Churn Rates: What It Is And How To Use It To Boost The Bottom Line

High churn rates can hurt your business growth

Churn rates are crucial to monitor, especially in a recurring revenue business model. If you cannot keep your existing customer base happy, growth will become very hard. Before you find out how to reduce customer churn, let’s get clear with a churn rate definition.

Understanding Churn Rates

There are ways to define churn rate – as a concept and as a metric. Let’s cover both of these quickly as a starting point.

A churn rate is the percentage of customers that cancel their subscription in a certain period. If 50% of your total customers cancel their annual contract, you would have a 50% churn rate. A 50% churn rate will make it very challenging to grow your company even if you have a fantastic SaaS conversation rate.

Your churn rate as a business metric should be calculated regularly (e.g., monthly) if you have monthly plans or annually if you sell contracts with an annual retention rate.

Use this formula to calculate your churn rate so that you can improve your retention rate.

1. Choose a time period for your churn rate schedule (e.g., monthly, quarterly, or annually) . Let’s say it is an annual time period.

2. Count the total number of customers acquired in this time period through your customer acquisition period. Example: Your customer acquisition plan is working well, and you signed up 1,000 customers in your ideal customer segment.

3. Measure your customer churn number (i.e., number of customers who canceled their account) in the same time period. For example, you lost 250 customers because of bugs in your company’s mobile app.

4. Do your customer churn math: divide the total number of lost customers by the number of acquired customers. For instance, 250 divided by 100 equals 0.25.

5. Multiply that number by 100 to determine your customer churn rate (i.e., 25%).

Find Your Path To A Lower Churn Rate With These 5 Questions

No company dreams of losing a customer. Yet, some amount of revenue churn is inevitable in business. Deciding whether you have a severe annual churn or revenue churn problem requires you to consider a few questions.

1. How does your annual churn compare to other companies in the industry?

Churn rates vary considerably. For instance, B2B SaaS companies observe that churn tends to be higher in the small business segment than the enterprise customer segment. Still, it is helpful to review a few churn benchmarks:

  • The average annual churn rate for SaaS companies is 3.73% (voluntary churn) and 1.06 (involuntary churn), according to Recurly’s churn rate benchmarks.
  • “When looking at churn based on the size of the company, you’ll notice that churn only loosely correlates with a company’s monthly recurring revenue with wide interquartile ranges that fluctuate between 5% and 16% gross revenue churn on the low end of MRR and 2% to 8% on the high end of MRR.” – Profitwell on churn rate benchmarks

Now, you’re probably wondering when you should get worried and take action to improve churn. Baremetrics shares the following perspective on SaaS churn:

“A typical “good” churn rate for SaaS companies that target small businesses is 3-5% monthly. The larger the businesses you target, the lower your churn rate has to be as the market is smaller… For an enterprise-level product (talking $X,000-$XX,000 per month), churn should be < 1% monthly. Most early-stage SaaS companies I’ve observed typically have churn around 10-15% for the first year as they work out exactly what their product needs to do, then they’re able to reduce it pretty quickly.”

After you get past your first year or two of business, your SaaS churn better get under 10%. If you consistently have a higher churn rate, you have a problem! You will need to take a closer look at your customer retention process and use cohort analysis to determine which customers are staying and which are leaving.

Above-average churn rates are going to make it more challenging to get funding. It is an essential factor that investors may ask you about when you seek out finding. After all, who wants to pour water into a leaking bucket?

2. What are you learning from churned customers?

Whether you call them churned customers or lost customers, there are important insights you can learn from this group of customers. As a starting point, use a survey to ask customers about their plans and what they plan to do next. For example, when I canceled an Aweber account, I was asked if I was switching to another provider. I had switched to another email marketing platform – Mailchimp. By analyzing this type of customer attrition, Aweber may find ways to improve their SaaS conversion rate.

3. Are you analyzing credit card issues to lower churn?

If your business model relies on credit card billing, pay attention. There are proactive steps you can take to lower churn. Start with expiration date management. When customers pay by credit card, find out when their card is going to expire. Once you have that information, reach out to them two months in advance and ask them to update their credit card.

In a small business, the sales team or business owner should take on the work of reaching out to customers with expiring credit cards. Likewise, you should also develop a process to identify declined credit card payments and contact customers about that problem.

Tip: If your credit card management becomes overwhelming, transfer this responsibility to customer support and give them a tool like Zendesk to manage this activity.

4. Reach out to lost customers regularly

There are several ways to look at churned customers. You could take their loss personally and refuse to speak to them again. Or you could review their customer dissatisfaction comments as an opportunity to improve. For example, if your lost customers complain about a lack of Shopify integration, your development team may eventually solve that problem.

Once you have solved a cause of customer dissatisfaction, ask your sales team to contact lost customers again. Tell your lost customers that you have improved the product and invite them to take another free trial. With this practice, your overall growth rate will improve over time.

5. Analyze the impact of seasonality on your business

Seasonality patterns sometimes play a role in your annual gross revenue. For example, retailers tend to have higher revenue in the final few months of the year due to holiday shopping. You might find that summer is a slow season in the enterprise market because decision-makers are unavailable.

Detecting seasonality in your business takes a few steps. Start by making a list of the lost customers. Next, look at the cancellation dates. If you find that many of them are canceling in the same month, you can make a probability cancellation about churn rates (e.g., customers cancel in the summer months). Instead of accepting seasonality as natural attrition, you can plan.

Over the next 12 month period, set up a field experiment to engage customers before seasonal patterns cause them to cancel. For instance, consider organizing a webinar or a virtual event in May to create new excitement about your product before the summer vacation season arrives.

Reduce Your Churn Rate: 3 Evergreen Techniques To Use

Once you understand the business drivers for your churn rate, you need techniques to improve this figure. If you keep improving, you might reach the promised land: negative churn!

1. Are you using pricing tiers to reduce churn?

If your customers only have one way to pay, canceling becomes much more attractive. That’s one reason why pricing tiers are so popular in the SaaS industry. Your annual gross revenue should have customers switch from a $1,000 per month plan to a $500 per month plan rather than canceling entirely.

Adding a lower-priced version to your business model lets your customer save money and prevents customer lifetime value from crashing.

2. Offer a better deal to retain customers

There are several ways to improve customer satisfaction so that you can keep your monthly revenue high. Start by finding out the customer’s desired outcome with your product. For example, are they buying a marketing automation app to double their marketing efforts on social media sites? Your customer may not reach their desired outcome because your onboarding process was too complicated to figure out.

Offer a better deal by creating a customized onboarding process for the customer. Empower sales reps to spend more time on customer happiness and your churn rates will come down over time.

3. Are you improving your onboarding process every month?

The onboarding process plays a significant role in guiding your customers to achieve their desired outcome. For example, take the Quickmail onboarding process as an example. Rather than relying on sales people, customers sign up for a free trial. To achieve results, Quickmail sends a series of emails that strike the right balance between inspiring users to send emails and learning how to use the product’s features.

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