Definition: Churn is a measurement of the percentage of accounts that cancel or choose not to renew their subscriptions. A high churn rate can negatively impact Monthly Recurring Revenue (MRR) and can also indicate dissatisfaction with a product or service.
What is churn?
Churn is the measure of how many customers stop using a product. This can be measured based on actual usage or failure to renew (when the product is sold using a subscription model). Often evaluated for a specific period of time, there can be a monthly, quarterly, or annual churn rate.
When new customers begin buying and/or using a product, each new user contributes to a product’s growth rate. Inevitably some of those customers will eventually discontinue their usage or cancel their subscription; either because they switched to a competitor or alternative solution, no longer need to product’s functions, they’re unhappy with their user experience, or they can no longer afford or justify the cost. The customers that stop using/paying are the “churn” for a given period of time.
How to calculate churn
In its most simplistic form, the churn rate is the percentage of total customers that stop using/paying over a period of time. So, if there were 10,000 total customers in March and 1,000 of them stopped being customers, the monthly churn rate would be 10%.
But where and when you start counting and calculating can impact the math and eventual churn rate. For example, if the product began March with 8,000 customers and added 2,000 new customers that month, should the 1,000 customers who quit be divided by 10,000 (total customers at the end of the month) or 9,000 (total customers at the beginning of the month, factoring in the addition of 2,000 and the subtraction of 1,000.) or 8,000 (total customers at the beginning of the month, regardless of how many were added)? That could change the monthly churn rate from 10% to 11.1% or 12.5%.
Beyond that, there’s also settling on the “moment of churn”: do you calculate churn based on when users cancel or when their subscription actually ends (which may be later in the month or even the end of the year). If you choose the latter option, it becomes impossible for a customer to churn in the same month they sign up, which may hide the fact that some customers are quickly dissatisfied enough with the product to cancel almost immediately.
However, many companies have adopted slightly more sophisticated and nuanced approaches to calculating churn. Some will take an average of the number of customers at the beginning and end of the time period in question as the denominator in the churn equation. Others will use weighted averages or rolling metrics to try and divine more accurate churn rates.
Other tactics may include breaking out the total customer base into different cohorts and calculating individual churn rates for each one. This more granular approach can identify which customer types are churning more often, as well as breaking out new customers from long-standing ones.
Regardless of which calculation method is ultimately used, the most important thing is using the same formula consistently for accurate period-to-period comparison and creating a reliable KPI. There may be dips and spikes when there’s a large influx of new customers, but it at least provides a reliable methodology.
Why customers churn
Although there is no magic answer to this question, there are a few likely causes for churn:
- Customer no longer values the product—Whatever first attracted the customer to the product and inspired initial usage is no longer present. This could be a change in customer priorities or a change in the product itself.
- Motivating factors to use the product no longer exists—Customers purchase and use a product because it solves a problem or addresses a need, but not all problems and needs are permanent.
- Customer frustrated with product user experience—Dissatisfaction with usability, lack of features, or persistent bugs and performance issues can drive a customer away.
- The product lacks a mandatory capability required by the user—A customer needs the product to do something, but the product does not offer that functionality (or the customer lacks awareness or training of how to access and utilize that capability).
- Value to the customer does not justify the expense—The ROI for the customer is no longer there.
- The customer has found/switched to an alternative solution—This may be a direct competitor or an indirect alternative that is free or already available (i.e. instead of a reminder app the customer will just write down their notes on paper).
- Damage to product reputation—This could be a security issue, noteworthy performance problems, terrible customer service or bad acts by the company or company employees.
Of course, each departing customer has their own motivation for discontinuing their usage. Exit surveys/interviews and analyzing the usage behavior of churned customers may reveal larger trends.
The impact of churn: What it means for product managers
Churn could quite possibly be the most important metric for SaaS product managers since it is a very telling measure of the perceived value the product delivers. While marketing and sales are primarily responsible for bringing in new customers, the product experience itself will determine how many stick around and for how long.
The cost of acquiring new customers is much higher than the cost of retaining those already onboard, so reducing churn is a real financial priority. Everything possible should be done to keep current customers satisfied, maintaining their usage and increasing their lifetime value. Plus a high churn rate can also damage a product’s net promoter score.
Product managers have two key tactics to employ in reducing churn: user research to understanding customer behaviors and proactively addressing product shortcomings. Having a sense for which usage patterns are predictors of potential defection allows for both forecasting future churn and activating account management to engage wavering users while prioritizing features and enhancements specifically targeting the concerns of current customers both displays customer centricity and reduces their reasons for leaving.
How to reduce churn
Churn is reduced by increasing the perceived value proposition of the product to current users. This can be achieved in a number of ways since the value is determined based on several factors.
- Make sure customers get the most out of the product—It doesn’t matter how much a product can do if end users aren’t aware of those capabilities, can’t figure out how to use them and aren’t positioned for success. Invest in onboarding, training, tutorials, contextual help, and proactive customer support to increase the chances that customers will understand how to actually use the product to its fullest.
- Recruit the right kind of customers—Not all products are right for everyone, so work with sales and marketing to target prospects matching the product’s ideal buyer personas. Ensure messaging is accurate and highlights actual product capabilities and benefits.
- Price based on value—Customers don’t care about vendor profit margins, growth rates, and revenue targets; they want to pay what they think a product is actually worth to them. Use customer-focused pricing strategies that present a clear ROI to users.
- Continually add value without breaking what already works—Current customers don’t mind and may appreciate new features, but this should never come at the expense of diminishing existing capabilities or disrupting the user experience.
- Don’t take customers for granted—No renewal should be considered a given and any customer may cancel at a moment’s notice, so continually engage customers to understand their likes and dislikes as well as what could improve their experience.