What is churn?
Churn refers to a customer cancelling their subscription to your products or services. It is a common metric among especially SaaS(service as a subscription) businesses.
Churn exists at some level in every business, so it is unavoidable, however, businesses try to come up with innovative ways to reduce it as much as possible. It is a widespread practice to find the reasons for customer churn and eliminate them to bring the churn rate down.
The reason why a customer churns can be anything. It is up to you to find common reasons and eliminate them after conducting a churn analysis.
A high churn rate means that there are many frictions in your product which force users to quit using your app and cancel subscriptions. Smoothing these frictions can create instant improvements to your churn rate which leads to a higher revenue and profit.
If you have a churn rate lower than your industry average, finding out what keeps users satisfied and further improving these points can result also in an increase.
How to calculate churn rate?
Whether monthly or annually, churn rate formula is: total number of churned customers / total number of all customers.
Monthly churn rate can be used to stay agile and undertake the necessary actions in short-term to keep your revenue high month to month. Calculating churn rate each month helps businesses stay on their toes and ensure they are making progress for their monthly, quarterly, and annual goals.
Calculating the yearly churn rate in the other hand helps keep you track of the effectiveness of your long-term strategies and how they’ve contributed to your business. However, yearly churn rate is not a sufficient metric alone to improve, calculating churn rate monthly will help you draw-out effective short-term plans and ensure that you are making progress every month and every quarter.
The other metrics that are related to churn rate are:
- Retention rate: this refers to the percentage of users that keep using the product. Churn can also be acquired by deducing retention rate from 100.
- Net Promoter Score: this score is helpful in measuring the satisfaction of customers with the product. The less satisfied customers are, the more they will be likely to churn.
- Customer lifetime value: this refers to how much value is obtained from an average customer before they churn. If the churn rate is reduced, there will certainly be an improvement in the customer lifetime value.
What is churn analysis?
Churn analysis is the process where a company analyzes its churn rate and the main factors affecting it in order to minimize churn.
Regularly measuring the churn rate is not going to solve any problem unless effort is made to reduce it. This is where churn analysis comes into play. By the end of a successful churn analysis the steps that should be taken to reduce churn should be clear.
During churn analysis, a few questions should be answered: (1) what are the characteristics of the customers who’ve churned, (2) what is the reason behind their churning, and (3) what could prevent them from churning. Interacting with real users who have churned/about to churn by email, feedback modals, or surveys can be useful in gathering data.
Collecting real data from churned users and analyzing it will help the business plan solid short-term and long-term strategies to get rid of the existing problems that make customers churn.
Conducting churn analysis is not always necessary, as the reasons for churn might be obvious. It becomes necessary when the business has an increasing churn rate and there is no obvious reason. In addition, churn can’t be eliminated completely, so if a business is experiencing a churn rate below industry-average, there will be no need for a churn analysis.
However, it is recommended to conduct churn analysis regularly to ensure that churn is as minimal as possible. There could be problems businesses aren’t aware of that could be solved easily. Churn is a threat to revenue unless there is no more room to improve.