As a product manager, I’m always looking for ways to improve retention and reduce customer attrition. To do this, it’s important to understand what is churn and why it matters. Churn is the rate at which customers stop using your product or service. Understanding why customers churn can help you take steps to prevent it from happening in the first place.
I’ll never forget the time I saw our team’s hard work go down the drain because of high churn rates. We had just launched a new feature that we thought would be game-changing for our users. But within weeks, we started seeing users drop off at an alarming rate. It was devastating – all that effort was wasted because we didn’t fully understand what is churn and why it was happening. Since then, I’ve made it my mission to learn everything I can about customer churn and how to prevent it
What is Churn?
Churn is the percentage of subscribers to a service who cancel their subscription within a given period.
Churn is a key metric for subscription-based businesses, as it directly impacts revenue. A high churn rate indicates that customers are not happy with the product or service and are canceling their subscriptions. This can hurt Monthly Recurring Revenue (MRR).
Churn is crucial in identifying areas of improvement for a SaaS business.
Churn can be calculated by measuring how often or seldom subscribers use the product or when they fail to renew their subscription.
Churn rates can be evaluated on a monthly, quarterly, or annual basis.
When new users start using your product, they contribute to the growth rate.
Some users will cancel their subscriptions, whether because they found an alternative, no longer need the product, or could no longer afford it.
How is Churn Calculated?
The churn rate is calculated by taking the number of customers who cancel their subscription or service within a given period and dividing it by the total number of customers you had at the beginning of that period.
For example, if you had 10,000 customers at the beginning of the month and 1,000 of them canceled their service during that month, your churn rate would be 10%.
When calculating the churn rate, it is important to consider when and where you start counting. This can impact the math and eventual churn rate.
For example, if the product had 8,000 customers in February and added 2,000 new customers that month, should the 1,000 customers who quit be divided by 10,000 or 9,000 or 8,000?
The monthly churn rate could be 10%, 11.1%, or 12.5%.
There’s also deciding when exactly a user “churns” — do you count them when they canceled or when their contracts ended?
If you calculate churn based on when users’ subscriptions end, rather than when they cancel, it becomes impossible for a customer to churn in the same month they sign up. This may hide the fact that some customers are quickly dissatisfied with the product and cancel almost immediately.
Many companies have adopted slightly more sophisticated approaches to calculating churn. Some take an average of the number of customers at the beginning and end of the period in question as the denominator in the churn equation.
Some will calculate a weighted or moving average metric to try to determine a more accurate customer lifetime value.
Other methods include breaking your client base into separate groups and calculating the customer attrition rate for each.
This can help you determine which customers are likely to leave, and which customers are new or loyal.
It’s important to use the same calculation method consistently to get accurate period-to-period comparisons and create a reliable KPI.
This method of sales forecasting is reliable, but there may be times when it’s inaccurate due to an influx of customers.
Why Do Customers Churn?
Unfortunately, there is no single answer for why customers leave. However, there are a few common reasons.
- Product is no longer attractive: Whatever enticed the customer to the product is no longer present. This could be a change in customer priorities or a change in the product itself.
- Product is no longer needed: Customers purchase a product because it solves a problem or addresses a need. Not all problems are permanent.
- Customer is frustrated with the product: Poor usability, lack of features, or persistent bugs can drive a customer away.
- Product lacks functionality: A customer needs the product to do something but the product does not offer that functionality.
- Value does not justify subscription fees: The ROI for the customer is no longer there.
- Customer has found an alternative solution: This may be a direct competitor or an indirect alternative that is free or already available.
- Damage to product reputation: This could be a cybersecurity issue, performance issues, terrible customer service, or negative acts by company employees.
While each leaving user has their own reason for canceling, analyzing their usage of your product can reveal broader trends in your customer base.
What Does Churn Mean for Product Managers?
Churn is a hugely important measure for software-as-a-service (SaaS) product managers since it shows how much customers like your product.
While sales and marketing are responsible for bringing on new clients, the customer experience itself will determine how many of those clients stay around and how long they remain customers.
“In SaaS, but especially in times like these, existing customers are your life blood. The more that you can retain existing customers, the more predictable your revenue stream will be in the future.” – Kristina Shen and Kimberly Tan, Andreesen Horowitz
Retaining customers is significantly cheaper than finding new ones, so finding ways to reduce customer turnover is an important goal.
Customer retention is key, so do everything you can to keep your existing customers happy.
A high churn rate can damage a product’s net promoter score.
Reducing the chances of customers churning comes down to two strategies: conducting extensive market research to understand your customers’ behaviors, and fixing any bugs or issues that may come up.
As a product manager, it’s important to have a sense of which usage patterns may predict potential customer churn. This allows you to take proactive steps to address any issues and prevent churn from happening.
Additionally, by engaging with customers who may be at risk of leaving and understanding their concerns, you can prioritize features and enhancements that will improve the overall experience for all users.
This not only shows that you’re focused on the customer experience but also reduces the likelihood of customers leaving in the first place.
How Can You Reduce Churn?
There are a few ways to reduce churn by increasing the perceived value proposition to current users. This can be done by improving the quality of the product, offering more features, or providing better customer service. By doing this, you will make users feel that the product is valuable and worth using.
Who Are Churn Rates For?
Churn rates can be beneficial for companies that have customers paying monthly. By calculating churn rates, companies can see how many customers are canceling their subscription or service. This information can help companies make changes to improve customer retention.
It doesn’t matter what industry you’re in, as long as you have repeat customers, you can benefit from these metrics.
Conclusion
What is churn? Churn is a major problem for product managers because it represents the loss of customers. Understanding what causes churn can help you take steps to prevent it from happening in the first place. By reducing churn, you can improve retention and reduce customer attrition.
