When B2B vendors see an uptick in churn, stakeholders generate multiple, sometimes conflicting, hypotheses about the causes: It’s because of a recent price increase. New competitors entered the market. Competitors offer a service or functionality that we don’t. Customers don’t recognize the value the company provides. While it is important to take fast action to stop the bleeding, you don’t want to invest time and resources in a perceived problem only to see little change in customer churn.
Product failures and price increases are the most common drivers of churn. Absent obvious causes, companies struggle to respond to increased customer attrition. Isurus’ research in B2B markets shows that outside of product failures and price increases, the market dynamics behind customer churn generally fall into six broad categories.
- Competing Priorities
- Convenience Seeking
- Latent Value
- Management Change
- Mainstream Convergence
This list provides a framework for B2B marketers and product managers to systematically analyze the dynamics behind customer churn. Armed with a clear sense of churn causes, the company can invest time and resources efficiently to address the problem.
1. Competing Priorities
It’s not you, it’s me. No one wants to hear this break-up line, but it happens even in B2B markets. A customer is satisfied yet forced to end a relationship because of across-the-board budget cuts. Their budget pressure may stem from functional level needs or broad corporate initiatives. It may simply be that costs increased dramatically, but budgets stayed flat.
Budgets are spread thin by an increasing number of activities, service providers, and line items. For example, the number of traditional and digital marketing channels has exploded. The marketing team may have to rob Peter to pay Paul to cover all relevant channels. In some industries regulations lead to higher compliance costs and cause cost-cutting in other areas.
Vendors that serve mission-critical needs are less impacted in this scenario. The vendors that offer the “nice to haves” often absorb budget cuts. For example, as real estate and construction costs increase, commercial contractors may look for alternative business insurance carriers, even though they are happy with their existing carriers and coverage. Hospitals’ costs for labor, insurance, technology, and infrastructure typically outpaces revenues: The budget squeeze flows down to medical supply wholesalers who feel the pressure from the purchasing department.
In the above examples, the customer didn’t value their marketing firm, insurance carrier, or wholesaler any less. It’s the relative value that changed: They faced budget pressures, and other areas of the business had priority from a funding perspective. When forced to switch from a vendor they are happy with, most customers recognize they will have to live with a solution that is good enough.
2. Convenience Seeking
Customers will leave a vendor they are happy with to gain efficiencies or make their lives easier. The clearest example of this is when customers streamline their vendor portfolio. They move to suppliers that provide multiple products, better geographic coverage, or work with a preferred channel partner.
Sometimes this is a conscious effort. Other times it just happens. As Microsoft adds features to Office 365, the software firms that provide project management, collaboration, and other supplemental functionality feel the crunch. The individual tools in Office 365 may not be as robust as stand-alone solutions, but they come bundled with O365 which makes it easy to use them. Here again, most customers recognize that they give up something by switching vendors but believe it is worth the gains in convenience or streamlined operations.
3. Latent Value
Customers lose sight of the full value a vendor or product can provide. Organizations often pigeon-hole vendors into the need for which they use it most often. As their needs evolve, customers don’t always consider if an existing vendor can address the need. Instead, they look for a new solution. Another scenario is that a new solution enters the organization in response to an external event: A stakeholder saw a product at a trade show or heard a sales pitch. This external event can ultimately lead to budgets being split between solutions or in some cases a migration to a new vendor.
In another example of lost value, after an accounting firm cleans up the books and tax accounts, the client reverts to managing its accounting with internal resources. Or, after a rebranding exercise, a customer cut ties with their advertising agency believing they have the road map in place and just need to follow the plan. In both cases the problem isn’t that the customer doesn’t value what the vendor provides, it’s that they aren’t aware of the additional value the firms can provide moving forward.
4. Management Change
A change in management often results in a change of vendors. A new CXO may place different value on the products vendors provide. For example, the previous leadership valued a component manufacturer for thought leadership and ideas it brought to the customer. The new regime believes innovation should come from within and feels low-cost, commodity suppliers are good enough. Even if they value the product, new leadership can still prompt a change in vendors. A new VP of Sales may bring in the CRM/SFA they are most comfortable with, or the VP of Strategy may bring in the consultants they worked with at their previous firm.
5. Mainstream Convergence
Higher churn rates in fragmented technology markets can indicate mainstream convergence on a platform or approach. For example, online backup drove churn rates among tape-backup solution providers before it became a significant competitive threat. Once online backup gained acceptance, there was no going back, and churn among tape-backup solutions increased. In other instances, as technologies and applications become mainstream, the larger technology vendors (Microsoft, Oracle, SAP, Salesforce, Etc.) begin to offer comparable solutions. They are often not as robust or user friendly as the vendor solutions that created the marketplace. But they can be good enough and convenient for customers to use.
Fast growing customers bring an additional set of churn dynamics. As a customer grows, the vendors they started with may not be robust enough to meet their expanding needs. Growth also exacerbates the churn dynamics previously outlined: They need suppliers that provide more products and wider geographic coverage. New senior managers come on board and start to consolidate vendors.
Churn in your market may be driven by a combination of these factors or something different altogether. The first step is to objectively determine the specific reasons churn is rising. Gather input from internal stakeholders and directly from lost/lapsed customers.
Some churn drivers are unique to specific accounts or small segments of accounts. Other drivers occur systematically and typically have deeper implications for your product or market.
If customers leave to divert budget to competing priorities, adding new features to your product is unlikely to reduce churn. A Good-Better-Best product bundle may be the best response. If customers need to streamline their vendor portfolio, demonstrate why it’s worth the extra effort to use your solution. In emerging technology markets churn can indicate the direction the market is moving away from your approach and have major implications for future strategy.
When faced with increased churn, use a systematic framework to take the wider view of possible market dynamics to ensure you focus on the right problem.