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What is Net Negative Churn (And Why Do You Want It)

Posted by Julie Dietz on Tue, May 17, 2016 @ 08:30 AM

What is net negative churn and how can you achieve it?

It's hard to pinpoint a single reason that your customers either stay with you or leave. However, if there’s one thing we know for sure, it’s this: change leads to churn. Customers will change their minds. Your services will evolve, and no matter what you do, your products or services aren’t always going to be the right fit for every person every time.

Even the greatest retention marketers out there are bound to lose a customer every now and then. In fact, customer churn is really just part of doing business.

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The fact remains that most of us view churn negatively though, so at first glance the term “net negative churn” doesn’t seem like something you’d want for your business. However, once you understand this low-profile metric, it becomes clear that it’s not only something you want—it’s also an effective growth strategy.

Defining Net Negative Churn

A widely quoted definition from Lincoln Murphy seems to say it best. You have achieved net negative churn:

“When, for a given time period, expansion revenue more than offsets any revenue you lose from customer churn, downgrades, lower usage, etc.”

In other words, even if you’re losing customers, you’re still making more money each month due to additional spending from your existing customers.

For instance, even if you lose 50 customers that make up 5% of your revenue per year, you’ll still achieve net negative churn if your current customers purchase additional products and services valued at 10% of your annual revenue. Despite the fact that you’re losing customers, your revenue grew 5%.

4 Strategies to Help You Achieve Negative Churn

Everyone company loses customers. Sometimes, the number of customers you lose equals or outweighs the number that you bring in. How do you lose customers and still grow?

The short answer is that you need to increase revenue per customer. There are a few growth strategies you can take advantage of to increase your customer value and spur net negative churn.

Strategy #1) Cross-selling

Cross-selling is when you encourage customers to purchase additional products or services that enhance something they’ve already purchased.

Think of buying a pair of earrings that matches a necklace you already own. You may not have necessarily needed the earrings, but you couldn’t say no to them once you saw how much more attractive the necklace was with the matching set.

Successful cross-selling provides additional value for clients, and the best cross-sell offers are not only related to the initial solution, but also sold at a lower price point.

Strategy #2) Upselling and Upgrades

Upselling and upgrade strategies are based around sales teams offering customers a more expensive or upgraded version of a product they already own. The offer should provide additional value, such as extra features or updates.

For instance, when Hulu started offering a more expensive, commercial-free version of their streaming service for a 50% higher price, they were offering customers an upgrade. The additional value provided was time and ease of use, since customers no longer needed to sit through commercials.

You can upsell and upgrade your customers in similar ways by enticing them with an improved version of a product or service they have already purchased.

Strategy #3) Resource Expansion

Similar to upselling is resource expansion. However, rather than purchasing a higher-end version of a product, resource expansion occurs when customers simply need to use an existing product more, like cell phone minutes, battery life, or miles per gallon. A service like DropBox—where users may eventually need to expand their service to include more storage space—is a good example of this path to negative churn.

For resource expansion, focus creating different package levels, or tiers, and let customers expand their capabilities whenever they need to.

Strategy #4) Seat Expansion

Seat expansion promotes additional, linear purchases within the scope of a product that your customer already owns.

This is a common model in the software industry. If you charge a fee per product administrator or software user, then seat expansion encourages customers to “add more seats to the table,” by purchasing additional licenses for the additional people who need access to the system. This increases the number of users who are already under your company umbrella.

A common strategy is to add features that help people outside of your traditional user base. For instance, if you sell financial software for businesses, you could add features that help HR manage payroll and employee information.

When encouraging seat expansion, be sure to clearly explain the benefits of additional users. How will adding seats to the table benefit your customer?

Using Retention Marketing to Capitalize on Net Negative Churn 

In order to send more customers down these sales paths and achieve net negative churn, you can’t focus only on direct sales techniques. Executing an effective negative churn strategy requires help from your retention marketing team.

A significant portion of successful retention marketing is understanding what your customers need, and when they need it. If you encourage an additional purchase too soon, you risk alienating customers and turning them off of your marketing messages for a long time. If you miss an opportunity to secure a much-needed repeat sales when your customer is in the decision process, you risk losing your customer to the competition.

The key to avoiding these blunders is also one of the main covenants of effective retention marketing: collect and analyze customer data. By learning as much as you can about your existing customers—whether through their purchasing history, their email open-rates, or their behavior in your private online customer community—you can start to understand your customers’ challenges.

When you can solve a problem or help your customers overcome a challenge by offering an additional product or service, then you’ve identified a prime sales opportunity.

Net Negative Churn Takeaway

While it’s certainly best to keep as many customers as possible, your company is always going to face some degree of churn. Smart businesses reduce the impact churn has on their bottom line and actually increase revenue by implementing a negative churn strategy. When your existing customers increase their spending, it can counteract the effect of losing a percentage of your customers.

As with all strategies to increase your revenue, negative churn is best achieved when you have a concrete and comprehensive understanding of who your customers are and what they desire. It’s only with a system in place to acquire and analyze this knowledge that you can confidently lead them toward sales opportunities that add value to both them and your company to facilitate net negative churn.

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Tags: Customer Retention, Generating Revenue, Sales

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