types-of-churn

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If you’re in SaaS business, you probably see nightmares about having a High Customer Churn Rate.

woke-up-from-churn-nightmare

HOWEVER, this bad boy isn’t just an issue for the people in the subscription model business, but understanding reducing customer churn should be a top priority to ALL business owners.

Why? Because by decreasing your monthly churn will have a significant meaning to your revenue and to the overall valuation of your company.

cohort-performance-churn

When your monthly churn is +3%, your revenue will go from $0 to $140.000 in three years.

But if your churn is -3%, your revenue will be $450.000 after three years. 

In other words: Decreasing your monthly churn by 6 % will lead to a staggering 221.429% increase in revenue.

 ​Also bear in mind the old truth that it is five times more expensive to attract new customers than it is to retain an existing one.

cost-of-customer-churn

Read more to find out everything you need to know about churn rates and how understanding it better will directly lead to:

  1. Fewer customers lost
  2. Less revenue lost
  3. More recurring business
  4. Less work for the sales team
  5. Lower customer acquisition costs
  6. Better customer lifetime value

1. Customer Churn in General

Customer churn = customer attrition = churn rate = customer turnover = customer defection = customer decay

Call it what you will. In laymen terms it means that you lose customers (or subscribers if you are a SaaS company)

Churn is the percentage of customers that stopped using your services or products  within a certain period. The period can be anything from daily, weekly, monthly, quarterly to annually, but most businesses calculate churn monthly, quarterly and annually.)

Here’s a simple way to calculate your monthly churn.

  1. Take the total number of customers who left you that month
  2. Divide that with the total number of customers at the beginning of the month
  3. Multiply by 100 (to get the %)
  4. Voilá! You have your monthly churn rate. The closer you are to 0%, the better you are doing.
churn-rate-formula

If you need the weekly rate, just use the weekly numbers. Easy.

Note that churn rates vary greatly by industry. You should know your market, customer segments and customer journey to be able to reduce churn effectively.

2. What is Revenue Churn?

By calculating customer churn rate, you’ll find out how well you are retaining customers. Revenue churn gives you an idea of how well you are retaining your revenue over a certain time period.

customer-vs-revenue-churn

Revenue churn can be used to analyze how churn is affecting your total revenue.

Most commonly, revenue means Monthly Recurring Revenue (MRR) which translates to the revenue your business is expected to receive over 30 days.

revenue-churn-rate

What Is the Benefit of Measuring Both Customer Churn and Revenue Churn?

By using both of these metrics, you’ll be more likely to identify the number of customers lost, the lost revenue and the overall effect that’ll have for your own business.

There are two important abbreviations to understand that play a role in the customer churn game.

  1. CAC = Customer Acquisition Cost = How much money it takes to get ONE new customer
  2. LTV = Lifetime Value = How much revenue does a single customer bring in during the time they use your products/services.

Wait. Why are these relevant? We are talking about churn rates and how churn can be reduced.

Churn rates and keeping existing customers are important, because:

  1. The lifetime value of each existing customer should always be at least three times more than the original customer acquisition cost was.
  2. The payback time for each customer should be less than 12 months
  3. It’s more 60-70% more likely that you sell something to an existing customer than to a new prospect
LTV-TO-CAC-RATIO-CHURN

In conclusion: Every customer lost means you are losing revenue in the long run. Big time.

Let’s dive into identifying churn to be able to do customer churn prediction.

3. How to Identify Churn in Your Business?

Generally speaking, churn can be divided into active and passive churn. You need to identify which are the key points in your customer lifetime cycle where customers stop buying from you. Only after that you can start to reduce customer churn.

  1. Active Churn means your customers make a conscious decision to leave you. They include:
    • Downgrading
      • Is an existing customer downgrading their current subscription?
    • Cancellations
      • Do you have dissatisfied customers who are cancelling their order altogether?
    • Stickiness
      • How often do your customer return to your product? Or use it more frequently?
    • Reactivation
      • Means the process of convincing your past customers to buy from you again. Putting it simples, someone churned, but you convince them to immediately come back.
  2. Passive Churn is harder to control, but here are some touch points to consider.
    • Expirations
      • Their subscription period has come to its end. Get to the bottom of why customer churn happens at this stage to lower that churn rate fast.
    • Credit Card Processor Issues
      • If your customers’ credit card has expired or is shortly going to, that’ll automatically cancel their subscription.
    • False Positive Fraud
      • If your customers are being flagged as frauds, and unable to use the service at all, it’s guaranteed to make them never come back. Try using multi-factor identification and the latest technologies available to prevent customer attrition.
    • Security Protocol Updates
    • Credit Card Limits
types-of-churn

What other types of churn have you identified?

4. A Simple Guide to Analyze Churn

Analyzing churn sounds like a piece of cake, right? You simply calculate customer churn rate, look at the number you got, compare to others in the industry and decide to do better to lower the churn rate in the future.

Wrong.

Analyzing customer churn includes figuring out:

  1. What your customer churn rate is
  2. WHY those customers churned
  3. When exactly did they churn

And most importantly:

4. How to fix the customer journey to lower you average churn rate

5-Step List for Analyzing Customer Churn

Let’s take a scenario, where a CEO notices that their total number of customers has gone from 5.000 to 4.800 in the past three months.

Before the CEO starts calling and blaming sales, customer success and marketing directors, they need to investigate what is going on by analyzing which customers have left and why.

1. Decide the time frame you want to analyze the data

How sudden has the drop been? Not sure? More is better! The more you have data to analyze, the better.

2. Calculate customer churn rate and revenue churn

Compare the annual to quarterly and even to monthly levels. Also compare to your previous data from that period to see changes. For example, monthly churn in March 2021 to March 2020 and March 2019,  but also to February 2021 and April 2021. The more you compare the numbers, the more patterns you’ll start to see in customer churn.

3. Find out WHY your customers churn

It’s not enough to know how many customer churned. You need to figure out why they did that. The best way to do this is to automate feedback collection in key stages of your customer journey. Including the stage where they left you.

The worst kind of customer attrition is when they leave without you even noticing and getting the chance to ask why. (I hate ghosting in personal and business life…)

If you aren’t collecting feedback yet, set up Trustmary in five minutes to make it impossible to ghost you anymore.

4. Look at which part of the customer journey customers churn

Collecting customer satisfaction data in different part of your customer path will also help you identify where exactly your churn rate is the highest and where the lowest.

If there are many black spots where customer churn happens, but you aren’t sure why, make sure to start asking for feedback before, after and maybe even during that part of the journey.

5. Figure out a plan to decrease churn rate in each department

Once the CEO has analyzed all this data, they should go over the results with the people responsible for sales, marketing and growth. As churn rate is easy to measure, it is also easy to track if the staff has succeeded in increasing customer retention in the future or not.

Make it a common goal in your company to keep the customers happy to prevent churn.

Not sure how to start reducing it? The next list is for you.

5. 9+1 Ways for Reducing Churn in 2022

When you’ve understood the importance of keeping your existing customer base as happy as possible and to lower customer churn rates in the long run, you’re on the right path in growing your business.

Here are nine actionable ways for preventing customer churn.

1. Measure Churn and Do Customer Churn Analysis

Measuring churn will give you the data you need to make sure you are doing well and growing as a business. Simply looking at new customers in doesn’t mean a thing, if your customer churn rates are skyrocketing.

By regularly looking at the customer churn data you’ll be able to spot trends and to become better at predicting customer churn. This the key to be able to retain customers before they leave. It’s so much easier to retain customers than to convince churned customers to come back once they’ve decided to leave.

2. Focus on Providing Exceptional Customer Service

In most cases, it’s enough if you just give good customer service to your current customers. Do aim to go above and beyond, as your best customers bring you an astounding 14 times the revenue than what a somewhat dissatisfied customer.

3.Retain Existing Customers > Getting More Customers

Focusing on customer loyalty is KEY. And don’t forget brand loyalty. How are you making sure you are creating added value to your customers AND that they think so too? Here’s a quick read on increasing customer loyalty.

Returning customers are 60-70% more likely to buy from you than new customers. Don’t forget to think about your CAC as well.

 

probability-of-sales-churn

4.Increase Customer Lifetime Value

Your goal is to create recurring value to your customers.

How well are you succeeding in offering this

  • for your existing customer base
  • for new customers?

Here’s hard data on you should focus more on creating more value for existing customers:

likelyhood-of-repeat-purchase
  • After a customer has purchased something from you once, there’s a 27% chance that they’ll buy from you again.
  • After the second purchase they are 45% likely to come back
  • The odds keep on rising, as if they come back again, the odds for another purchase climb up to 54%

5. Constantly Measure Customer Satisfaction

The major benefit of constantly measuring your customer satisfaction is that you are aware of what your customer think about you. Measuring customer satisfaction will help you identify which actions you should take today to stop losing customers.

If you aren’t already measuring customer satisfaction levels on a daily or weekly basis, start now. Get started in less than five minutes with our free trial.

Did you know that the customers how gave you a 7 or 8 out of 10 (Net Promoter score) are the most at risk customers to leave you?

Figure out who these 7s and 8s are, and you can make them happier before they churn.

6. Identify Customers That Need Your Help

If your existing customers are feeling that they aren’t getting their money’s worth from you, they’ll become a number in your “churned customers” statistics.To prevent this from happening, ask for customer feedback.

You need to know what’s broken in order to be able to fix it. This is not just about trying to reduce customer churn, but more about recognizing on identifying the key hurdles within your customer base during their customer lifecycle.

7. Apologize for Poor Service

We all make mistakes daily. That’s guaranteed. Customers churn when they feel like their opinion or experience isn’t important. One simple and effective way to reduce customer churn is to apologize for any mistakes made.

5 step Foolproof Formula for Apologizing
  1. Listen to what your customer has to say. Don’t interrupt!
  2. Count to five before answering.
  3. Don’t start explaining yourself, but simply apologize
  4. Ask how you could make the situation better
  5. Do your best to make their wishes come true

If you succeed in making their wishes a reality, you are actively reducing customer churn rate.

However, sometimes customers churn even though we’ve tried our hardest. That’s okay. But by using this formula to handle tricky situations, you’re significantly increasing the chances of your customers sticking around.

8. Value Customer Loyalty

Focus more of your marketing efforts on your existing customers. As you’ve already created a loyal user base, why not make them more engaged.

Points to consider:

  1. Are they aware of your new products and services?
  2. Tell them how they can benefit even more from using your services
  3. Write customer cases with data that can help others to succeed better
  4. Do you have a customer loyalty program?

Here’s a real-life example:

I bought an Oura ring in January 2019 and I’ve used it daily to this day to track my sleep, activity and general readiness scores.

Oura recently announced their 3rd generation Oura-ring and sent all the 1st and 2nd generation ring owners a personalized code to get 50€ off their purchase. In addition, they offered a lifetime membership to their app if you place your order using the discount code during the next 14 days.

To people unfamiliar with Oura, the use of their app has been free until the launch of this 3rd generation ring. For new users, it’ll cost monthly 5€ = 60€ annually.

Needless to say, I placed my order for a new ring without much hesitation. Why?

I felt that they are interested in keeping me as a customer when they offered this exclusive deal to me instead of new customers.

If they would’ve announced “Here’s our great new ring! Buy it here! Oh, and btw, you’ll now have to start paying us an additional 60€ every year to get to see the data the ring saves” I would’ve thrown my ring away immediately and never become one of their customers again.

Instead, they engineered a genius plan to increase customer retention, to get pre-orders and to minimize customers lost.

Bravo Oura, bravo.

How could you do something similar, when you launch a new product or service to reduce customer churn?

9. Treat Your Customers as Actual Human Beings

No matter if you’re a SaaS company, do B2B or B2C, every single one of your customers is a real human being. And they want to be treated as such.

Always treat your customers how you’d like to be treated. Furthermore, talk to them like they are humans. Even though you might feel that you serve companies, not individuals, remember that there is always actual individuals who use your products and services.

And the most obvious of them all as a bonus.

Constantly ask for customer feedback, and DEVELOP YOUR PRODUCT OR SERVICE ACCORDINGLY

No-one will use a product that isn’t creating them value (anymore). This is also one key elements of product led growth. When was the last time you stopped using something as it wasn’t quite your cup of tea anymore or just stopped creating any value for you?

If you want to stop losing customers, start measuring your customer satisfaction with NPS today. Begin your 14-day free trial for Trustmary here.

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