Churn can be a headache for SaaS businesses if not handled timely and effectively. It can negatively impact a business's profitability and sustainable growth. This guide discusses in depth the churn analysis and its importance. It explores what causes customers to churn, various churn types, and how to reduce them. Let's dive in.
What Is Customer Churn Analysis?
Customer churn analysis is analyzing and understanding why customers stop doing business with a company. It is a key metric for businesses, as it can significantly impact their revenue and profitability.
Companies use customer churn analysis to identify patterns and trends in customer behavior and to develop strategies to reduce churn rates. It involves analyzing data on customer interactions, including customer service inquiries, purchases, and others. By understanding the reasons behind customer churn, companies can improve their products, services, and customer experience to retain and grow their customer base.
What Is a Good Churn Rate?
A low churn rate is generally considered good, indicating that customers are satisfied with the company's products or services and are likely to continue doing business. It increases revenue & profitability and lowers the cost of acquiring new customers.
However, a low churn rate may signify a stagnant market or a lack of competition. In some industries, it is typical for a certain level of churn to be considered normal. For example, in the subscription-based industry, it is common for customers to sign up for a service, use it for a period of time, and then cancel their subscription when they no longer need or want the service. In this case, a churn rate of around 5-10% per month may be acceptable.
On the other hand, a high churn rate can be a sign of significant problems with the company's products or overall customer experience. A high churn rate leads to a decline in revenue & profitability and an increase in the cost of acquiring new customers.
Why Does Churn Analysis Matter?
There are several reasons why customer churn analysis matters:
- Reduces Revenue Loss Customer churn significantly impacts revenue, especially for businesses with a subscription-based model. By understanding the reasons behind churn, companies can take steps to reduce churn and increase revenue.
- Improves Customer Retention Businesses want to maximize the value of their customer relationships. Also, acquiring new customers can be expensive. User churn analysis helps to identify ways to improve customer retention and increase the lifetime value of their customers. Businesses can maximize profits without incurring high customer acquisition costs.
- Increases Competitiveness With User churn analysis, businesses can understand how they compare to their competitors regarding customer retention. By identifying areas where they are losing customers to competitors, businesses can take steps to improve their offerings and retain more customers.
- Improves Customer Experience By using customer churn analysis, businesses identify areas where their product or service is not meeting the needs or expectations of their customers. By understanding these issues, companies can improve their offering and reduce churn. Also, fixing customer experience-related issues leads to an improved product offering.
How Is Churn Rate Calculated?
To calculate the churn rate, determine the number of customers your business lost and the total number of customers at the beginning of the period. The formula for calculating the churn rate is as follows:
The period used for the calculation will affect the churn rate. It is essential to consider the context and industry when interpreting the result. A high churn rate may be a cause for concern, but it may also be standard for particular industries or business models.
How to Analyze Churn
You first need data to analyze the churn. Analyzing churn begins with tracking. Here's a step-by-step process to improve churn rate:
- Identify the actions or inactions that constitute churn for your business.
- Collect data on customers who have churned. A subscription-based analytics tool like Usermaven is a great way to start the user churn analysis.
- Analyze the data to identify crucial KPIs , patterns & trends and determine the root causes of churn.
- Develop a plan to reduce churn, and implement and track the results of your efforts.
You can analyze the data to identify churn insights by segmenting customers across the following main categories.
Churn Analysis by Revenue
Customer churn analysis by revenue is the process of analyzing customer churn within a business based on each customer's revenue. Revenue-based segmentation can lead to identifying issues related to product offering and pricing. Early-stage businesses can reduce customer churn (caused by budget constraints) by offering discounts, flexible payment plans, or free trials. Moreover, an established business can determine if its pricing meets business growth needs and ensure it scales accordingly.
Churn Analysis by Industry
User churn analysis by industry refers to customer churn within a specific industry or market. It involves identifying the factors that contribute to churn within a particular industry. It allows businesses to understand the specific challenges and opportunities that exist within their industry.
For instance, a business in the SaaS may want to understand the churn rate for their industry and compare it to their churn rate to see how they are performing relative to their competitors. With this segmentation technique, businesses can identify areas where their product is not meeting the needs or expectations of their customers. Thus, they can find ways to differentiate their offering from their competitors.
Churn Analysis by Geography
User churn analysis by geography looks at customer churn within a specific geographic region or location. Different regions have their tax laws, payment options, and processing methods. Analyzing churn by geography helps you identify any bottlenecks your customers might face. You can solve these problems by offering multiple payment gateways and compliance with regulations.
How to Analyze Churn by Cohorts?
Churn cohort analysis lets you get to the root cause of churn within a specific group or "cohort" of customers. To analyze churn by cohorts, you first have to define the cohort. Identify the particular group or cohort of customers that you want to analyze. It can be based on customer segment, sign-up date, feature, touchpoints, etc. Next, collect data on churn rates, customer demographics, usage patterns, and satisfaction scores.
Analyze the data to identify trends and factors contributing to churn, such as low customer satisfaction or infrequent usage. Based on your analysis, identify opportunities to improve customer retention within the cohort.
Finally, implement the changes you have identified and track the results over time to see if they impact churn. Continually collect and analyze data to identify further opportunities for improvement.
With Usermaven, you can perform retention cohort analysis and track slipping away users to re-engage them timely to reduce churn rate.
Monitor Relevant Key Performance Indicators (KPIs)
Some of the most relevant and useful KPIs for analyzing customer churn includes:
- Net promoter score (NPS): It measures customer satisfaction and loyalty by asking customers "how likely they are to recommend the service to others." By tracking NPS, businesses can identify customers at risk of churning and take steps to improve their satisfaction.
- Customer Satisfaction: As the name suggests, it measures customers' satisfaction with the product. By tracking customer satisfaction, businesses can identify areas where they are falling short of customer expectations and take steps to improve their offering.
- Usage Engagement: It measures how often customers use the product. By tracking usage patterns, businesses can identify customers who are not using the product as frequently as expected and take steps to improve engagement.
Pinpoint What Type of Churn Is Happening — Then Take Action
By understanding the type of churn your company might face, you can better equip yourself to handle it. Usually, businesses come across the following types of customer churn.
Early or Late Stage Churn
Early-stage churn refers to the rate at which customers stop using a product or service within the first few months or years of their relationship with the business. It is often more significant for businesses because it can occur before customers have had a chance to realize the product's value entirely.
Late-stage churn refers to the rate at which customers stop using a product after a more extended period. It may be more challenging to identify the root causes because customers have had more time to use the product.
Voluntary Active Churn
It happens when customers cancel their subscriptions or stop using a product or service. Voluntary churn can be caused by various factors, such as dissatisfaction with the product, changes in the customer's needs or circumstances, or a better alternative that became available. Companies are likely to face voluntary churn more than any other churn. To handle it, you can:
- Target the right customers that are the right fit for the product
- Improve customer onboarding
- Ask for customer feedback.
- Provide resources to educate the customer to get the most out of your product.
Involuntary Passive Churn
Involuntary churn is when customers stop using a product or service due to external factors beyond their control, such as a credit card expiration, an account being closed due to non-payment (payment decline), etc. You can easily undo the impact of this churn and regain the revenue lost by identifying and fixing the issue causing it.
The "Good" Churn
While any churn can hurt revenue, "good" churn is generally considered less of a concern because it does not reflect the quality or value of the product or service. Some businesses may even view "good" churn as a positive development, indicating that the customer has outgrown the product and is moving on to something else.
Businesses can focus on maintaining good customer relationships and providing customer service to minimize the impact of "good" churn. It can reduce the risk of involuntary churn and increase customers' likelihood of returning or recommending the product to others.
Overall, "good" churn is an inevitable part of doing business and cannot be eliminated.
Downgrade churn refers to the rate at which customers reduce their usage or subscription level for a product. It results from switching to a lower-priced plan, canceling certain features or services, or reducing the number of users or devices covered by the subscription.
It can be a significant concern for businesses with a subscription-based model. Some common reasons for downgrade churn are customer needs changes and poor value proposition. To minimize downgrade churn, you can provide value to your customers, stay up-to-date with industry trends & customer needs, and continuously improve your offering.
Find Out Why Your Customers Are Churning
Here are some of the top causes of churn and potential ways to address them:
- Poor product or service quality:
- Lack of value:
- Poor customer experience:
- Attracting the wrong audience:
- Expensive product:
Customers may churn if they are dissatisfied with the quality or functionality of the product. Focus on improving the product, responding to customer feedback, and providing excellent customer support. Fix any bugs in your product and eliminate downtime to whatever extent possible.
Customers churn if they feel the product needs to provide better value for money. Businesses can focus on helping customers achieve their goals with the product and enhance the onboarding experience.
Customers also churn if they have a negative experience with the business, such as poor customer service or difficult-to-use products. Focus on providing customer service and support, making products easy to use, and addressing customer complaints promptly and effectively.
Another cause for customer churn is if they find a better alternative from a competitor. To avoid this, focus on differentiating your offering from competitors, staying up-to-date with industry trends, and continuously polishing the product positioning.
Often, customers sign up for a product and find out it's different from what they were looking for. It happens because your product was not the right fit for the customer. To avoid this problem, you need to get your customer persona right. Your message can become effective by understanding customers' needs, desires, and motivations.
Another reason why customers churn is when your product is too costly. You can optimize your pricing for value and make your customers see the value in your product with your marketing message. You can test your pricing to determine what customers are willing to pay to match it with what your product is worth.
Tips on Reducing Churn Rate
Depending on your business, customer base, and product type, it can be challenging to reduce the churn rate. We have the following tips you can benefit from.
- Ask for customer feedback regularly to catch problems before they lead to churn.
- Educate customers on how to get value from the product by offering resources like a knowledge base and product tutorials.
- Stay engaged with customers to build a meaningful relationship and customer trust.
- Build a user community to foster customer loyalty and provide new ideas.
- Focus on retaining the users that bring the most value to your business (most profitable segments).
- Offer incentives to customers considering canceling their subscriptions.
- Monitor competitors to stay aware of new features or improvements to keep your product updated and meet customers' ever-evolving needs.
- Send out customer surveys to gauge their satisfaction with your product.
Why You Need to Analyze Churn Rate Frequently and Accurately
Delivering an exceptional customer experience is the result of an ongoing process. Similarly, customer churn analysis becomes more fruitful when done regularly. Periodically analyzing business metrics keeps you updated on the performance of your product. But these metrics don't usually reveal the real cause of an issue. Keeping an eye on customer churn can help you find areas that need attention. Frequent monitoring leads to improved product and business growth.
To help you reduce customer churn, Usermaven offers actionable insights. It lets you see where users are getting stuck during the onboarding process. Once blockers are identified, you can optimize the user journey to help them reach the 'aha' moment. You can measure engagement metrics, stickiness ratios, power users, and more to maximize customer success.
FAQS About Churn Analysis
What Does Churn Mean?
Churn refers to the rate customers cancel their subscriptions or stop using a product or service. It's an important metric for businesses to track and understand because it can impact revenue.
How Do You Analyze Churn Analysis?
Businesses can take the following steps to conduct customer churn analysis:
- Start by determining the specific goal of your user churn analysis.
- Next, gather data on churn rates and other relevant metrics using an analytics tool.
- Use the data to analyze the churn rate and identify trends or patterns.
- Identify opportunities for improvement.
- Implement the changes that you have identified and measure their impact on churn.
- Continually collect and analyze data to identify further opportunities for improvement.
How Is Churn Calculated?
Churn is typically calculated as the percentage of customers who cancel their subscriptions or stop using a product or service over a given time period. The formula for calculating churn is:
For example, if a business has 1000 customers at the beginning of the year and 100 churns over the year, the annual churn rate would be 100/1000 = 10%.