You’ve heard about it, and you’re probably a bit scared of it — the ominous churn rate.
But there is good news. The customer churn rate isn’t something to be afraid of. Instead, it’s a critical metric that will help your business succeed. And sometimes, it’s even a good thing.
In this article, we dive into what a churn rate is, how to perform a churn rate analysis, and when customer churn can be your good friend rather than foe.
What Is Customer Churn?
The customer churn rate, or simply churn, is arguably one of the most important metrics of your product’s market performance.
Churn measures how many customers have stopped using your product or service over a given period. Calculating it is pretty simple — just divide the number of customers you lost in a period (month, quarter, year) by the number you started with.
How Do You Perform a Churn Analysis?
The churn rate gives you a critical number, but what do you do with it?
Once you’ve calculated the churn rate, you need to understand what this number means and how it affects your business.
An ideal churn rate for most SaaS companies is between 5% and 7% annually. This means you are only losing a few customers, which is natural.
However, if the churn rate goes above 8% per year (and it can reach 30%, 50%, or even more), you need to critically assess what’s going on with your product and fix it, ideally ASAP.
There are many reasons for high churn rates:
- Low service quality
- Poor market fit
- Avid competition
- Lacking engagement
- Price sensitivity
- Performance issues
- Market changes
- And more
A crucial part of your churn analysis process is determining the underlying causes of a high churn rate.
The good news is that regularly performing a churn analysis lets you detect issues early on. It’s like a warning system that alerts you to issues you might not be aware of otherwise.
As long as you pay attention to the metrics and take appropriate steps to fix the issues, then you’ll be on the right track to high performance.
Ways Churn Can Actually Benefit Your Business
But what about that 3% to 7% of customers that do leave? Shouldn’t we try to retain them too?
Simply put, no. Or not in most cases. Some churn is, in fact, good for business. Let’s take a look at why.
1. Remove Users Who Are Not Engaged
When focusing on product-led growth, churn might indicate the removal of those users who are not engaging with your product or service.
This is a good thing because you can focus your efforts on paying customers and not be distracted by those who were never going to convert.
2. Expand Your Quality User Base
Similarly, you want a user base that is likely to spend. Getting rid of unpaying customers is in your best interest because you want to increase each user’s lifetime value (LTV).
Of course, it can be difficult to know whether users are falling off because they were never going to pay for your services in the first place or because they didn’t like the product but are willing to pay for it if it’s good.
To know, you’ll need to dive deeper into other metrics like net revenue retention, which measures both lost and gained revenue over time.
3. Focus on Customers with High Lifetime Value
It costs money to onboard and retain each customer. You want returns on investment (ROI) for your efforts. Instead of spending time and money on customers who won’t spend much, churn can be a sign that only quality customers remain.
Over time, this can mean higher LTV per customer than if your user base didn’t change. This improvement in customer quality can positively impact your income statement by increasing revenue per customer while potentially reducing costs.
4. Optimize the Customer Service Cost vs Revenues Generated
Customer service also costs money. You need various tools, like chatbots and help centers, to onboard, maintain, and support customers across their user journey. You also need a customer care team.
Your overhead may suffer if you are estimating the scale of your customer service team based on a user base that isn’t engaging or spending any money.
So, when unpaying users drop off, you can save on customer service costs while generating higher revenues.
5. Build a Better Pricing Strategy
Price sensitivity is another reason customers leave. Getting your pricing strategy right is critical to the success of your SaaS business.
Higher churn rates can help you realize that your pricing is off and adapt accordingly.
You’ll need to do a deep dive into the customer journey to see when users are abandoning your product and why. If price is the issue, you can test new pricing strategies to respond to high churn rates.
6. Improve Your Product Market Fit
Often, churn indicates a mismatch between your target market and the product you are selling.
Seeing higher churn rates can help you re-target your promotional campaigns and penetrate markets where you can see higher profits.
It’s also possible that your current strategy focuses on a segment with too much competition, and you need to find a better niche for your product.
7. Shift Strategies and Adapt to Market Demands
Today’s markets are incredibly dynamic. Just because you have a great product today, you might see a dip in sales tomorrow.
Churn rates can warn you of these dynamics and prepare you for what’s to come. If you suddenly see higher-than-normal churn rates, check out what’s happening around you.
Is it time to add new features? Is your user base looking for new services? Has the competition landscape changed? If these are some questions on your mind, ask your existing user base and do your market research to make the necessary product changes.
Using Churn Analysis to Your Advantage
The churn rate itself won’t tell you how to make your product better and more profitable.
Instead, it serves as a warning sign that something is happening in the background. A little alarm goes off, telling you to pay close attention to your product, user base, pricing, and the market.
It’s important not to think of churn rates as simply a negative metric. It’s there to help you succeed, not fail.
By regularly performing a churn analysis, you’ll set yourself up for success. Use the data to adapt your product, marketing, and pricing strategies to what users truly need.
And remember, some churn is perfectly normal. It’s even necessary to ensure your efforts are targeting paying customers instead of idling users.
Wrapping Up
So, there you have it. Overall, high customer churn is still something to take seriously. Once you see your churn rate go up over time, it’s best to take immediate action.
That said, don’t just take the numbers at face value. Do a deep dive to understand exactly what’s happening and why.
Having more users is good, but only if they generate value and money for your business. Some churn is necessary to ensure a quality paying user base.
For those you want to retain, you can often lower your churn rate with straightforward solutions like bug fixes or improved customer service. But when strategic shifts are necessary, the churn rate will alert you so you can adapt before it’s too late.
Ultimately, the rate means nothing without understanding its underlying causes. So, while you don’t want to disregard the numbers completely, make sure you know why churn is happening and how it’s affecting your business.
