Churn: What It Is and How To Avoid It
Growing your business isn’t all about getting new customers. While you can spend a great deal of time and money on this, the long-term growth of any business also depends on retaining as much of your existing customer base as possible. To be able to determine how effective your retention efforts are, you need to pay attention to two key things: churn and churn rate.
In this post, we’ll provide a clear definition of churn, show you how to calculate churn rate, explore the reasons why customers churn, and go over some tips and tricks for reducing churn.
What is churn?
Churn refers to the customers or subscribers — depending on your business model — who stop purchasing your product, using your paid SAAS offerings, or subscribing to your service(s) over a specific time period. Some examples of churn include customers closing their account with your company, cancelling their subscription, or not renewing their contract. If you’ve ever been offered a loyal client discount or incentive when renewing your cell phone plan, you were dealing with a business that wanted to minimize churn.
To understand how much revenue you’re losing to churn, you need to calculate the “churn rate.” Churn rate is the calculated percentage of customer churn that an organization experiences. While the best possible churn rate is 0%, unfortunately, this isn’t a realistic goal. Credit card companies can see churn rates of around 20%, while SaaS organizations see around a 5 to 7% churn rate. Between July 2018 and July 2020, Netflix saw a customer churn rate of 2 – 3%.
Now let’s find out how you can calculate your own business’ churn rate.
How to calculate churn rate
Fair warning: there’s going to be some math involved here. We’ll keep things simple to avoid those traumatic high school algebra flashbacks. This is the basic formula for calculating churn rate:
(Customers Churned / Total Customers) X 100 = Churn Rate
But before you start plugging any numbers, you need to choose the time period you’ll be measuring for. You might want to look at a monthly or yearly rate. Once you’ve decided on your time period, determine how many customers you had at the beginning of the period, and how many you’ve lost (or who have churned). Once you have both these numbers, divide the number of churned customers by the number of customers you started the period with. Multiply that number by 100 and you’ll get your churn rate.
For example, say your organization started with 100 customers and lost 7 customers last month. You would divide 7 by 100, which equals 0.07. Then, this gets multiplied by 100 to give you a 7% churn rate.
You can apply a similar formula to your Monthly Recurring Revenue (MRR) to determine your revenue churn rate.
If you’re looking at a time period of 30 days, the formula would look like this:
(MRR Lost to Churn Over 30 Days / MRR 30 Days Ago)
X 100 = Revenue Churn Rate
For example, if you had $50,000 of MRR 30 days ago and now have $45,000, the calculation would be $5,000 (the MRR lost) / 50,000 = 0.10 x 100 = 10% revenue churn rate. So if your company makes $50,000 in MRR and your value churn rate is 10%, you’re losing $5,000 a month — not exactly pocket change.
As you can see, ignoring your churn rate can be expensive. By using these simple calculations you can get a general overview of your company’s performance and use this data to make any changes necessary.
Advantages and disadvantages of using churn rates
One of the primary advantages of calculating your company’s churn rate is in giving you more data you can use to understand your customer base. Knowing how much revenue you’re making every month — or every year — is great for understanding your cash flow in the short term. But by itself, that number can only tell you so much. When you combine MRR or ARR with your churn rate, you’ll know not just how much money your customers bring in, but how much of your revenue is coming from old customers.
Similarly, a sudden bump in your churn rate — up or down — can tell you how effective different initiatives are. Say your marketing team runs a big campaign to bring in a ton of leads, but your churn rate skyrockets a month later. That tells you the promises made in that campaign didn’t match up with what your new customers saw when they hit your product.
Finally, you can effectively determine how expensive each new customer is by comparing your customer acquisition cost (or CAC) with your churn rate. If both your CAC and churn rate are high, there’s probably a problem with retaining those customers. That means you need to look at the value you’re offering or the promises you’re making in your marketing. However, if your CAC is high but your churn rate is relatively low, then the problem lies in the methods you’re using to acquire new leads.
Despite its many advantages, churn rate isn’t a perfect metric — especially if you use it in isolation. The primary disadvantage of churn rate is that, on its own, it doesn’t tell you much about the customers you’re losing. After all, it’s a single number. It doesn’t distinguish between new customers that churn just after a free trial and long-time customers that only churn after a specific business decision. As such, you should combine your organization’s churn rate with deeper data, like what you’d get from CRM software.
Another thing to remember when using churn rate is that the amount you should aim for depends on a bunch of factors. For instance, a newer company will likely have a higher churn rate than a startup. Likewise, the industry you’re in can seriously affect your churn rate. That’s why you need to make sure that you’re basing your data on the right benchmarks; otherwise you might start pulling out your hair over numbers that are relatively normal.
Why customers churn
Now that you know what churn is — and how to calculate it — it’s time to learn some of the most common reasons that cause churn. Some are completely within your control. Some can be influenced. Others are totally out of your hands. Here they are:
- The customer no longer needs your product: While your ex-customer may have once required what you’re selling, they (or their company) don’t need it anymore. Their business priorities and goals might have changed, their business might be closing down, or they may have restructured and lost employees who were the primary users of your product or service. This one’s usually out of your control.
- The customer can’t justify the cost: While they were able to incorporate your product or service into their budget before, their finances have changed somehow. Budgets got cut, teams got downsized, and so on. Alternatively, they didn’t see the positive results they had originally anticipated when purchasing or signing up for your product or service.
- A competitor is offering better value: When another company offers almost the exact same product or service as you at a lower cost — or a better product at the same cost — chances are you’re going to see more churn. Pay attention to what your direct competitors are offering and their price points. Notice any additional value they add, like including their foundational product or extra customer service.
- The customer is dissatisfied: Although there will always be a few difficult clients you can never satisfy, most customer relationships can be improved. Work with your team to ensure your organization provides the most positive customer service experience possible, for as many customers as possible. And if you run into particularly bad experiences, do what you can to rectify the situation.
Tips for reducing churn
Each customer is different, but the reason they churn often falls in the same common categories. That means there are common tactics you can use to reduce churn. Here are just a few of them:
If your business is based on a subscription or download model, you need to pay particular attention to the onboarding process for new customers. When you consider that the average three month churn rate for new users of mobile apps is 71%, the importance of dynamic onboarding is clear.
Start by highlighting your product’s key benefits before diving into more intricate details. Show customers how they can get the most value out of your offering as soon as possible, and with as little difficulty as possible. For example, a SaaS company should have a dedicated and structured onboarding process for all new users to optimize adoption rates organization-wide. There should be support available for new users at all stages of their onboarding journey, as well as help documentation they can access as needed.
Identify at-risk customers
Rather than trying to win back customers who have already decided to leave, take a proactive approach and identify at-risk customers beforehand. Monitor customer engagement and take note of those who seem less engaged with your product or service. Signs of at-risk customers include not logging into your service or site for weeks or months at a time, not purchasing a product from you in a while, or even not opening your emails.
These actions can suggest that your customer is not getting the value they want out of your organization’s products or services. Once you’re able to identify customers who are potentially at-risk, you can then take the time to try and hold on to them.
Gather user feedback
The best way to find out why your customers are churning is to ask them. Conduct user feedback surveys with a series of standardized questions prepared. While not every customer will be willing to participate, those that do will provide invaluable feedback that enables you to make data-driven decisions in the future.
For example, you may learn of a missing feature that multiple customers cite as their reason for leaving. Or you might find out that they didn’t find your company’s customer service to be satisfactory. When you notice patterns in your survey results, you are able to narrow your area of focus and concentrate your efforts on these areas.
Pro tip: Start using customer feedback right away
One of the challenges of getting user feedback to where it needs to go? It’s trapped in a CRM tool. That’s great for getting it in front of customer-facing teams, but everyone else is probably working in a different tool. By using Unito, you can make sure that feedback gets from your CRM tool (like HubSpot) to your project management tool of choice (like Asana).
Here’s how we did it.
Make your product more valuable
You can add more value for users in a number of ways. You could create a new feature that multiple customers have mentioned right before they churn. You can take extra time to fix a commonly encountered bug or issue with your product. Maybe you can add webinars and additional educational content to your website.
Since a disconnect between the price of your product and perceived value is a common reason for customer churn, creating more value will help your churn rate. The more inherent value you add, the more difficult it will be for a customer to walk away from your product or service.
Churn rate and customer lifetime value (CLV)
It’s often said that acquiring a new customer costs five times as much as retaining an existing customer. However, not all clients have the same Customer Lifetime Value (CLV). Before you decide how much you want to spend on acquiring new customers or retaining your current customers, you need to understand CLV. Here’s how it works.
Say you have a current customer from a dwindling business who purchases $100 worth of product from you every few months and who constantly complains about issues outside of your organization’s control. You’ve spent tons of resources trying to keep this customer happy but they continue to cause issues.
Conversely, you have a potential new client from a rapidly growing company who is projected to spend $1000 a month with your business. In a direct comparison like this, you need to weigh the lifetime value of these customers to decide what kind of initiatives you want to pursue when trying to reduce churn rate. This line of thinking can also make you realize that churn shouldn’t necessarily be avoided for all customers. You might see the one customer churn, but you’re then able to spend the freed-up resources on acquiring the new, more valuable long-term customer.
Churn, baby, churn
Monitoring your business’ customer churn rate is crucial. While it’s inevitable that some clients will leave for reasons beyond your control, understanding your customer churn rate is one of the best ways to take the general “pulse” of your business. From there, you can focus your teams on initiatives that help you not only acquire new customers, but hold on to the ones you already have.