The churn rate, also known as the abandonment rate or customer turnover, refers to the number of customers who unsubscribe or cancel their subscriptions in a given period of time.
In today's article, we analyzed what the churn rate is, how to calculate it, what its ideal value is, why the churn rate is important in startups with SaaS business models, etc. The churn rate indicates the percentage of customers who, for a given period of time, have stopped buying a product or service or who do not renew or cancel their subscription. In a nutshell, Churn rate measures customer loss (and, consequently, a decrease in the company's revenues) so this is a fundamental aspect: a high churn rate may indicate problems with customer satisfaction, product quality or the retention strategy implemented.
How to calculate the churn rate?
The churn rate exists, the important thing is to know how to measure it and to be aware that the percentage of lost customers is as or more important as the decrease in revenue represented by the loss of these customers: Are we losing the main customers of the business or the occasional customers that involve residual income? It's also important Specify a certain period of time (depending on the company's needs) and analyze how it is evolving: monthly churn, quarterly churn or annual churn, if you are looking to obtain the broadest possible view. To calculate the churn rate (gross), you must determine the number of customers who have unsubscribed during a period and divide it by the total number of customers at the beginning of that same period.
For example, if there were 1,000 customers at the beginning of the month and 50 have unsubscribed during this period, the churn rate would be: Churn rate= (50/1000 * 100) = 5% of customers lost during a month.
What is the ideal value of the churn rate?
While having a high churn rate on a recurring basis can lead to problems in the customer experience, a sudden increase in the churn rate informs us of a problem with the product or with automatic billing. On the other hand, a low abandonment rate indicates that the company is able to attract the right customers and that the product market fit is being found. Although there is no percentage that is considered “ideal” for all startups, and although sometimes a very small churn rate may imply a lack of growth or that it is not growing at the desired speed, most companies work to keep your churn rate as low as possible. However, it is essential to make comparisons with the competition and to set realistic goals based on the business model, the market and the company's growth stage.
What types of churn rates are there?
There are several types of churn rate that companies must consider if they want to have as detailed a picture as possible, in terms of customer loss:
- Gross Churn Rate: Indicate the total percentage of customers lost over a given period of time.
- Net churn rate: It takes into account the growth in the customer base, so for its calculation we must subtract from lost customers the number of new customers during the period and divide it by the total number of customers at the beginning of the period.
- Voluntary or transparent churn rate: Indicate the total number of customers lost due to voluntary causes such as: dissatisfaction with the quality of the product or service, the existence of other alternatives that better solve the problem, changes in the clients' economic or personal situation, etc.
- Involuntary or opaque churn rate: Indicate the total number of customers that the company has had to cancel for reasons related to the customer himself, such as lack of payments.
How to lower the churn rate?
As we mentioned earlier in the blog, the Burn Rate, or capital burn rate, is another critical indicator for SAAS startups. It is related to the churn rate, since a high churn rate can increase the burn rate by requiring greater investments in customer acquisition to compensate for losses. Thus, reducing the churn rate can help maintain a lower burn rate and increase long-term profitability. In addition, subscription-based companies rely heavily on predictable revenue streams, and forecasting is important for financial planning and budgeting, and a high churn rate makes such planning difficult. What strategies can a company implement to reduce the value of this metric?
- Improve the user experience: Customer satisfaction is essential to reduce the churn rate: the product or service offered must be intuitive, easy to use and provide real value to customers. In business models where the learning curve is high, we must ensure that we have a good onboarding plan prepared, including a sequence of emails so that the user knows, through user guides and tutorials, how to start using the service easily and offer an excellent customer support service.
- Personalized communication: Data analysis can help segment customers to understand the reasons behind their withdrawal and send personalized messages that fit their needs and behaviors. A loss doesn't have to be permanent, so implementing recovery programs and offering customized solutions can be effective in winning over a previously lost customer.
- Offer incentives and promotions: As we have discussed throughout the article, the churn rate is closely linked to customer loyalty and, to this end, offering discounts, free updates or rewards to loyal customers (such as those who subscribe for long periods) helps promote retention and increase customer satisfaction.
- Continuously improve the product or service: It's a fact that customer needs are constantly changing. That's why it's important to conduct market research and analyze emerging trends in the industry to add features that are valuable to users and keep products and services updated and relevant to customer needs.
- Know the main reasons for the churn rate: To prevent other customers from continuing to unsubscribe for the same reason, it is important to ask and ask for feedback from those customers who decide to stop being so. Knowing what led them to make this decision allows us to correct the most recurring problems and reduce the churn rate.
- Offer flexible billing options: Providing customers with the ability to pay both with different payment methods and through dynamic billing options (such as annual or biannual payments), is one of the main strategies for reducing involuntary churn rates.
- Preventive communication: Sending personalized messages when the subscription is about to expire, the card's due date is close or there is simply an upcoming charge, increases the likelihood that customers will pay on time and reduces cancellations due to unforeseen causes.
Data analysis and churn rate
Data analysis can help develop predictive churn models, using techniques such as machine learning and data mining. These models use historical customer data, together with relevant variables, to, among others, identify early signs of abandonment, segment customers and measure their satisfaction with the objective of predicting the likelihood that a specific customer will abandon the service in the future and identifying customers with the highest risk of churn to take preventive measures to retain them.
