respecting the companies who pay you money is imperative, making your support team almost as necessary as your sales team.

Why Some Companies Find It Hard to Calculate Churn

While it may be easy to see which customers stay with you for more than a year, the calculation process becomes more complex in certain scenarios, according to Sage Intacct: 

“Another metric which can be hard to define is Customer Retention, or churn. If your company runs pilot or trial periods, and collects payment upfront, but the payment is for a short term period, do you include these customers in your churn rate, or not? Most companies do not. Customer retention rates aim to understand the retention of customers that have committed to using your service, and trial period customers by definition have not yet committed. That is not to say that it isn’t useful to track how many of these customers convert to being committed customers, but that is a different metric.”

How to Track and Improve Churn Rate

One of the biggest problems companies have in calculating, tracking and controlling churn is likely the same reason your quote-to-cash process is hard to track or speed up— disparate systems. Too often, companies will have an ERP and a CRM product that exist parallel to each other. When it comes to the quote-to-cash process, speed is the name of the game; when it comes to churn, it’s your ability to dig into the numbers and drivers.

The cure to this is integration. By centralizing your data and eliminating silos between finance, accounting and sales, you no longer have to rely on emails between departments, spreadsheets and the like to see the who, what, where, why and when. 

By connecting your ERP and CRM, you not only gain speed, accuracy and compliance but also are able to better understand patterns and even attribute the churn to specific changes and developments. Imagine knowing when a company might leave based on behaviors other customers had. You could take steps to reach out to customers who show signs they might leave, hopefully stopping the bleed before it happens.

The Path to Tech Company Growth With Sage Intacct and Wipfli

At Wipfli, we understand the challenges that firms like yours face in getting the right information, managing the complexities that come from the quote-to-cash and subscription management processes, and the importance of rapid, well-informed decision-making.

We work with tech companies across the nation to customize, implement and integrate Sage Intacct, helping our clients act faster and do more. We invite you to learn more about Sage Intacct’s role in reducing churn through integration here, watch the on-demand webinar on connecting finance and sales at technology companies and contact us for a free consultation.