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Your top questions about churn answered

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Last editedMay 20223 min read

What is churn?

Churn is a measure of how much value a business with a recurring payment model loses during a specified time period. This value is commonly represented by the percentage of recurring revenue lost, but may instead be represented by the actual amount of recurring revenue lost (in $, £, €, etc.), the percentage of customers lost, or the actual number of customers lost.

Why is churn important? (Why is churn bad? Why reduce churn?)

Churn is important because it affects a business’ profitability and survivability. For recurring revenue businesses, the cost of acquiring a new customer needs to be outweighed by the lifetime value of that customer - if that customer churns before a net profit is reached, the business won’t be able to survive long term.

What is a typical churn rate?

A typical churn rate is 5.6% annually, according to Recurly. This differs for business-to-business (B2B) and business-to-consumer (B2C) businesses, as well as for different industries.

Can churn rate be negative?

Churn rate can be negative. This occurs when the recurring revenue gained from upsells during the month exceeds the recurring revenue lost from churned customers during that month. Negative churn is highly desirable.

Why do customers churn? (What are the drivers of churn?)

There are 9 drivers of churn, broadly:

  1. Positioning incongruity - When the way you position your product or service, in terms of problems it addresses, way it works (features), or benefits it provides, does not align with the experience your customer has.

  2. Poor onboarding or customer success - When, after your customer signs up for your product or service, they are not given suitable guidance to get set up and see quick initial success, or ongoing guidance to see continued or greater success.

  3. Poor product usage - If your customers don’t frequently use your product or service and do not have it firmly embedded in their workflow (so it becomes a habit) and their organisation, you’re likely to see higher churn. Some customers will become dormant - that’s to be expected - but you should address that dormancy with messaging to get them re-engaged.

  4. No drive towards product mastery - If you don’t educate your customers on how best to use all the features of your product or service and get the most out of it in the easiest way, you’re likely to see higher churn.

  5. Poor customer service or support - When things go wrong for your customer, a slow or un-empathetic approach from your business is likely to result in higher churn.

  6. Inappropriate pricing - Not understanding the price sensitivity of your customers, or pricing your product or service in a way that does not suitably represent the value it brings your customers, is likely to result in higher churn.

  7. Payment plan - Providing your customer with more purchasing decisions (e.g. by promoting a monthly plan over an annual plan) may result in higher churn, as it provides them with more opportunities to question the value you bring them.

  8. Payment method - If you take payments via credit or debit card, you are likely to experience involuntary churn, where your customer stops using your product or service because their card expires, is lost or stolen, reaches its credit limit, or a host of other reasons. Taking payments via Direct Debit, for example, is a way this risk can be mitigated.

  9. Feedback and product development - If you don’t take customer feedback on board (across the spectrum - from customers who love your product through to those who churn) and action that in your product development, you’re likely to see higher churn.

What are the costs of churn?

The costs of churn include lost recurring revenue, lost potential upsell revenue, and lost customer acquisition cost (of replacing the churned customer).

How is churn rate calculated?

Churn rate (%) is calculated by (monthly recurring revenue from customers lost during a month - new monthly recurring revenue gained from upsells) x 100 / (monthly recurring revenue at start of month).

Revenue gained from acquiring new customers is not factored into churn rate calculation. And although monthly is a common time period to measure churn over, it can be adjusted to other time periods if desired.

There are other alternative ways to calculate churn that each have their pros and cons. In some cases, these become extremely complex and are not worth doing for small-to-medium businesses (SMBs).

What is churn prediction?

Churn prediction is the act of using past churn trends to accurately estimate future churn trends. It involves using techniques like machine learning to analyse data about your customers and their usage behaviours when they use your product or service, to determine factors that identify those that are likely to churn in future.

Why is churn prediction important?

Churn prediction is important as it provides a business greater confidence about what makes customers churn, and how to identify those customers, so they can take steps to reduce it.

What is churn management?

Churn management is the act of identifying the factors contributing to churn in a business and undertaking actions to reduce it to an acceptable level. In some companies, this may include specifically focusing on high-value customers in addition to, or instead of, addressing general causes of churn across the entire customer base.

What churn tools are there?

Churn tools include:

  • Churn analytics - Software that integrates into a company’s CRM or support software to measure churn, as well as the customer’s behaviour leading up to it.

  • Subscription metrics - Software that takes existing payments data in your business to calculate a range of desirable reporting metrics.

  • Involuntary churn reducers - Software that identifies when payments fail and takes steps to help solve the problem and prevent involuntary churn.

  • Messaging software - Tools that allow your customers to reach out via live chat for instant support or even provide automated prompts at the right time and place to educate or guide customers towards success.

  • Feedback capture - Software that automatically reaches out to customers to solicit feedback on your product or service.

  • Onboarding assistance - Tools that enhance your customer onboarding by automatically guiding them through the features of your product or service.

  • Heatmaps - Software that detects and aggregates where customers click (in your digital product).

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