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Daniel Craig on Why Customer Churn is a Silent Killer
Daniel Craig from ProfitCoach is joining us on The Property Management Show today to discuss the problem of churn and the value of retention.
Walk down memory lane with us for a bit, and you’ll remember that Daniel’s first benchmarking study led to the NARPM Accounting Standards and a new focus on property management profitability.
On our podcast, we’re discussing how client retention and client lifetime value affect your property management company’s profitability.
Churn Kills Profitability
If you have a low rate of client retention, your property management business has a leaky bucket. When it comes to your sales and marketing efforts, you’re investing a lot of money to ensure doors are coming into your business, but those new doors end up going out the back door.
The money you’re spending on sales and marketing doesn’t contribute to profitability because you can’t earn anything significant. Too much business is being lost.
Your customer’s lifetime value is what contributes to profitability. If you can’t keep your clients, you’re basically operating at a net loss on your sales and marketing spends.
When we look at overall profitability in any organization, profit increases when revenue rises.
It’s that basic. When you don’t have decent lifetime value from your customers, your rate of growth suffers. You lose the opportunity to make more profit off those customers. Doors have to stay with you for the long term, otherwise you lose money.
Reputation and Customer Experience
To really maximize the dollars you spend on sales and marketing, make sure two things are in place:
- A good reputation
- Delivery of a fantastic customer experience
You’ll undermine your entire marketing effort if you don’t already have a good reputation established. That reputation is a foundation upon which you’ll build with your sales and marketing dollars.
The customer experience is what prevents churn and the loss of existing profit.
Organic referrals are a big part of your marketing strategy. People don’t always think of it as a strategy, per se, but it should be considered exactly that. Referrals don’t just happen. They happen when an outstanding customer experience is provided. It inspires your clients to talk about you.
With a good reputation and a significant referral strategy in place, your sales and marketing efforts will work better. Creating the right customer experience will drive new business and retain existing business.
You can throw a lot of money into marketing your property management company, but if you’re not establishing yourself as a reputable company, your marketing dollars aren’t going to spread as wide for you. Leads will get more expensive, and your lead quality goes down. The people contacting you when your reputation is subpar may not be the right clients for your company.
Tracking Who You Keep and Who You Lose
Is your glass half full or half empty?
Meaning, are you calculating who you keep or who you lose?
From a metrics standpoint, it’s important to watch your churn.
But, don’t lose the real value in tracking that churn. You can look at it as a way of diagnosing the chinks in your armor when it comes to customer experience.
Are you delivering what you’re supposed to deliver?
Churn can give you the insight you need to see where you’re falling short of your ideal.
Your property management company needs a specifically designed customer experience. How is that delivered? Is it delivered that way every time? The churn can provide some feedback on how well you’re delivering that experience. You need to collect feedback from your customers all the time, but you may get more honest feedback when those customers leave your company.
Avoiding churn and being a more profitable property management company is about having a clear vision of what you’re leading your team towards. Each team member has their own job. But the job of everyone at your company is to provide the experience of working with your company.
Daniel says that at ProfitCoach, each team member asks these questions to know whether they delivered the ProfitCoach experience:
- Did they own the client’s outcome?
- Did they make it easy?
- Did they do it in a way that provided an extraordinary service so the client goes out and talks about it?
When your vision is clear and your team knows what they’re delivering, you’ll find that you have more referrals and churn goes down.
You can cut down churn by focusing on customer experience.
Average Churn Rates for Property Managers
The first benchmarking study said the annual average churn rate for property management companies is 25 percent.
Another study will be revealed at NARPM National, and we asked Daniel if he had any guesses or gut feelings about what would be revealed for average churn rates with the new and more recent data.
He expects that the new study will show an initial drop in churn and then an uptick. Here are the factors contributing to that:
- First, with the initial study showing the 25 percent number, owners might have realized that their churn rates could be lower, so they set about improving their own client retention. That would lead to a lower churn average.
- But. There’s a lot more competition since that first study was released. The landscape is far more competitive and there’s a lot more tech.
- Let’s also consider the market. While Daniel says he hates to ever blame the market for customer churn, in this case it’s hard to dispute that a lot of homes were sold in the last year or two.
As ProfitCoach ingests all the data, Daniel expects a drop in average churn during 2018 and 2019, and then an increase in averages for 2020 and 2021.
The industry can do better than 25 percent.
When we’re talking about churn, Daniel advises that anything under 15 percent is great. Some companies manage to stay under 10 percent.
Under 20 percent is okay. But, having churn that’s higher than 20 percent isn’t good. It’s hard to grow when 25 percent of your business is churning out the door. Growth tends to be linear and churn is exponential and percentage based.
In general, property management companies add anywhere from 10 to 30 doors per month. Some do more, but that’s a safe range for the purposes of looking at how churn can hurt. We’re talking about single-family homes under management. Once you hit 1,000 doors, a 25 percent churn rate means that you’re losing 250 doors a year, or 20 doors a month. It’s hard to grow with that kind of loss.
The average churn rate for a professional service business is around 16 percent.
Yes, property management is different so maybe we cannot put it in the same bucket as all other services businesses.
But, you can look at property management in Australia, which has a much deeper market penetration rate than the U.S. In a 2020 Real Estate Dynamics Rent Roll Growth Report, they noted an average attrition rate of 17.3 percent.
Twenty-five percent is too high of an average for our industry.
Churn and your Ideal Client
A lot of property management entrepreneurs are thinking thoughtfully about churn and how it relates to customer experience.
Remember that some churn has to happen in every company. You need to let go of those owners who are not a good fit for your ideal client profile. One of the things Daniel quickly noticed with the consulting work he does at ProfitCoach is that a lot of property managers will actually make more money when they fire certain owners. Those are the owners who take too much from you. Those doors are a loss when it comes to revenue versus time spent on them.
When you have owners like that, raise your prices to the point that it’s worth it for you or they leave.
Are you measuring churn by owners or by units?
Everyone does things differently, but Daniel recommends measuring churn by units so you really know how losses are affecting your portfolio. You might lose one client with 200 properties. You wouldn’t consider that a loss of one revenue stream. You’re losing hundreds of revenue streams.
This speaks to that ideal client. Maybe you don’t want to work with large investors who have hundreds of doors, because the risk is too great if you lose that client. You’ll have to be a perfect fit if you’re in the business of serving owners with large portfolios. They’ll expect different things from the owner who has a couple of duplexes.
Maybe your ideal client is in the single-family space. It might mean a smaller portfolio size and you’ll have more owners to eat with, but it could also mean more profitability. Those owners with large portfolios end up with a lot of leverage over the management company. It can be a less profitable relationship for a property manager.
How to Budget for Retention and Sales/Marketing
Customer retention can be a line item in the way you look at financials.
But, it must be an internal investment. Supervisors have to take responsibility for having an ongoing conversation with their direct reports. Everyone needs to be equipped and empowered to understand and architect how the work gets done. This impacts labor efficiency and customer experience. Outside help to retain clients and avoid churn is great – but all levels of management have to be part of the strategy.
One of the data points from the first benchmarking study showed that ROI on sales and marketing spend is all over the place. There’s no real relationship reflected in the data that shows how it impacts profitability. We asked Daniel what contributes to that.
He believes is comes down to the mindset of the owner.
As an owner, do you view marketing and sales as a thing you have to do? Or, is it central to what you’re about? If you see sales and marketing as nothing more than a chore, you’ll take shortcuts. You have not embraced a better vision where you think of sales and marketing as more central to the essence of your organization.
You don’t have to be a marketing expert. But, you do have to participate in the marketing and sales of your company. You can delegate the implementation. You can work with partners on strategy. But, you can’t plan a marketing budget and then walk away.
When a property management company wants to grow, they may spend a lot of cash on marketing without any strategy for growth. They might not even know what results they’re looking for. That is going to slow the ROI you see on your marketing spend.
It also comes down to long-term versus short-term goals. Short-term strategies are expensive and easy. You can invest in Google Ads to gain leads. But, even better and more economical are those long-term strategies like content marketing. Referrals are long-term. They work and they’re affordable.
If you want to make the best use of your marketing budget, think about long-term marketing strategies.
We’re excited about the upcoming benchmark study and we hope we’ll see you all at NARPM National. Daniel will be there, and he’s going to have a Beat the Benchmark game. You’ll have the opportunity to make some wagers on what you think the benchmark study will reflect. When you win a category, you get a prize.
Contact us at Fourandhalf with any questions you have about our conversation with Daniel Craig of ProfitCoach.