Customer Churn: The Experts Data Driven Guide to Churn
May 27 2020
Customer churn is the silent killer of the subscription business. With rising customer acquisition costs (CAC) over the past five years and more market competition than ever, anything you can do to keep customers around longer is vital to your business.
So why aren’t more companies doubling down in their fight against churn? Because the solution isn’t intuitive. You have to understand the underlying issues that contribute to churn, predict how churn will impact your business, and find ways to combat it.
To help you reduce churn at your business, we put together this guide. We’ll walk through how you can identify, measure, and resolve churn so you’re able to retain more customers and keep your SaaS company healthy.
What is customer churn?
Churn refers to customers no longer using a company’s services or products. Understanding how the term can vary across businesses and industries will help you combat the issue with more precision.
How the Covid-19 crisis is affecting customer churn
So far, COVID-19 has had its most dramatic impact on churn in mid-March into April. Now that we’re in May, the storm seems to be subsiding and churn is recovering.
Before the global crisis, we’d seen pretty steady growth, at 2.5% in January and 1.9% in February of 2020. By March 15, the market had grown 5.3% since the start of the year. But, unsurprisingly that growth flatlined beginning in mid March, and from March 15 to April 7, the market declined about 0.12%.
The flatlining began around March 15, and continued through the first week of April. The market has started to rebound since then at a slower pace than before the downturn, but it tentatively appears to be accelerating.
Looking back on the total ProfitWell index, April 18 marked the beginning of a steady upward trend in growth continuing into May. Since the beginning of May, data shows a plateau in MRR loss, which is good because it means less people are churning.
Why customer churn is the most important metric for SaaS and Subscription businesses
Customer churn is the most important metric because revenue is tied directly to recurring relationships in the subscription model. Customer acquisition costs are especially high for subscription businesses, which I’ll get into momentarily. First, I’ll break down why SaaS businesses rely so heavily on recurring revenue.
SaaS businesses depend on recurring revenue
Monthly recurring revenue (MRR) is the lifeblood of the subscription business. Without predictable sources of revenue, it’s impossible to sustain your business over the long-term. On the flip side, it’s critical to track churned MRR to assess how lost customers affect your revenue. If you’re losing customers too quickly, it can seriously hurt your ability to grow.
It's cheaper to retain customers than acquire new ones
CAC, or customer acquisition cost, is one of the most important SaaS metrics to track. CAC is the total costs of sales and marketing efforts that are needed to acquire a customer. It is one of the most defining factors in whether your company has a viable business model that can yield profits by keeping acquisition costs low as you scale.
A successful business model means your CAC is sufficiently lower than customer lifetime value (LTV). Low CAC and high LTV means customers are staying for the long-term. Remember, it’s less costly to retain customers than acquiring new ones.
Existing customers spend more than new customers
Focusing on acquisition alone is a huge mistake because existing customers are likely to spend more money. You should still work to acquire new customers, but upgrading your existing user base will unlock even more revenue.
Existing customers are with your product for a reason. It’s easier to sell to existing customers because they already have rapport with your company. If existing users find value in your product, then they are more likely to upgrade features if it means the experience will be enhanced. Convert more sales by focusing on upselling. Offer additional features or upgrades in an attempt to make a more profitable sale.
Why do customers churn (and what can I do about it)?
Customers churn for a number of different reasons. Businesses tend to focus on voluntary churn (where customers actively choose to leave your service) but involuntary churn (where they leave due to a failure that is outside of their control) Is the most common type, and the most easily addressed (if you can fix it proactively, before the failure).
Voluntary churn happens when your customer chooses to leave the service on their own, whether it’s due to a poor experience or a better competing offer. Combating this type of churn starts with understanding how to keep your customers happy.
Involuntary and delinquent churn
Involuntary, or delinquent, churn is what happens when customers leave your service without actively choosing to do so. It’s the most common type of churn in SaaS, but it’s much more easily avoided than voluntary churn. As a mostly mechanical failure of your tools, delinquent churn is easy to fix by using the right tools.
Modeling customer churn
Calculating the basic formula for churn is simple: you take the number of customers you lost over a specific period and divide it by your total customer count. This formula, however, doesn’t give you the whole picture. To truly understand how churn impacts your business, you must create a model for it.
There are a number of different ways to calculate churn, from formulas to more in-depth statistical analysis. By looking at these results together, you’re able to build a comprehensive picture of both your historical churn and a prediction of the impact churn may have in the future. Deciding on which results to use for your subscription business depends on the size of your company, your customer sample size, and your goals.
Predictive churn modeling
Once you’ve done a basic churn calculation, it’s a good idea to build a predictive churn model as well. It will help you anticipate customers leaving your service, so you can put a plan in place to stop them from leaving. This model also helps you predict future revenue by accounting for MRR that will likely be lost to churn.
How to manage customer churn
Combating customer churn is only possible when you have a solid retention process in place. Building this plan starts with recognizing what drives churn for your subscription business, as we covered earlier in this guide. Once you understand these reasons, you’re able to find tactics that directly address those issues.
Prevent it from happening in the first place
For most types of churn, there are strategies you can put in place to prevent customers from leaving. Prevention tactics are especially effective for decreasing involuntary churn, which is more solvable than voluntary churn. This is the foundation of customer retention.
Treat B2B and B2C churn differently
Churn impacts B2B and B2C companies in different ways. For B2C companies, the biggest issues are competition and the potential for individual credit card failures. For B2B companies, it’s a reliance on employee output and a high-touch customer service experience. Resolving these issues requires different types of strategies.
Aim for a net negative churn rate
Negative churn refers to your MRR being greater than the revenue lost to churn. In other words, you’re earning more than you’re losing. Maintaining a negative churn rate skyrockets company growth. Our research shows that businesses with a 5% negative churn are able to grow more efficiently than those battling positive churn rates.
Understand the churn rate benchmarks
The average churn rate for subscription companies is between 2% and 8%, which is a fairly wide range. A “good” churn rate is relative to the size and maturity of your business, but of course, lower is always better.
Customer churn is dangerous, but you can fight it
Don’t let churn be the silent killer of your subscription company. When you understand the drivers of churn for your business and have a retention process in place to combat those issues, you can drastically decrease your churn rate over time.
Learn more about how churn impacts your business and what you can do to stop it with Retain, ProfitWell’s churn-prevention software.
Reduce churn automatically with ProfitWell
ProfitWell is sitting on data from roughly 20% of the subscription-based economy, giving us an exclusive view into billions of transactions and the metadata surrounding payment methods within those transactions. When it comes to retention, we know what works and we know what doesn’t.
Our research shows that up to 40% of your churn is caused by failed credit payments. Most customers weren’t planning on cancelling and may not even realize their card is outdated. That’s where Retain comes in. We stop churn before it happens.
Retain strings together all the necessary outreach to recover failed payments—white-labeled, constantly tested and optimized emails, in-app notifications, and smart retries. The best part is that with Retain, you only pay for performance. We don’t charge until we beat your current recovery rate. Ready to combat churn? Get started today.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.