A Guide to Churn Rate Part 1: The Basics, How to Calculate it & How to Reduce it

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Everyone can agree that data is critical to sustainable SaaS growth, but what data matters the most. For many start-ups, it is the concept of churn rate. Yet, churn rate is a result, not an indicator of your product’s performance. With that in mind you have to ask yourself, does churn rate really matter? Before we touch that topic (and we will in this series) - let’s get into churn rate fundamentals.

This article covers:

  • What is churn rate?
  • Different types of churn rate
  • How to calculate churn rate?
  • Different reasons for churn rate 
  • How to reduce churn rate

What is churn rate?

Churn, as I’m sure you're aware, is when customers stop doing business with a company. In addition to that, it can be customers who cancel their subscription or don’t want to renew it. A high churn rate equates to less MRR and unstable MRR.

Plus, acquiring customers can be a costly endeavor, so this might be why companies are so obsessed with their churn rates. 

There are two types of churn you need to know about: 

Customer churn, revenue churn

Customer Churn rate is when a customer cancels or doesn’t renew your contract. This is the most common and universal churn calculation. Revenue Churn is when a customer who was given a special offer or paid for an annual subscription (also usually discounted) with one invoice cancels their plan. 

The reason many companies separate these metrics is because their client persona and acquisition strategies are quite different, so understanding where and why they are experiencing attrition is important.

How Do You Calculate churn rate?

There are so many ways to calculate churn rate and that’s why it can be complicated. Whatever you decide is your approach to calculating churn rate, be sure to communicate it with all of your departments.  Below is a popular approach to calculating this metric.

First choose a time period – monthly, quarterly, or annually. Be sure that you know the number of customers you had at the beginning of the time period and customers at the end of the time period. 

Once you have a time period and customer volume data points settled, you divide the number of lost customers by the number of customers you had prior to the churn and then multiply that number by 100. 

Here is an example:

Let’s say that you sell your product to 500 customers at the beginning of the quarter, but, you lost 50 customers.

Customer churn rate= (lost customers ÷ total customers at the beginning of time period) x 100

Your company churn rate= (50 ÷ 500) x100 = 10%

Many experts don’t recommend taking action on monthly churn rates. This has to do with many factors. 

  1. You may have run a monthly discounted offer
  2. You may have a month-long trial period
  3. Monthly churn doesn’t provide enough insightful data relating to either product updates or launches, marketing campaigns, etc.

On the opposite side of the spectrum, the annual churn rate is extremely useful. Here is how you can measure your churn rate annually.

Once you have a system in place to track your retention, it is time to start working on a solution, because remember - churn is a lagging metric. It again is the result, not the cause.

How to Reduce Churn 

 Understanding what causes churn is critical to prevent. One of the best ways to gain insights into your product’s performance is to survey your customers. NPS surveys are really effective in this case. They can explain product or support issues and customer needs. 

Speaking of support, you can look at tickets or how you communicate product updates and fixes to perhaps bugs. Do you have self-serve knowledge base tools? Do you communicate updates properly?

Another area to assess is product usage. How engaged is your customer? What feature are they using most? What features are they not? Then dig a little deeper. Are certain features being used by industry more than say another sector? Once you have a deeper understanding you can start to address those issues in the following ways:

  • Forecast churn based on key indicators that you put in place and ideally prevent it
  • Better targeting and acquisition allow you to not only reduce CPA but also gain more qualified leads who are more likely to see the value of your product
  • Improve product engagement by focusing on behavioral segmentation which means the customer is getting information that is relevant to them as opposed to spam like communication 
  • Provide proactive customer support so your customers feel empowered to find solutions based on how they use your product

Summary on Churn

While churn is an important measurement, it still doesn’t give you the big picture of what is going on with your product and your customer experience. Before you dive into churn, you need to set your data methodology for evaluating your churn rate. Once that is done, you need to dive into the cause which means you need to embrace digital CSM. We will get into that in our next Fireside Chat with Elizabeth Courland. In the meantime, put in your data foundation - how you measure churn and its causes. This is the first and best approach to preventing churn.

If you still aren’t sure what to do - ask us - we average 0.1% churn and are happy to share how we do it

(HINT: we use our own product).

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Heather Rodgerson
British, born and raised. Digital Marketing Nerd living in the Costa-del-sol, Spain. Full-time Growth Marketer, book worm, Lego lover & gym rat. Part-time singer, translator & sketcher

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