I hate bad advice. Even if one person takes you up on your word, you potentially led someone down the wrong path. They may have been better had you not tried to help at all. That’s why I am extremely careful in all the content I have ever created, whether the ones I am creating right now on this space, or on my Medium page in past, or in my Quora answers. I care less about making it a well formulated, share-worthy piece of content, and more about the substance of it. I have, and will always happily accept the trade off of having a less than ideal content than compromise on the subject matter.
Why this rant today? I read. And while I was browsing earlier today, I came across an article that seemed to suggest Churn Rate is a massive concern for SaaS businesses. Nothing wrong with that statement, it is absolutely true. But then, in the immediate next line, the article seemed to make a comparison between a SaaS business and a T-shirt vendor, only to highlight the point that a T-shirt vendor doesn’t need to worry about Churn as much as a SaaS business. And that simply blew my mind. I had to go over it again just to make sure I did not misread that.
…t-shirt retailer only really needs to convince you to buy once, compared to the SaaS industry, which makes its money off ongoing subscriptions to drive monthly recurring revenue. The t-shirt vendor doesn’t need to worry about churn rate the way a SaaS business…
Typically, we like to stay focused on our targeted audience base. SaaS businesses and early stage startups. So, setting the record straight on this is slightly out of our regular stream. But we talk about growth, marketing and business strategy in general, so we would have been doing businesses out there a disservice if we simply ignored something we so very strongly disagree with.
Churn is important to almost every single kind of business out there.
Except businesses where the ticket size of each sale is massive enough in itself. Think luxury real estate, high-end art and the likes of it. Even then they try to keep their customers roped in, and make another transaction, and then another and so on.
For businesses where the average order value is small to medium, churn is absolutely critical - no matter what space they are in. It is wrong to think that churn rate doesn’t impact the business selling t-shirts or shoes. In some cases, it hits them even harder than it typically does a SaaS business.
Margins on physical products are lower. Add to that the packaging costs, delivery charges, return/replacement charges, breakage (damage to goods stored in warehouse/during transit), those margins sometimes get wafer thin. If you are selling items of another brand on your website, you could be making 20-25% gross margin - i.e. before incurring any of the costs we mentioned earlier. So, on a $100 shoe, you just made $20, $25. And in this, you need to account for packaging, delivery and all those charges. So if your customers are churning out after a single transaction, you are not going to survive for long.
I intentionally did not talk about costs like Customer Acquisition Cost, payroll expenses etc. Because they would be common to both a shoe retailer and a SaaS business. On different levels maybe, but they do exist for both.
Return/replacement charges is not the same as SaaS businesses offering refunds. While cancellations and refunds exist for SaaS businesses, there is no additional cost attached to it per say. For a physical retailer, there would be cost at every step of the return, replacement, and in many cases even cancellations (think of the scenario where a customer cancels the order after it has been shipped off).
Running a business, any business, is hard. And churn is something that keeps entrepreneurs up at night. It is wrong, disrespectful and extremely inconsiderate of anyone to suggest it is not of concern to a particular business type.
With that I’ll take your leave for the day.
(I thought I would address Churn in the second half of this article, but it doesn’t feel right. I’ll get back to talking about churn in the next article.)
That’s it for today, see you tomorrow.
Stay safe, stay motivated.
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