All Churn is Not Created Equal

Our Market Dominance Guys, Chris and Corey, are back this week with an episode about churn. No, they’re not talking about butter making here. They’re addressing business churn, a measurement of cancellations or non-renewals of your company’s product or service. Are you thinking, “Churn? What can I do about it?” If you’re like many people, you may look at your company’s churn rate, give a philosophical shrug, and go back to hunting for more prospects to replace those MIA customers. But is it really easier to find new customers than it is to figure out what went wrong? As the folk rock band, The Byrds, might’ve sung in the 60s, to every cancellation, churn, churn, churn. There is a reason, churn, churn, churn. Okay. Forgive me. Sorry.

Corey points out that some churn is inevitable, but not all churn. Examination of cause and effect is needed. In a spirit of solidarity, Chris comes clean about what unexamined churn costs ConnectAndSell, the company he works for. He explains that he had to put arrogance aside, and face the fact that their customers weren’t getting the full benefit from ConnectAndSell’s sale acceleration platform, simply because reps didn’t know how to successfully conduct a cold call. And thus a training program was born. Yes, it shined a bright light on the problem, time, on the Market Dominance Guys. In today’s episode, all churn is not created equal.

Corey Frank (01:58):

So here we have my friend, Chris, and we have nobody on Johnny Carson’s couch today, buddy. It is just you, the Carnac, and then me. I don’t even think [inaudible 00:02:08] Ed McMahon, I’m probably even like Doc Severinsen. I don’t even know what I am to your Johnny Carson, so. The production assistant to feed you the little three by five cards that you do your Carnac the Magnificent, so.

Corey Frank (02:19):

So here we are today, and we were talking before we jumped on, we got yet another story of a lesson learned from your life about one of your first jobs. How you hung out at the right place at the right time, and almost owned a restaurant. And that led us talking about, sometimes when we are thinking about our profession, how many times are we really tourists in our own profession? Where I think this is what I’m supposed to do, be promoted to a sales manager, or assume this more… This bigger territory, the VP or the CEO sits down and seductively presents it to us. Right, Chris? And I guess that’s what I’m supposed to do, and then I very quickly realize that I don’t know if I like this. And so, you shared kind of a couple of stories about that, but what do you think about that epidemic in our profession? That just because you can, should you?

Chris Beall (03:19):

Yeah. I think the answer is generally… Well, I don’t know if it’s generally anything, actually, now that I think about it. I mean, my whole career is built to these things, and there’s two flavors of it. One is like the one story I told you, of coming up out of the desert on a warm day. And I was out rock climbing by myself, bouldering, not dressed particularly for company. A pair of cutoffs, a pair of climbing shoes, and some geeky glasses that I wore. And long hair, and a headband pulled down behind my back, and that was it. And-

Corey Frank (03:49):

So, you were the Matthew McConaughey before there was Matthew McConaughey? Sounds [inaudible 00:03:53]. The outfit you’re describing, that sounds very much like something he would… And bongos in your backpack or something, probably.

Chris Beall (03:59):

I didn’t have even a backpack, and I still have this bad habit, I didn’t even take water with me. So I used to go climbing out in the desert for three, four hours at a time with no water. I heard a sound and I didn’t know what it was. I walked over a ridge to check it out, and there’s a guy in a suit. Nobody wears a suit out in the desert. I mean, it was a hot day, not hot for the desert, it was probably 97 degrees or something, but cool enough to boulder. Bouldering being climbing stuff that you think you can jump off of. Right? And every once in a while you find out you shouldn’t have, but I was pretty practiced at taking some pretty long jumps. I’d practiced up to 22 feet, and then being able to land reliably on something.

Chris Beall (04:35):

So I felt… Feeling pretty, kind of worn out. I was bleeding here and there, because the rock there was pretty sharp. I walk up to this guy, who’s standing there looking at a building, and I think it was the first time I ever really wanted a job. I had a job already, but I never had to get that job. But I wanted a job at that point, because I wanted to buy some climbing gear, and I was kind of starting to formulate this idea of taking a year and climbing all over the West. And so, that was going to take some capital. And in my world there was only one way to get money, and that was to work. I suppose there are other ways in other worlds, but that’s kind of how we did it. So I walked up next to this gentlemen and stood there, quietly. And we watched what was down there, which is this nice, new building.

Chris Beall (05:21):

And it looked like a restaurant, and as I mentioned to you, my family really didn’t go out to restaurants. We went out to Bill Johnson’s Big Apple out there in Phoenix, which by the way, is the last place that I took my dad the night before he died. And so that was kind of coming full circle. And I suspected this was a restaurant, in Carefree, Arizona. Right? What else can it be? And the gentlemen, his name was Joe, he’s just standing there. And finally, I asked the right question. I asked, “Is this yours?” And he beamed with pride. And he said, “Yes.” And I said, “What’s it called?” And he said, “The Elbow Bent.” And I thought for a moment, and I said, “Need any help?”

Chris Beall (05:57):

That was my value prop, for I… “Need any help?” And that was the entire interview. And he said, “Yeah. Truck’s going to be showing up in about 20 minutes, and would you like to help me unload it?” And we just had a great time that afternoon, setting up the kitchen, and setting up the freezer, and learning where everything went in the bar. And he offered me a job in the front of the house, as they call it. I could have been a bus boy. Now this turned out to be a very high-end restaurant, and a busboy would’ve made a bunch of money, but I told him… I asked him what I had to do. And he said, “You have to cut your hair.” I said, “No. I’m not going to cut my hair.”

Chris Beall (06:30):

So that was a little crossroads, that little piece of arrogance on my part ended up back in the kitchen. But the kitchen fascinated me, because the kitchen was where the mysteries were. The kitchen was technically complex. It had to do a job that, done imperfectly, resulted in really nothing. In a place like that, I could tell, you couldn’t make a 90% good meal. You had to make a good meal, and you had to get kind of everything right. So I spent a long time back there, for me as a kid, 10, 11 months, working every night in that restaurant, six days a week and going to school, going to high school. And at the end of my tenure there, he took me aside, took me to the bar, poured me a single malt whiskey, very much like this. In fact, it was the Macallan 12, it’s exactly what’s in this glass. I didn’t really realize he’s the guy I learned it from. And told me a story about his restaurant career, and what his aspirations were.

Chris Beall (07:25):

And then hit me with a blockbuster, which is, “I’d like to give you this restaurant.” And I said, “That’s a very strange thing to say. Why are you saying that?” And he said, “Well, I don’t have any heirs, and you seem like an unusually… A different kind of business person. And you’ve done a good job in the back, you’ve helped in the front some, and you can talk to people, obviously. And I get the sense that you know numbers.” Well, I knew numbers, that was pretty clear, right? As a participant, put it modestly, in the National Math Contest several years in a row, and did all right. So I thought it over. I told him, “I’ll tell you tomorrow.” And I thought it over, but I just thought, “That’s not my adventure.” That’s really what it was for me, is this, this isn’t my adventure. This isn’t what I’m made for. I could do it, I’d probably be pretty good at it. It’s fun, but I really was a tourist.

Chris Beall (08:14):

And what did I take out of that job? I cook now. I cook a lot, and I love to cook. And I learned how to handle a knife, and assess a recipe in progress, and taste things, and go fast when you need to go fast, and pay attention when you need to pay attention, all the things you do in the kitchen. And so I love to be in the kitchen. I love to cook, and that was the part of the adventure that was my adventure. But running a restaurant wasn’t going to be my adventure. And so, I reluctantly told him no. I was flattered, I was blown away. I was only just 17 years old, and [inaudible 00:08:49] to have to work there for five years, etc., in order to get the place. But I still think about it every once in a while. I would have been your neighbor out there in Carefree, maybe we’d still have the restaurant.

Corey Frank (08:58):

Yeah. Chez Beall, whatever you’d call its, or something.

Chris Beall (09:01):

It would have had some crazy name, I would have renamed it.

Corey Frank (09:06):

But it’s interesting with that, it wasn’t what you were called to do. It wasn’t your adventure, you knew you were a tourist. He didn’t, until you told him. So the question then is, as a sales leader, and as a CEO of many companies, as an investor, can you build a sales organization with a bunch of folks who are in an existential crisis? Who am I, what should I do? Do you want… Does it matter? How much of the companies that you’ve built, or the companies you know that are successful… First of all, do people care? Right? Because hey, I’m filling a role, a busboy, a dishwasher, or front of house, back of house, a sales rep, a field rep, a BDR, BDR manager.

Corey Frank (09:42):

But everybody is kind of going through these, maybe little, mini-existential crises, especially as the company grows to different stages. Do I want to stick around for series A? Do I want to stick around for acquisition? Do I want to stick around after the layoff, do I want to take this territory? Do I want… How do you deal with all of that, and should you really care as a CEO? And especially, maybe how it’s evolved today, where some of the younger folks entering into the market, who seem to be laden with these existential crises all the time.

Chris Beall (10:14):

Yeah. Yeah. I treat it for myself the same way I treat all, what I call, fundamental churn. Everything in life involves things changing, people going through changes, people making decisions, people staying or moving on. I never really give that a great deal of thought. I think persuading somebody to stay when they want to move on doesn’t make a lot of sense. Great to explore it, great to figure out if it’s just something stupid that you’re doing, or some misunderstanding of the situation and how it’s evolving, that’s causing somebody to want to leave. But when somebody wants to go because they do want to go seek their adventure, I think that’s great. And I feel that way about customers, too. I think there’s this obsession we have, especially in SAS, with holding on to every customer, and almost forcing them to be a customer forever. Even if it requires extraordinary acts.

Chris Beall (11:01):

Discounting, I think, is a bizarre and extraordinary act. I see discounting as making a lot of sense when you’re trading cash today against cash need tomorrow. I think it’s a form of financing, and that’s fine. Money always costs money. And if discounting is how you’re going to get that transaction to happen, so to speak, and it’s at a time in your company’s life when you’d rather do that than raise money from a VC, or some other dilutive, or control losing kind of proposition, then discount. Right? But discounting to keep a customer just to keep a customer, maybe you should ask yourself whether that’s a really great relationship. And it’s okay if they move on, and I-

Chris Beall (12:16):

And I think in SAS, we do SAS upside down and inside out. The upside down part is, that we tend to do it from the top down. We tend to make a model, and I just did this the other day, by the way, so I know what the lure is like, and I’ll tell you what the model is here in a second. But we’ll make a model, and the model has certain assumptions in it. And one of the big assumptions that drives the big numbers three years out, four years out, is this churn assumption. So we have a customer churn, and then we have kind of a net dollar churn that people care about. And then you also have got these other numbers, a little easier to lay your hands on. Cost of acquiring a customer, you’re probably going to be closer on that than a few things. And then, what? Your…

Corey Frank (12:56):

[LTD 00:12:56].

Chris Beall (12:56):

Your ARR per net new customer is, and stuff like that. You’re probably going to be within bounds, but churn is a funny one because it operates like compound interest, but the other way around. It’s inverse log that you’re going to run, and it’s going to be really ugly when the churn is high. So we’re afraid of this thing, and we manage our companies at the margin often, to artificially reduce churn temporarily, so that no one draws the “wrong conclusion,” which is the right conclusion. Sometimes they come, sometimes they go, and that’s the way the world works. So in our business at ConnectAndSell, for instance, it’s a naturally churn-y business, in that we sell to vice-presidents of sales often, and vice presidents of sales have pretty short half-lives. About seven months after you meet them, they’ll be gone. And it has nothing to do with you, right? It doesn’t involve us at all.

Chris Beall (13:48):

We sell to somebody, and it’s just the nature of the beast, because sales management by and large, consists of hiring somebody, giving them a territory, or if it’s a sales manager, giving them a team, and a number. And then if it works out and they make the number, which is pretty much a roll of the dice most of the time, it has very little to do with what anybody does in their first year. But if they do okay, we keep them for another year, and if they don’t, we replace them. Same thing with territories. So there’s a lot of survivor bias, survivorship bias, built into our analysis of sales situations and sales outcomes. You wrote a very good piece once, I really liked it, in which you were asking yourself the question, “Why do I sometimes celebrate lucky deals?” That’s like the dumbest thing to do in the world, is to celebrate luck.

Chris Beall (14:33):

You take your natural superstitious-ness, which will already celebrate luck on the inside, and then you amplify it publicly, forcing yourself to believe that what you did was material, when in fact it might’ve just been luck. So you have the same thing on the churn side. I think that another way of looking at churn is like this. When folks leave, whether it’s employees, or whether it’s customers, for a good reason, then you just improve the quality of the remaining stock. And quality is a harder problem to solve, quality of your employees, quality of your customers, is a harder problem to solve than quantity. So if you have a mechanism that naturally solves the quality problem, probably shouldn’t fight it really hard. You can go ahead and let it run, which means you need to run a very robust top of the funnel, both with regard to getting new customers, and getting new employees.

Corey Frank (15:22):

Sure.

Chris Beall (15:22):

It’s like a pot of water that’s boiling away. It’s a really good idea to have some more water around to put in there, but just putting a lid on it, and saying, “Sorry. No boiling today,” is not really the right answer. So, that’s kind of how I feel about it.

Corey Frank (15:36):

[crosstalk 00:15:36] All churn is not created equal, and there’s certainly healthy churn. And the focusing on the churn that you have by discounting, and giving away dollars, etc., it’s better off firing up the new customer engine, and keeping that going to find the folks that fit your profile a little bit more jointly, than trying to save, or salvage, or create a hostage situation with an existing client.

Chris Beall (16:01):

Yeah. There is, however, another side to it. That another reason that churn occurs in both employee situations and customer situations, and who knows? Maybe in personal situations, the churn we call divorce, for instance, those sorts of churns.

Corey Frank (16:15):

Right. Sure.

Chris Beall (16:15):

It has to do with something else, which is what Geoffrey Moore calls, “the whole product.” So when we think about the whole product, say, what does somebody really need in order to get the full benefit of what I have on offer? What is all of that? It’s tempting to say, like we said at ConnectAndSell for many years, well, when it comes to training reps to speak on the phone, you know what we do, we let people talk to 10 times as many folks, right? So I can look at my team today and ask this question, which is, “Well, how’d they do?? Right? Well, how they did was, in a big number sense, they said 28 meetings, and they converted 9.37% of their conversations to meetings.

Chris Beall (16:51):

Is that good, or is bad? It’s above threshold, it’s good enough to keep us in business, but when you come right down to it, and you look at it and go, “Okay. So what is the important factor here for us, or our customers being successful with ConnectAndSell?” It’s not really delivering all those conversations. That’s a brute force, mathematical thing, it’s always going to happen. Somebody once asked me, “Well, when does this product not work?” And I said, “Oh, it’s simple. It doesn’t work on all days where three times five doesn’t equal 15. Those are the days it doesn’t work. But on days where three times five does equal 15, it really works quite well, because it works simply by multiplication of three times five.” Actually it’s five times three, I suppose, at five times as many people making the dials as you do.

Chris Beall (17:38):

And since I have a level of automation, you can’t afford for your individual sales reps and specialization, they’re three times as fast. And when five times three is calculated, it tends toward 15, whether it’s Monday, Tuesday, Wednesday, Thursday, or Friday. So that’s not the interesting question. The interesting question is, what do your reps say, and to what effect, when they get somebody in a conversation? Now we used to just say at ConnectAndSell, “Well, the ecosystem will take it.” Right? The training ecosystem. They know all about the cold call. Why should we have to be the guys to teach it? And then we stumbled onto, once, a situation where we were obliged to teach it. It was an emergency to help save a company, to help save a customer of ours, who will remain unnamed. But they were in bankruptcy, in Chapter 11, being managed by the bank, the receiver, and somebody had taken many, many millions of dollars out of the company without permission.

Chris Beall (18:33):

And it had come to light late, and they had a problem. And I felt for him, and I made an offer. It was a really weird offer. I said, “Well, I’ve got extra capacity on Mondays and Fridays. So, how about if we just use a fixed price deal for a month? You pay me a certain amount of money, and you guys can use it all you want Monday and Friday.” It was like, “Yeah. We’ll do that. But now it’s really focused on two days, we need to be really good.” And next thing you know, this thing called Flight School was born, where the first Friday they prepped like crazy, and trained, and did all sorts of [inaudible 00:19:07]. And then Monday, they ran in production, but being coached. It was a blitz and coach thing, and just being coached on the first seven seconds of the conversation.

Chris Beall (19:15):

One of my colleagues and I just, literally, made this up on the airplane, like, “Well, let’s do the first seven seconds in the first session, and call it takeoff. And let’s do the value portion in the second two hour session, we’ll call it free flight. And then we’ll do the asking for the meeting part in the third session, and call it landing.” And then, this was the clever one, and then handling objections. What do you do when somebody asks the famous question, “Well, tell me more,” or they have some other objection. We call that turbulence, handling turbulence. So Flight School was born. Well, we didn’t think it was a big deal. It was just like, this is going to help this one customer out, but we started to feel it. And we must’ve felt it more than we thought, because we made a logo for it. James [Townsend 00:19:56] Actually built a logo on a flight, so now we have this logo. That was years ago. Well, this last week we launched Flight School as a product, right?

Chris Beall (20:04):

Two, three years, maybe three and a half years, to get to the point of finally saying, “You know what? The ecosystem’s not going to do it.” So we were having excess churn because of our failure to see that part of our responsibility was to take the learnings from millions, and millions, and millions of conversations on our own use of our product, and put those learnings to use in a way that would help our specific customers with their specific problem. And the specific problem is, by the way, they are ambushing people 30 to 40 times a day. That’s a very specific problem. Not they’re ambushing somebody at all, you’re ambushing… Each rep is now ambushing somebody 30 or 40 times a day, that’s a new problem. Sometimes quantity makes a difference, speed makes a difference. You get something new.

Chris Beall (20:48):

It’s like, we were talking about those big ships out there that have all the containers on them. And I got to experience the wake of one of those that goes a lot faster than the other ones. Well, it made a difference. A one foot high wake is very different from a four-foot high wake coming at you in the back of your little sailboat, when you’re not paying attention. So I think there’s good churn that just happens, and improves things, and then I think there’s chronic bad churn, probably for a reason that you don’t understand. And the resistance you will have as entrepreneurs, especially if you’re funded, to doing the best thing for that other churn, for the one that you should have been providing more and you weren’t, is you’ll say, like I said…

Chris Beall (21:29):

And I said it on Tony Safoian’s Cloud N Clear podcast, we don’t want to be a training company. And that was a small minded thing to say, rather than just saying, “Our customers really need the opportunity to learn from us, and take that group of reps, and get them in the top 5% of all reps, in terms of cold calling.”

Corey Frank (21:48):

Sure.

Chris Beall (21:48):

But we wouldn’t… We didn’t do it. I was stubborn, and I had this view of revenue multiples for evaluation, and a bunch of other stuff that got in the way of clearly seeing just first order. What does the customer need to actually succeed by their standards? Not some BS I made up because my spreadsheet said it would look good.

Corey Frank (22:09):

Right. Exactly. Vanity.

Chris Beall (22:10):

It is a kind of vanity. And so I have a spreadsheet I did just yesterday, and the day before, on this whole Flight School thing. And the spreadsheet says, that if certain occupancies of capacity is filled, and an instructor does this, and we charge this much, and we use this many dials, and we have this blah, blah, blah. Voila, with two instructors, I got $500 million evaluation. And I had to look at that really carefully, and say, “Well, that’s good to have done the calculation. Now, put it aside and forget about it, and ask this question. Which is, on the Flight Schools that we’re going to be offering, are they going to provide what the customers need in order to be successful?