The Payment Process: The Secret Cause of Customer Attrition for Your B2B Business
Joe Sweeney
Oct 1, 2024
Summary
You work hard to win new customers. So losing them is never a good feeling. But more than a feeling, a high customer attrition rate can be a sign of an unhealthy business. Why invest big budgets, as well as lots of time and effort, in winning new customers if they don’t stay with you?
Getting customer attrition under control is a major focus for B2B businesses today, given the economic context and the well known statistic that it’s five to ten times cheaper to keep an existing customer than it is to acquire a new one.
Keep reading to discover:
What is customer attrition?
Ever wondered why customers leave? It's a phenomenon known as customer attrition, churn, or turnover. Every business faces it, regardless of size or industry.
Customers might decide to part ways with you for any number of reasons. From budget, to a new strategic direction or because they’ve chosen a competing product, not all customer attrition is the same.
While losing customers is a natural part of running any business, measuring customer attrition is crucial to ensure you are doing everything possible to reduce the number of customers being lost. Customer Attrition Rate is the metric used to calculate customer attrition.
On the other hand, customer survivability is how long customers stay active before churning.
It’s important to remember that customer attrition isn't just about losing customers. It's also about understanding why they leave. The real goal is to analyze the reasons so you can implement strategies to improve customer retention and build a more sustainable business.
Closely linked to customer attrition is Customer Lifetime Value (CLTV). This metric estimates how much revenue a customer represents to a business over the life of that relationship. Also called lifetime value (LV or LTV), this metric allows a company to measure and analyse the cost efficiency of obtaining new customers and supporting them over time. Businesses with a high Customer Attrition Rate are likely to see low Customer Lifetime Value, which can be one sign of an unhealthy business.
What are the different types of customer attrition?
Not all customer attrition is created equal! In fact, it can be categorized into several distinct types, each with its own causes and solutions.
Voluntary attrition
This occurs when customers consciously decide to end their relationship with a company. Reasons for voluntary customer attrition might include:
Dissatisfaction: Customers may be unhappy with the product, service, or customer experience.
Competitive offers: More attractive options from competitors might lure customers away.
Changing needs: Customers' circumstances may evolve, making the product or service no longer relevant.
Involuntary attrition
Involuntary customer attrition happens when customers leave due to factors beyond their control. Common causes include:
Payment failures: Expired cards, insufficient funds, or technical issues can lead to involuntary cancellations.
Accidental unsubscribes: Customers may unintentionally cancel their subscriptions.
Service disruptions: Interruptions in service, such as outages or technical difficulties, can frustrate customers and lead to churn.
Passive attrition
Passive customer attrition occurs when customers lapse on their subscriptions without actively canceling. This might happen due to:
Subscription expiration: Customers may forget to renew their subscriptions.
Lack of engagement: Customers may become disengaged with the product or service.
Early attrition
Early customer attrition occurs when new customers leave shortly after signing up. This can often be attributed to:
Mismatched expectations: Customers may have unrealistic expectations about the product or service.
Poor onboarding: A confusing or inadequate onboarding process can lead to early churn.
How do you calculate customer attrition rate?
Simple: divide the number of customers lost during a period by the initial customer count. For instance, if a company started with 100 customers and ended with 80, its attrition rate is 20%.
Why is customer attrition rate an important KPI in SaaS?
Customer attrition, often referred to as churn, is the quiet killer of SaaS businesses. It's not just about losing customers; it's about the lost revenue and potential future revenue that goes with them.
In SaaS, Recurring Revenue (both annual and monthly) is a key metric followed closely internally and by prospective investors. In the early days of B2B software, the product was often a one-time purchase, similar to any physical product. This was largely because cloud-based solutions weren't yet widespread. Today, the landscape has shifted dramatically. With the internet, software is readily available to anyone, transforming the buying process.
SaaS companies have embraced the subscription model to adapt to evolving customer demands. In truth, they’ve also seen it as an opportunity to demonstrate future growth potential to investors and secure revenues over a longer time period.
Having a recurring revenue stream offers invaluable insights into financial performance for SaaS businesses. By tracking subscription income, businesses can:
Predict future growth: Forecast short-term and long-term revenue trends.
Monitor financial health: Track cash flow and growth rate.
Optimize operations: Increase MRR expansion by refining internal processes.
Churn and customer attrition put recurring revenue at risk. This is why tracking customer attrition rate is crucial.
However, simply reacting to past churn data isn't enough.
Proactive attrition tracking can uncover strategic insights that lead to:
Improved renewal rates: By understanding why customers churn, you can tailor your retention strategies to address their specific needs.
Greater and more efficient growth: Lower churn means a healthier customer base, allowing for more efficient expansion and growth.
Negative churn: The holy grail of SaaS, negative churn means you're generating more revenue from existing customers than you're losing from churn.
Here are a few areas where customer attrition rate is particularly important:
Revenue forecasting: Attrition is a significant factor in revenue forecasting. Accurate churn projections ensure your growth targets are realistic and achievable.
Pricing strategy review: Analyzing attrition by customer segment can reveal pricing misalignments. If certain customer segments churn at a higher rate, it might indicate that their pricing is too high or that the value they perceive isn't commensurate with the cost.
Customer success collaboration: Customer success teams are responsible for retention, but they can benefit from a broader perspective on attrition. By analyzing churn data alongside other metrics, you can identify issues like poor onboarding, low satisfaction, or product-market fit.
Remember: Customer attrition rate is just one piece of the puzzle. To truly understand its impact, analyze it alongside revenue growth, net revenue retention, and other operational metrics.
What causes customer attrition? 7 Common Reasons
Understanding why customers leave is crucial for developing effective retention strategies. While there are numerous reasons for customer churn, here are eight common culprits:
Poor customer experience: A lackluster customer experience is a primary driver of churn. Customers expect value, convenience, and satisfaction. A frustrating user interface, unresponsive support, or a product that fails to deliver on promises can quickly lead to dissatisfaction and cancellation.
A hidden culprit: Payment is often overlooked as a part of the customer experience. A complex or unreliable payment process can frustrate customers and contribute to churn. Upflow is dedicated to simplifying payments, making it easier for businesses to do business and for customers to pay - with the ultimate goal of helping our customers reduce their attrition rates and build healthier businesses. We call it Financial Relationship Management (more on that in the next section!).
Competition: In competitive markets, customers have a lot of choices. If a competitor offers a better product, lower prices, or superior customer service, customers may be tempted to switch.
Price: Customers are increasingly price-conscious. If they perceive a product or service as too expensive, or if a price increase isn't justified by added value, they may churn.
Inadequate customer support: Poor customer support can frustrate customers and damage brand reputation. Slow response times, unhelpful agents, or limited support channels can lead to dissatisfaction and churn.
Product or service quality issues: Technical problems, bugs, or frequent downtime can erode customer trust and loyalty. Consistent product quality and timely issue resolution are essential for retention.
Poor onboarding: A confusing or overwhelming onboarding process can leave customers feeling lost and frustrated. This can be a major cause for early attrition. A smooth and intuitive onboarding experience sets a positive tone for the customer relationship and paves the way for good adoption of your product which can be key to retetntion.
Evolving customer needs: Customers' needs and preferences can change over time. If a business fails to adapt to these changes, customers may seek products or services that better align with their evolving needs.
A story: Payment and the customer experience
Let’s dive into a fictitious example of how a poor payment experience can lead to customer attrition:
Alex was thrilled when he discovered NovaSync, a powerful project management tool that streamlined his team's workflow. The software was intuitive, easy to use, and delivered real value. However, his excitement quickly faded when it came time to pay.
NovaSync's payment process was a labyrinth of confusion. The website offered limited payment options, and the recurring billing setup was anything but straightforward. After several failed attempts, Alex finally managed to set up automatic payments, but the process was so frustrating that he began to question his decision to use NovaSync.
Weeks later, Alex received a surprise email: his subscription had been paused due to a payment failure. He checked his account and discovered that the issue wasn't on his end; it was a glitch in NovaSync's payment system. Frustrated, he contacted customer support, but the agent seemed unable to resolve the problem quickly.
As the days turned into weeks, Alex's frustration grew. He felt neglected and unsupported. The once-positive experience with NovaSync had turned into a nightmare. Eventually, Alex decided enough was enough. He canceled his subscription, not because of the product itself, but because of the company's failure to manage the financial aspect of their relationship.
NovaSync's story is a cautionary tale. By neglecting the importance of a smooth payment experience, they lost a valuable customer. Had they implemented a more customer-centric approach, such as offering flexible payment options, proactive communication, and efficient issue resolution, they might have been able to retain Alex's business.
Financial Relationship Management (FRM): A new way to reduce customer attrition?
Financial Relationship Management (FRM) is a strategic approach to managing the financial aspects of customer relationships. By prioritizing a smooth and positive payment experience, FRM can significantly reduce customer attrition.
It’s about turning traditional Accounts Receivable and cash collection on their heads and embracing a new approach to treat customers as individuals and tailor the financial experience to their needs.
6 ways FRM can reduce customer attrition
Frictionless payment experience: Ever found a useful business tool or service, but struggled to actually pay for it? PDF invoices sent via email with payment instructions that are almost impossible to find? Ever wished B2B transactions could be as simple as B2C ones? FRM solutions simplify payments by offering multiple payment options (think credit card, ACH debit and all the other modern payment methods) and providing the tools you need to clearly communicate with your customers. All this will help you minimize frustration and reduce the risk of involuntary (and voluntary) churn by simply making it easy to do business with you. After all, the large majority of your customers want to pay you (if you have a good product) - so make it easy for them!
Improved customer experience: Financial interactions are often touchpoints where customer frustration can arise. FRM solutions help businesses deliver a positive customer experience by integrating into the wider business’s customer experience strategy, reducing friction points and making cash collection a ‘business task’ and not just a finance one.
Personalization and proactive management: FRM enables businesses to personalize financial interactions, tailoring payment plans and offers to individual customers. Proactive outreach and issue resolution can prevent minor problems from escalating into major ones.
Better cash flow: Efficient payment management through a leading FRM solution like Upflow improves cash flow, allowing businesses to reinvest in customer service, product development, and marketing. This, in turn, helps maintain or improve the quality of service, reducing churn.
Reduced internal errors and improved efficiency: FRM is about streamlining financial processes, reducing the likelihood of errors and inefficiencies that can frustrate customers. This ensures a smooth and error-free financial experience, fostering customer loyalty.
Stronger relationships through trust: Trust is fundamental to customer retention. FRM helps build trust by ensuring transparency, consistency, and timely resolution of financial issues. This strengthens relationships and reduces the likelihood of customers leaving.
By implementing FRM strategies, businesses can create a more positive and customer-centric financial experience, leading to increased customer satisfaction, loyalty, and ultimately, reduced churn.
Reducing customer attrition with Upflow
Traditional Accounts Receivable is broken. Invoices lost in emails, unclear payment processes, and harsh collection tactics can damage customer relationships and lead to churn. Upflow offers a revolutionary solution: Financial Relationship Management (FRM).
Upflow is not just a tool; it’s a solution that empowers a strategic approach to Financial Relationship Management (FRM). We offer a unique combination of features and benefits that set us apart:
Proven results: We've consistently helped businesses improve their cash flow, reduce churn, and enhance customer satisfaction. Check out our G2 profile for the proof from hundreds of happy customers - over 160 reviews and a 4.7/5 rating!
Collections focus: Unlike many other accounts receiveble automations tools, we prioritize effective collections strategies. Our platform is designed to optimize communication, streamline payments, and reduce the time it takes to collect outstanding invoices.
Personalized approach to payment: We believe that every business and customer is unique. Our platform enables personalized outreach, tailored payment plans, and customized communications to build stronger relationships and improve customer satisfaction.
Data-driven insights: Upflow provides valuable data and analytics that help you understand your customers' payment behavior, identify areas for improvement, and make data-driven decisions.
Seamless integrations: Upflow integrates seamlessly with your existing systems, streamlining your financial processes and reducing manual effort.
Continuous innovation: We are committed to staying ahead of the curve by continuously investing in research and development. This ensures that our platform remains at the forefront of FRM technology.
By choosing Upflow, you're not just selecting a tool; you're investing in a strategic approach to financial relationship management that can deliver significant benefits to your business.
Want to see Upflow in action? Sign up for our free Discover platform today - connect your billing tool and get a quick and clear picture of where you stand today on key accounts receivable metrics.
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