The avoidable bottom line impact of customer churn
When the pressure to hit targets and meet forecasts rises, focus will always drift towards achieving specific metrics, signing clients or hitting minimum revenue figures. If these aren’t met, then the subsequent autopsy will normally start at the end and move backwards:
“Why did we only sign 4 of the 8 clients forecasted for this month?”
“We signed 4 because we only had 28 qualified leads. We know our conversion rate is around 15% - I need more leads!”
The end result therefore will be, more budget spent and more human capital and resources used to generate the additional leads. It may, in the short-term, generate enough revenue but critically it is unscalable; there’s only a finite number of leads. A better approach would be to start from the beginning and look at the gaps:
“Why did 24 of our qualified leads not convert?”
This can provide more insights and shine a light on the effectiveness of the different stages of your sales process such as when clients are dropping out: while in contract negotiations, following a demo or during onboarding.
During the onboarding stage, the majority of the sales engagement has been completed. Good fit has been established, pricing agreed and now information needs to be collected so that compliance can complete the necessary regulatory checks. It should be a straightforward and quick process that converts these leads into live active revenue generating clients.
Those who don’t complete this process are deemed to have ‘churned’. Churn is not limited to the onboarding stage, but it is so critical because, at this stage, it is not just the lost revenue but the wasted time, resources and energy.
What is customer churn?
As mentioned above, churn is the act of a user abandoning a process. It can occur during the sales cycle or an active client can churn if the value of a product to them naturally diminishes over time.
Churn can be defined as the number or percentage of users who abandon a process (or stage within a process).
What we’re focusing on is specifically onboarding churn:
Onboarding churn can be defined as any customer who starts the onboarding process (whether it be a simple application form or a more thorough web-based process) but doesn't finish it.
Onboarding churn reduces revenue, wastes multiple teams’ time and can lead to negative word of mouth if churned leads are unhappy with the onboarding experience. Additionally, onboarding churn (or lack of) can be a good indicator to show competitiveness, for example, in marketplaces, users are keen to be verified quickly so that they can start trading. High churn would indicate not only poor onboarding but that there’s potentially better opportunities elsewhere.
What are the causes?
Onboarding churn is normally caused by a combination of two factors: the process and the person completing the process. A process can request too much information, have no automation and have multiple parts to it which could all lead to a user churning. Equally the process may be smooth but users find it difficult to complete, irrelevant to their application and so drag their heels. When someone churns it’s likely to be a balance between the two and here are some examples:
- Length & Time - The longer the onboarding flow the more time the user spends on it. As the onboarding process gets longer the frustration of the user may increase.
- Relevancy - If the same application form is used for leads in different countries, product types or risk categories then there’s going to be questions that don’t relate to the user completing the flow. Consistently answering ‘N/A’ is a tedious exercise and could result in a user churning.
- Engagement - Automation and removing unnecessary steps can keep a user focused. For example if you know certain data points are readily available - don’t request them again!
- Disjointed Process - Multiple steps across different formats/mediums can generate high levels of churn. If a manual application form needs to be completed, followed by an ID verification on a third party website and then also for documents to be sent over by email it creates additional gaps for a user to churn.
Some degree of churn will always be expected due to natural human behaviour. However, it can be minimised and processes can be optimised to monitor and decrease churn.
How is it measured and how can its cost be calculated?
When starting from nothing, finding a way to measure customer churn can be difficult. Initially, the onboarding process needs to be defined as well as the stages and where gaps exist. This helps distinguish from churn that takes place earlier in the sales process or after onboarding has finished.
Once this exercise has been completed then a simple measure of onboarding customer churn can be calculated. At the highest level the number of users who started compared to the number of users who finished. However, levels of details can be added by investigating where the drop off is happening, how long it takes before a user churns or any other patterns.
When the amount of churn has been defined, a simple calculation to estimate cost of churn would look at the lost revenue of a lead not converting:
In one year, 20 businesses started onboarding, but 30% churned. Their average annual contract value is £22,500. Annual Cost of Churn = £135,000
However, this doesn’t take into account other factors such as the marketing spend attracting the prospect, the sales effort to convert them or the additional lost revenue for future renewals. If these factors were considered in the previous example then cost of churn would increase:
£500 marketing spend per lead & £2,500 cost of sales effort. Additionally, 50% of signed customers sign again and 1 in 6 customers provide a referral that signs for one year. Annual Cost of Churn = £243,000
More and more factors could be included which would make the true cost of customer churn incredibly difficult to calculate. However the importance of this exercise is to illustrate that (regardless of how its calculated) churn has a direct impact on your bottom line.
How can churn be reduced?
Of course, churn can be reduced in many ways. Any improvement to the onboarding process that streamlines the user’s journey should have a positive impact on churn. For a more thorough explanation of how to improve your onboarding processes read this article but for specifically reducing churn here are three suggestions:
- Ensure the flow is relevant to the user - only ask relevant questions, request documents that exist from their country and for details that are required for the product/service they are signing up for. This can keep the user engaged and not frustrate them. However, having to set-up and maintain different configurations (or variations) of the onboarding process can be challenging without an easily replicable system.
- Request information based on data availability - If you know you have good coverage in the Netherlands for group structure don’t ask for an onboarding client from that region to list all their related entities. Utilise the business owner’s (i.e. the users) first-hand knowledge to obtain information that couldn’t be obtained from data sources, while keeping their onboarding journey streamlined. Although, this solution requires complete understanding of the data availability and having the agreements with the necessary sources in place.
- Have one complete process - Streamlining the whole onboarding process to one journey is essential to reducing churn. By having gaps in the process it provides opportunities for a user to churn. Identifying where these gaps exist such as how document upload happens, if an ID verification is required or if more information is ever requested by the compliance team can then lead to changing the process to reduce the friction the user faces.
At Detected, we are reinventing the traditional approach to onboarding customers by reducing costs, while improving the ease of regulatory compliance. Onboarding customers in a compliant way is a time-sensitive and commercial imperative across all businesses.
Detected is uniquely positioned to allow customers to design their ideal business onboarding sequence using the modular Detected Onboarding Flow Builder. Then Detected’s Intelligence Engine connects to a carefully curated ecosystem of selected data, risk and compliance sources, ensuring that the most appropriate checks are completed fast. Finally, the Detected Case Management System provides a single source of truth and control over all customer data.
Mondu, the fast-growing B2B payments company, has signed with Detected to automate its merchant onboarding process. As Mondu continues to expand across Europe, having strong foundations in place for its merchant onboarding will aid its growth while also providing a better experience for Mondu’s business customers.