What Y Combinator Taught Proof About Churn

This is a guest post by Ben Johnson who  runs Content at Proof, a Y Combinator-backed startup that provides real-time social proof and personalization software. Over 18,000 sites trust Proof to help increase their conversion rates.

In January 2018, our team packed up our bags in Annapolis, Maryland and flew out west to Silicon Valley for what would be the most transformational event in our company’s history. We’d bootstrapped our way to $175,000 in MRR — and after being denied our first application cycle — we finally had been accepted to Y Combinator.

Moving across the country meant leaving our families and friends behind for 3 months, but in the long-haul, we knew this was an opportunity that we couldn’t pass up. It was a chance to learn and grow from the best minds in Silicon Valley — a dream come true for any startup.

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Y Combinator (or simply YC) is the foremost startup accelerator in the world. Since its founding in 2005, some of the biggest names in tech have emerged from the doors of the program. Alumni include consumer companies such as AirBnB, Twitch, and Reddit — as well as B2B leaders like Stripe, Gusto, Segment, Optimizely, Mixpanel, and Zapier. And twice a year, they accept about 150 companies to join the ranks.

What they don’t tell you about YC beforehand is that most of the program is heads down work. You work on your company day-in and day-out — 12+ hour days, 6 days a week. That’s 90% of the program.

The other 10% is the YC-sponsored events — networking, lectures, office hours.

You get to hear from the biggest voices in the valley: the AirBnB guys, Tracy Young from PlanGrid, and Steve Huffman from Reddit. You get to attend office hours with Michael Seibel (co-founder of Justin.tv), Sam Altman (president of YC), and a host of Y mentors (founders & investors).

When we weren’t working on Proof during our time in California, we were having tough conversations with mentors, and many of them centered around reducing churn. For B2B businesses in the program, getting churn under control is a first critical step in building a lasting company that can truly scale to thousands of customers and multi millions in MRR.

The truth is: most lessons they teach in YC aren’t that complicated — but that doesn’t make the advice any less useful. In this article, we’ll share the playbook of advice we received around churn while in the program, so that you can use it to control the growth for your SaaS business.

Lesson #1: Fix churn now, or it’ll kill your business

As you likely know, churn is the Achilles heel of a B2B businesses. It might seem like it has a small marginal effect on MRR every month, but once churn gets out of control — it can tank your entire business. Why?

Let’s imagine a scenario.

Imagine you have 1000 customers, acquire 100 new customers a month, and have a 5% churn rate. At this point, you churn 50 customers/month. That makes your business grow by net 50 customers a month.

At 2000 customers, let’s say you are still acquiring 100 new customers a month, and your churn rate is still at 5%. Now, you churn 100 customers/month. At this point, your growth has started to stagnate. And if you can’t quickly reduce your customer acquisition cost or drive more top of funnel growth, your business will start to shrink at any point past this critical inflection point.

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It’s an unhealthy position to be in for any business. But this can be truly disastrous for a B2B SaaS company that relies on month over month growth to outperform in a competitive market, raise capital, and reinvest into growth.

YC is interesting in the way that it thinks. They think extremely big picture when it comes to growing a business — they want to help their entrepreneurs have grand visions, and they aim to grow their portfolio companies into $100MM+ ARR businesses.

To do that, you have to focus on the two sides of the business: customers coming in and customers going out.

Before YC, we focused heavily on growth, but we sacrificed a lot of other things for that decision. We grew to $175,000 in MRR. But we had really high churn... Not a great way to build a sustainable business... If you’re looking at a SaaS business — there are two major growth metrics that work in parallel: conversion rate and churn. Our social proof software product was designed to help businesses increase their conversion rates, and we totally understood the importance of conversion rates and A/B testing. It was the problem we were working on, day in and day out, to help our customers.

At YC, our team had a realization that we had never developed a strategy to reduce churn. As Sam Altman, former president at YC says, “Churn is the story we don't like to talk about.”

When we entered YC, they simply said to us, “You have scary high churn. You have to fix churn now or your business will die.”

While we were getting a lot of expansion revenue as we iterated on our pricing, and the effects of churn hadn’t immediately hit us. Eventually though, you pay a price for high churn. You can’t just keep pushing off the wild beast forever.

“Churn is the story we don't like to talk about.”

We slowed our growth lever, stopped building secondary features, and worked to develop features that made our product more sticky and valuable for our current customers.

For us, that included developing in-app analytics and testing tools to show the actual metrics lift from using our social proof product. We also worked through a better onboarding experience as well as customer success protocols to save fledgling customers.

Our churn lowered, and we built Proof into a product we could start growing again.

Lesson #2: Talk to your customers to reduce churn

Imagine two restaurants open up on the same block in the same month. They both build out cool spaces, develop extensive menus, hire staff, and open their doors. Two years later — only one of the two spots are left.

What differentiates the success from the failure? While there are many variables that help a food establishment survive, like the types of food and decor, the surviving restaurant did something that ensured their success: they talked to their customers.

After launching, they asked for feedback on their menu and iterated. They adjusted their space based on customer comments to managers. Their staff was trained to actively seek and record feedback.

The same concept of feedback from the offline world applies to the Internet.

If there’s one point that YC harped more than anything, it’s “talk to your customers.” It seems obvious, but today’s tech ecosystem has created an environment where you can build and grow a product without talking to anyone.

You can operate away from your customer for a while, but much like churn, if you don’t face the music — eventually it’ll catch up to you.

There’s a famous story about the AirBNB co-founders that gets repeated at Y Combinator. When the founders were in the program, they were having trouble understanding their customers — and their business was suffering for it. They also were having trouble getting high-quality photos of their listings. What did they do?Paul Graham, YC partner, had some advice for the co founders of AirBNB when they entered the program. He said,“Your users are in New York and you’re still in Mountain View. What are you still doing here? Go to your users. Get to know them. Get your customers one by one and make something directly for them.”

So, they followed his prudent advice. They flew to New York every week, and they went door-to-door to meet their hosts.

Then they returned to Mountain View for YC each Tuesday for mandatory YC meetings. Through the (often-unannounced) conversations that occurred living rooms across the city, they were able to take high-quality photos of their listings and use the in-home visit as a method to solicit feedback from their customers.

Customers are less likely to churn when they know you care, and when you directly solve their problems.

This can be done through product. You can talk to customers about their pain points, you listen to their issues (but not necessarily their solutions), and you make them feel special.

You can do this with in-app prompts like live chat, or by sending them a personalized email (ie. not a marketing email blast) to start a conversation.

You can operate away from your customer for a while, but much like churn, if you don’t face the music — eventually it’ll catch up to you.

Today, everyone on our team continues to talk to customers. Every team member — from engineering to marketing — has a one-hour customer success shift every week. We also do user tests more frequently than before YC.

The result?

We understand our customers better than we used to, we respond quicker to their queries, and our product roadmap is more informed to meet their needs.

Lesson #3: Find product-market fit — the natural cure for churn

Product-market fit, or PMF, is one of those acronyms that you’ll hear all the time in the startup world. But what does it really mean?

The concept is relatively straightforward. Product market fit is defined as when a product satiates a market desire. When the product deeply fulfills the needs of a group of customers.

For SaaS products, there are a few things that will give you an indication that you’ve hit PMF:

It might be better understood by comparing the environment in which a company has it to one in which they don’t. Marc Andreesen, co-founder of legendary VC fund Andreessen Horowitz, describes PMF as such:

“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close. And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”

Many startups mistakenly think they have arrived at PMF before they actually in fact have gotten to this “utopia.” It’s one of those points you know when you know — and that can be frustrating as you build a product.

YC taught us that we were nowhere near PMF, and that finding it would be a whole lot more useful than trying to grow before we had it.

If you’re trying to grow before hitting PMF, you’re going to be doing a whole more work than is necessary. And you’re likely even limit yourself with growth through organic means.

After the program ended, we relocated to Austin, Texas, ramped down our paid growth on our Notification product, and made a significant shift in our product roadmap. We decided to laser focus in on developing a software for one of our highest segments of customers to reach PMF (B2B SaaS companies).

As we built our social proof software, we always were frustrated by the limited software options and the complexity in developing personalized marketing. After some conversations with other SaaS companies, we found out we weren’t alone.

That in part with a lot of data and research on the industry, convinced us to launch a new software offering to get us closer to PMF. We knew that a higher value software would allow us to get to PMF — and provide a product that customers would be less likely to churn from.

For the past year, we’ve been building a personalization software for B2B SaaS businesses — and while we don’t have PMF yet — it’s showing us a lot of early indicators that we are moving in the right direction.

We’re still helping customers increase their conversion rates, but our new software is much more powerful and relevant for a specific use case.

With Experiences, you can identify visitors to your site in real-time and swap out elements on the landing page to make the site directly speak to their needs. For instance, on our homepage we use the software to swap out CTAs, headlines, and copy when we identify a visitor as falling into a specific industry bucket.

Personalized vs Unpersonalized

We’ve helped an early access customer BuildFire increase their MQLs by 46% — and we’ve seen a 32% increase in new trials on our own site. And to make sure we’re on the right path to PMF, we’re asking our Beta customers to rate us on a PMF score frequently:

  • If you couldn’t use Proof Experiences, how disappointed would you be?
  • Very Disappointed
  • Somewhat Disappointed
  • Not Disappointed

Never stop learning

Just as attending a college only gives you back as much as you put into it, the same principle applies with an accelerator like YC. They provide an extraordinary amount of knowledge, resources, and mentorship — but that means nothing if the lessons you learn stop as soon as you walk out the door.

The most successful YC companies — unicorns such as AirBnB and Dropbox — have succeeded in part because they have taken the lessons from YC and used them to make structural changes in their business. They are constantly learning from companies at the next stage of growth and from successful case studies in other industries.

Inspired to reduce MRR churn? You might like this piece: 6 Things You Can Do to Squash Churn Right Now.