What impact is customer churn having on your MSP business?
As we move through the last quarter of 2018, MSP hearts and minds are probably focussed on giving ‘one last push’ to close new business before the end of the year. All good and necessary, but in striving to bring new business on board make sure you are not neglecting your existing customer base.
There’s little value in onboarding new business if your customer attrition rate means that the overall ongoing customer number/recurring revenue remains more or less the same.
That is why it is so important to track customer churn.
‘Churn’ is the rate at which businesses lose customer recurring revenue over a given time period. In MSP-land, this period is normally a month, given the typical MRR cycle. Churn includes customers who jump ship to a competitor as well as those who, for one reason or another, reduce the amount of services they take from you.
Isn’t some churn inevitable?
Yes – to an extent.
Customers may no longer require your services because their own business situation has changed. They may have merged or been acquired, with implications for the way their IT is managed. They may have decided to take IT back in-house. They may be downsizing, so fewer of your services are required. Or, having signed up, they may quickly realise that partnering is not for them: evidence points to a higher churn rate among new customers than those who have been with you for a while.
But a high rate of churn is not inevitable – and it can hurt your business.
The financial impact of churn on your MSP business
The findings of a recent IT Glue survey showed a definite link between churn and financial performance.
Results showed that over 80% of MSPs reporting churn under 5% in the previous year also experienced higher revenues, compared with only 40% of MSPs reporting churn over 10%.
Happily, nearly 70% of respondents claimed to have experienced customer churn of less than 5% in the previous year
There are obvious reasons why high churn rates are linked to poor financial performance.
- Negate new business growth
You need to measure the new business coming in at the top of the sales funnel against what is going out at the bottom. The average North American MSP adds 9.6 new customers per month – but this will only contribute to growth if existing accounts are retained. MSPs apparently lose on average 2.23 accounts per month.
- Impact on the bottom line
The actual figures vary, but I think we would all agree that it costs considerably more to acquire new accounts than to keep existing customers happy and receptive to upselling/cross-selling.
High churn rates reduce customer ‘lifetime value’ and drive higher cost of sales to replace lost customers. The result is less profit for your bottom line.
- Indicator of company health
Tracking customer churn gives a snapshot of the health of your business – and of what customers think of it. A sudden or sustained increase in the churn rate is an indicator that something is wrong and questions need to be asked: Why is it happening now? What have we changed? Is it restricted to a particular sector or size of customer?
It is also important because churn rate is a metric used by investors to assess company health. High churn can lead to questions about company viability.
Measuring the real impact of customer churn
In a blog earlier this year, SolarWinds MSP introduced a simple methodology that they use to measure the real impact of churn on the business.
Quick Ratio measures growth divided by churn, to produce an easy to understand ratio.
Growth = New MRR (MRR from new customers) + Expansion MRR (Additional MRR from existing customers)
Churn = Contraction MRR (Service reduction by existing customers) + Churned MRR (Full cancellations)
The article included the following worked example:
Current MRR $225,000
Minus $ 45,000 Churned MRR (loss of two customers)
Minus $ 20,000 Contraction MRR (total reduced billings)
Plus $ 15,000 New customer MRR
Plus $ 21,000 Total expansion MRR
New MRR $196,000
Converting this into a Quick Ratio:
Growth = $36,000 ($15,000 New customer MRR + $ 21,000 expansion MRR)
Churn $65,000 ($45,000 Churned MRR + $ 20,000 Contraction MRR)
Quick ratio = 0.55
The article pointed out that a Quick Ratio of 0.55 every month would lead to a contraction in your MSP business over time. Scoring a monthly Quick Ratio of one, would see your business staying the same size, while a Quick Ratio of two would indicate a healthy rate of business growth.
This is just a snapshot of your business, fed by a couple of key metrics – but it is useful to identify trends and to set high-level performance targets. And it can indicate when you need to dig deeper to find out why churn rates are changing so you can address the underlying causes.
The downside is that it is a backward-looking indicator: by the time you have the Quick Ratio number you have already lost the customers/revenues.
So, preventative measures and warning systems need to be in place.
The flip side of ‘churn’ is customer retention. A significant amount of churn could be prevented if an effective customer relationship management (CRM) strategy is in place.
My next blog picks up this theme and suggests 10 ways to improve customer retention and reduce churn.
Contact us or chat now to find out how we can help you ensure high levels of service for your customers by partnering for NOC and Service Desk.