Keep value above price to hold customers

1. The rule: value above price

Price is what a customer pays; value is what they get. If you can hold the value customers get above what they pay, they stay. That can be done in two ways: give more value, which keeps customers longer, or lower the price. The preference given is for the first. SOP 73 — Feature-downsell customers before they cancel uses the second, for a customer who has stopped using what they pay for.

Price, value and churn are the three variables in play.

2. Turn the question round

To work out how to keep customers longer, flip the question. Do not ask how to keep all of your customers. Ask what would make them leave, and then do the exact opposite. Put it at its extreme: what could you do to lose every single one of them?

To lose every customer	To keep every customer
Ignore them	Talk to them
Break your promises	Keep your promises
Miscommunicate	Communicate clearly
Treat them badly	Treat them like royalty
Set expectations they cannot meet	Set expectations they can meet
Keep progress and other news from them	Give them updates on where things stand
Keep them apart from other happy customers	Put them in touch with other happy customers
Make what you sell harder to use	Make it as easy as you can for them to get the most value possible

It looks obvious. The claim is that nobody does it, because it is work.

3. Read a price against churn, not against sales alone

The best price is the one that brings the most sales at the highest lifetime value. That does not necessarily mean the lowest churn. A price moves more than how many people buy; it moves churn as well.

The worked table starts from something sold at $10 and compares $10, $20 and $100 at 100 clicks each: conversion rate, number of sales, lifetime value, churn and total return. Its cells are the same as the table in section 3 of SOP 128 — Test price with a step size and a cadence, where each row is checked. The price in the example does not matter; the relationship between the numbers does.

How it is read:

• The best price in the table is $20.
• The next prices to test would probably sit somewhere from $20 to $100, around $39 to $59: if churn stays lowish, those may be the most profitable options.
• Price moves both conversion rate and churn rate. Both get worse as price rises, but not always in proportion.
• If you can double your price and close 20 percent fewer deals, with all else unchanged, do it. The table's $10 and $20 columns are that case: 5 sales become 4, a fifth fewer, and churn stays at 10 percent.
• The first and most important thing is to test, and to keep testing.

Across the data from many businesses, unsurprisingly, the higher the price, the higher the churn.

Many businesses misprice what they sell. The example given: trying to make something recurring out of something whose value comes once. Match your business model to the pricing model that makes the most sense. One way to charge for the two parts separately is in section 5 of SOP 76 — Design cancellation terms and the waived-fee offer.

In a recurring-revenue business, a big part of succeeding is giving value that keeps coming. How to keep it coming without burying customers in it is section 1 of SOP 131 — Run the keep-one and remove-one survey.

4. Why cutting churn is worth the work

Your customers are your best prospects. Customers are easier to sell than strangers. Picture a prospect who:

• already trusts you;
• has already had value from you;
• has already given you their card details;
• costs nothing to acquire;
• is your ideal customer.

That is not a prospect. It is a customer you already have. Existing customers are easier to sell than new ones and cost far less to sell, so put your effort where that points.

What a cut is worth. Cut churn from 10 percent to 3 percent and each customer's lifetime value rises 3.3 times: a customer who stayed 10 months now stays 33. Keeping them does add some costs, spent on retention, but those are usually small. The flag on a similar figure, 9 to 3 percent, is in section 4 of SOP 133 — Run the five retention habits and expect the first-month rise.

Set that against the effort of selling 3.3 times as many customers every month. First, that would cost far more; this is put as a promise. Second, even if you pulled it off, you would speed up how fast everyone in your market learns that you are bad.

Three more reasons are given.

1. The best return on effort. Winning a new customer is said to cost 5 to 25 times more than keeping one. So owners who put money into keeping customers make far better returns on what they have. Give yourself a budget: what you are willing to spend, on top, to keep a customer. Set it at a fifth of your customer acquisition cost and you would be surprised how far it goes.

2. Small changes make large differences in profit. A study found that raising retention by five percent raised profits by twenty-five to ninety-five percent. The example given turns this into customers who canceled after 1 month on average staying 1.05 months instead, which could raise profits by that same 25 to 95 percent.

   Flag: what five percent means. The study's figure is retention up five percent. The example turns it into an average stay going from 1 month to 1.05 months, a stay 5 percent longer. With the stay taken as one over churn, 1 month is churn of 100 percent a month and 1.05 months is about 95 percent, so retention goes from nothing to about 5 percent. How far a five percent rise in retention lengthens a stay depends on where retention starts. This page does not settle which reading is right.

3. It is the only road to compounding growth. If referrals run ahead of churn, you never stop growing. If 10 percent of your customers leave each month and referrals bring in another 10 percent, and you win customers no other way, you stay flat. Cut churn or raise referrals, and you grow. There is a bonus: the work that cuts churn makes customers happier, and happier customers send more referrals.

5. When churn is built into your market

How much churn you face depends on your industry. If you serve very small businesses, you will have what is called structural churn: your customers go out of business. That makes yours a high-churn business, and that is fine. You still want to cut it, and if you do, you can still build a big company; there are large businesses whose customers are, by share, mostly very small ones. It does not mean you cannot make more money from your bigger customers.

6. What keeping customers does, and what losing them does

Keep customers longer and their lifetime value rises. With higher lifetime value you can spend more than anyone else to win customers. What cuts churn also makes customers happier. Happier customers send more referrals, goodwill spreads, and you build a real brand.

It is said that going through the nine-step retention checklist (section 1 of SOP 129 — Derive the activation point) and applying it has always made more money, every time. Which steps did more than the others is not known; only that doing all of them worked. The recommendation is to go through the action steps and put them into your business.

When you work through the checklist and keep your customers:

• you grow every year whatever happens, even with sales flat;
• you make more profit from the same customers;
• your business compounds;
• you sleep well, knowing every month's bills are paid and a group of customers loves you;
• you get good word of mouth, which brings you more customers for free;
• you keep your best people, because they see you actually helping people.

When churn is high:

• you have to keep winning new customers every month just to stay the same size;
• you never build a business that compounds;
• the business is hard to sell, and so worth less;
• you sleep badly, because you are only as good as your last month;
• customer feedback is poor;
• word of mouth turns bad, which keeps customers away later on;
• staff are hard to keep motivated, because they watch customers fail and drop off;
• you lose credibility, because you always need something new to stay alive instead of riding a good reputation.

7. What this page does not decide for you

• What a five percent rise in retention means. Flagged in section 4. This page does not settle which reading is right.
• What the retention budget buys. A fifth of acquisition cost is the figure offered; what to spend it on is not established on this page.
• Whether your churn is structural. How to tell is not established on this page.
• Which checklist step to start with. Which steps work better than others is not known. Not established on this page.

8. The checklist

Step	What you do
The rule	Keep the value customers get above the price they pay (if you can); more value is preferred to a lower price
Flip the question	Ask what would make customers leave; do the exact opposite
Pick a price	The most sales at the highest lifetime value, not necessarily the lowest churn
Read churn	Beside conversion rate; price moves both
Test	Test, and keep testing; in the worked table the next tests probably sit between $20 and $100, around $39 to $59
Double the price	Do it if you can close only 20 percent fewer deals, all else unchanged
Pricing model	Match it to the business model; the mispricing named is a recurring price on one-time value
Retention budget	A fifth of customer acquisition cost, on top, to keep a customer
Referrals	Keep them ahead of churn
Structural churn	If you serve very small businesses, expect it, and still cut it
All the steps	Work through the nine-step checklist (SOP 129, section 1) and apply it

9. What this page does not cover

The price table and how to run a price test are SOP 128 — Test price with a step size and a cadence. How churn is counted is in SOP 55 — Compute lifetime gross profit and the ratio that gates spending, section 4. Delivering less but better is SOP 131. Finding what your best customers do differently is SOP 129. Onboarding is SOP 139 — Onboard customers to the activation point. Turning kept customers into referrals is SOP 284 — Earn more referrals by giving more value.