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Understanding Customer Churn & Improving Retention

7 min read

Understanding Customer Churn & Improving Retention

What Is Customer Churn?

What is Customer Churn? Churn is a term that indicates number of customers a company loses over a specific time period. "Churn rate" designates the percentage of a company’s total customers who churn, and often refers to service subscribers cancelling their memberships. Churn is a critical metric of company performance.

In love, we get dumped.  In business, we get churned.

The concept is the same. Very simply, churn is what happens when a customer decides to terminate their relationship with your company, usually by discontinuing their subscription or canceling a membership. And just like in personal relationships, it’s often obvious where it ended, but much harder to pinpoint where things started going sideways.

What Is My Churn Rate And Why Is It Critical?

Churn rate is the percentage of customer losses within a specific time period. It’s typically measured yearly, quarterly, or — as many SaaS and subscription services prefer — monthly. Churn rate is useful for many things: understanding company performance, making future projections, calculating customer lifetime value (LTV), analyzing the effect of changes on retention, and seeing who your most successful prospects really are.

Pro Tip: Aim to minimize churn, not eliminate it. Perfect retention is impossible. Your customers will churn, so it’s critical to track and analyze this turnover. (Learn strategies to increase customer retention here.)

image Impact of Churn on ARR. If you start with 1000 customers who pay $50 a month, and have a growth rate of 8%, lowering churn by even a single percentage will gain you hundreds more users, and will dramatically raise your ARR.

Obviously, lost customers are lost revenue—but customer value is not linear!  Existing customers are cheap to keep. You’ve earned their trust and loyalty. Plus, return customers spend as much as 67% more on products and services. Acquiring new prospects means starting from scratch, using maximum sales and marketing resources to sway them from competitors and squeeze them through your funnel. Acquisition is always exciting, but the real money is in teaching old dogs new tricks (or at least keeping them happy).

How Do I Calculate Customer Churn?

Churn is easy to understand, but deceptively difficult to to calculate. In any 30-day period, you may have three types of customers: renewals, new sign-ons, and those who leave. New customers tend to churn more than older ones. Your company’s growth rate can skew results. And you must be precise when defining churn. The moment of churn can be when a subscription ends, or when users cancel and are technically still customers. Do you include involuntary events (like failed auto-renewals), where the customer did not actively terminate the account?

What is a “good” churn rate?

The honest answer: it depends on your industry. Some industries expect monthly churn of 20+%. Others shoot for <5% annually. In SaaS, the ideal is typically between 2% – 8% of MRR, but this varies with size and age of company, number of customers, and the amount (and quality) of competition. Generally, lower is better, and absolute rates matter less than changes over time. If your churn rate is going down, encourage that trend.

What is a negative churn rate?

Negative churn, aka “the Holy Grail of SaaS,” is when revenue from expansion surpasses revenue lost from churn, meaning the income from upselling existing customers exceeds money lost from departing customers. Consider upgrades, add-ons, expanded services and other options.

What is “positive churn”?

Some industries — dating, weight loss, pet adoption, job recruiting — use an “outcome achieved” model, in which customers are expected to accomplish a single goal and then leave. When expected, it’s positive churn, which is not necessarily an alarm bell.

How Should I Calculate My Company’s Churn Rate?

Three key metrics:

Customer Churn Rate

This is the number of customers who are leaving, expressed as a percentage. image

Revenue Churn Rate

This is the financial impact of customer turnover in a given time period. image

Growth Rate

This is the number of new customers acquired within the same time period. If growth rate is higher than churn rate, congratulations — you’re making money! When churn rate is the higher number, your customer base is slipping away. Time to do something.

What Are The Most Important KPIs And Metrics To Monitor For Churn?

Here are some distinctions:

Gross Dollar / Gross Value Churn measures loss of your highest-revenue customers — including those who stay on, but downgrade. You definitely want to know when users think your premium offerings aren’t worth the cost!

Expansion Revenue measures new income from current customers. Customers who keep buying tend to be happy, and upselling them helps increase profits while mitigating acquisition needs.

Renewal Rate is a loyalty metric. Divide the number of customers who renew by the number of customers up for renewal in a given time period. Then multiply by 100 to get a percentage. (It’s about revenue, not number of subscribers.)

Customer Retention Cost is your spend per customer to keep them. In a given time period: add up expenses from your success program, divide by the total number of customers. Comparing retention costs against marketing efforts indicates how efficiently you’re achieving success.

Finally, support tickets are excellent indicators of account health. Your success team should analyze recurring friction and bottlenecks and educate users so they don’t need to contact support.

What are the critical product metrics you should be tracking? Read our guide here!

What Are Some Strategic Approaches To Reducing Churn?

The main strategy is being proactive. (You could write a book on this topic alone—and we did.) By the time customers send their complaints on to you, they’ve been dealing with problems for months.

Ultimately, reducing customer attrition is about maintaining product-market fit by evolving to meet the changing needs of your customers. Keep listening, keep learning, and keep digging into their pain points.

imageThe three stages of churn. Stage 1 is the churn that happens right after people try the product. Stage 2 is longer-term churn over time. Stage 3 is the dropoff of usage when other tools enter the picture, or when your tool is no longer useful. Each of these stages demands a different strategy.

What Are Some Best Practices For Reducing Churn?

1. Know what users are doing…and not doing.

Analytics helps show which behaviors (or absence of them) best predict churn. Develop your standards for account health with actual usage data—which accounts use which features, with what frequency? If you know which behaviors suggest long-term usage, you can see everyone not taking the right actions in your product, and reach out to them.

Example: Facebook famously revealed that users who added “7 friends in 10 days” predicted retention more accurately than any other metric, so they lasered on getting people to pass this threshold. Find your equivalent measure to reduce churn earlier rather than later.

2. Put ‘em in cohorts

A thorough analytics tool like Heap will let you perform cohort analysis to analyze customer value. (Cohort: a user group sharing demographics or behaviors.)  By putting users into cohorts, you can see what power users do, or what users who stick around tend to do, then adapt your product or site to nudge all users to perform the same activities, or follow the same user flows.

Cohort analysis can also tell you which groups need attention, and which types of users tend to be loyal. When you attract the best users in the first place, you’ll have fewer problems with churn later.

Use cohort analysis to improve your product. Read our guide here!

3. Keep everyone on the same data

When product, marketing, sales, and customer success teams see the same customer data, everybody knows whom to target, whom to build for, and whom to reach out to. You can push behavioral data into the tools each of these teams already uses, like Salesforce and Gainsight.

4. Make it “sticky”

“Stickiness” is the degree to which the product is embedded in users’ regular workstreams. Get users to adopt more features in your product — the more features they learn to rely on, the more likely they are to stick around.

5. Let them know!

Create educational materials, like articles, webinars, release notes and training courses, so customers are not left to figure things out on their own. Offer incentives and discounts to people who are on the fence. Demonstrate that you’re better than the competition.

6. Think ahead.

Provide ongoing value—stay relevant to companies as they grow, and new technologies as they show up. The more you can evolve to meet your customers’ needs as soon as those needs appear, the less likely they’ll churn.

7. If you do lose them, learn where they churn.

Many unhappy customers won’t complain. Interviews and exit surveys are useful, but people aren’t always skilled at explaining their problems. There are many ways to beat your competition: a product that’s better or easier to use, better service, being more forward-looking, etc. Correlate what users say with their behavior, which shows where they get stuck, and which tasks take longer than they should. This is where a great analytics tool shines.

How Can My Teams Employ Analytics To Reduce Customer Churn?

Analytics helps you optimize activation and engagement. Users who find value in their customer experience stick around longer.

Read our guide to learn more about Product Analytics.

Start tracking user behavior. Behavioral data includes leading indicators of how customers find value in your product—or fail to. The more robust your usage data, the more reliable your customer health measures can be, with more opportunities to discover correlations that predict churn and retention.

Heap’s auto-capture feature collects all the data, all the time, so you can make new inquiries whenever you wish.

Why can’t I just use Google Analytics to reduce churn? It’s free.

As we’ve discussed before, we respect Google Analytics—it’s great for seeing how people come to your site, but not what they’re doing there. There’s no cost to use GA, but its limitations are numerous:

  • No PII data allowed
  • Only predefined events and page views can be tracked
  • Difficult to instrument for a SaaS app
  • Can’t measure actual user behavior
  • Has limited integrations available
  • No real customer support from Google

With analytics, you get what you pay for.

Want to compare some of the top alternatives to Google Analytics? Read more here.

How Can Heap Help Me With Retention and Customer Churn?

Heap gives companies an easy way to capture a full set of customer data that provides complete and predictive insight, and enables teams to fully understand how customers interact with products. This gives your organization the power to be proactive rather than reactive when prioritizing efforts and leveraging insights, so you can quickly turn them into action and give customers what they want most.

Interested in retention? Download the Heap Guide to Retention!

See How Teams Use Heap To Increase Customer Retention and Reduce Churn

At Heap, we believe churning is for dairy products, and customer success is for everyone who strives for it. Everything we do is designed to help you understand your business and your customers better. Find out how we can help you accelerate your business goals.

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