How I Help $20M+ CEOs Lose Less Customers
What is “churn” and “LTV”?
Churn: The number of clients who were with you last period, who are no longer with you. For example, the number of clients from last month you lost this month, shown month over month for the whole year.
LTV: The lifetime value of a client. Value can mean different things, like revenue or gross profits. It’s often most useful to think of lifetime gross profits.
When do I stop increasing sales velocity, and start improving churn & LTV?
If your product is really good, you get lots of referrals. If not, you get lots of negative referrals—which is common.
Most products go through 3 phases: A, B, and C.
Phase A: You create a product that kind of delivers on what you promise in your marketing/sales. You grow from 0 clients and start generating a bit of revenue.
Phase C: You see something working, so you double down on marketing/sales and start to scale.
What about Phase B?
Key Insight
Phase B: The phase that 99% skip. It’s between A and C. Here, you DO NOT GROW ON PURPOSE, so that you can make your product generate a metric ton of referrals. ONLY AFTER THAT do you enter Phase C. If you skip Phase B you will end up with an increasing CAC (cost of acquiring a customer), because your product is not worthy of recommendation.
If you do Phase B well, and don’t skip it, you grow without doing any marketing/sales. And any marketing you do is extra growth, on top of the growth you get from an incredible amount of referrals.
“That doesn’t sound realistic at all. I’ve never experienced that.”
If you haven’t experienced this, then you have for sure experienced the alternative: which is struggling to sell more and more, and feeling like you’re running uphill. Even worse, profit margins just keep shrinking, and you have to find new people to be able to pay payroll.
The reason is simple, but not easy: You skipped Phase B.
How do we improve churn & LTV?
Here’s the high-level overview of how I do it:
I focus on putting out just 1 fire—the biggest one—and I ignore the 99 other “lost” opportunities and happily watch those fires burn.
Then, when I am absolutely sure I’ve saved the biggest pile—and only then—do I start saving the 2nd biggest pile of cash. And I ignore the 98 other piles—happily.
Note
This is the theory of constraints, which the founder of Intel was known for. Charlie Munger and Warren Buffett also used similar thinking. Ray Dalio recommends similar thinking as well. I’ve found it very useful to follow their footsteps and do the same.
Step-by-step: How I do it
I look at it like a math & probability problem, which it is. And I simply do the thing with the highest risk-adjusted increase in throughput (# of new clients)—given my available resources.
- Step 1: First I input all the numbers below.
- Step 2: Then I find the weakest link—the number that if increased, would produce the highest increase in # of new clients. Most often it’s the lowest number.
- Step 3: Finally I adjust for risk. For example, if I don’t see any way that I can move the smallest number, then I go on to the next smallest number, and so on.
Key Insight
Remember, if you cut churn in half you double the business.
The three phases of cutting churn
Activation
- Pick better and/or mandate actions: Do regression-based analysis to find commonalities between your clients with the least churn. Then filter for those clients if there are traits or channels or behavior-patterns you can’t control, or mandate actions they need to take with you if the commonalities are actions the best clients take, but the rest don’t.
- Do Phase B even better: Make your product even better. Set better (lower) expectations, get them better results, reduce the risk of getting the result, reduce the time to get the result, reduce the effort & sacrifice (including mental and emotional and physical cost) of getting the result.
During relationship
- Sell them more things (upsell, downsell, cross-sell, re-purchase the original thing)
- Make them refer
- Make them leave a review
- Assimilate a real relationship (attend events, handwritten cards, regular human follow-up)
Prevent exits
Do regression-based analysis to find early signs of churn. Set up actionable systems that warn you, so that you can take action.
The KPIs I look at
Your biggest opportunity to improve churn & LTV is increasing the #1 weakest KPI below, and ignoring all the other KPIs (but do consider risky interaction effects):
- % A-Players, B-Players, and C-Players on the sales team (I use Topgrading for definitions)
- % clients activated (in many industries, if people make 5 purchases, they are far more likely to keep buying—but don’t assume, use your data and do regression analyses)
- % of clients asked for feedback regularly (minimum if many customers: Ellis + NPS + Main factor why. If fewer, each leader talks with an end-customer per week)
- # of purchases per year per customer
- AOV (Average Order Value)
- % Upsold
- % Downsold
- % Churned clients per month
- $ LTGP/LTRev (Lifetime Gross Profit / Lifetime Revenue)
- % Referrals (traffic source for sales velocity)
Want help?
Connect with me on LinkedIn to discuss your churn challenges.
