Churn is an important part of any company’s success. But just what is it, and how do you avoid the common mistakes that most people make when calculating churn rate?
The concept of churn is certainly not a new idea, especially among the SaaS community who use churn numbers to determine just how successful their business is. But, just what is churn? Churn is essentially the number of customers that either cancel their subscription, or cancel your services. Once you lose a customer, they are considered to be churned. This then means translates into you losing a portion of your revenue.
Calculating churn rate, however, is not as simple as it seems. It is not just about picking the number of customers that you are losing a month. There are a number of factors that you have to consider when doing the calculation. We have found the 13 most common mistakes that people make when working out churn rates.
Not Understanding Your Customers
The foundation of churn is getting to know your customer. You will need to have a keen overview of who your customer base is, and what their habits are. This will make all of the difference when trying to establish who is dropping off as a customer.
Your first step is to have a recent and accurate account of your entire database. In order to gain the maximum amount of information about your churn rate you will also need to have an accurate record. Take a specific period of time as the example to do the calculation.
- Number of customers in total. Take into consideration active and inactive;
- Number of new customers for the month;
- Number of customers lost.
2. Not Differentiating Between Customer Churn vs Revenue Churn
Let’s put this as simply as possible. Say you are in a non- SaaS organisation, and you lost two customers in one day, one being a multi-billion dollar client like Coca-Cola, and one being the small family business down the road, you simply wouldn’t calculate the losses equally.
In the same way, you have to differentiate your customer churn and your revenue churn. Losing a few small customers over a month could be very demotivating, but losing a large cash cow could be the difference to your organisation’s success.
3. How to Calculate Customer Churn Rate
Customer churn is going to be the more measurable calculation, and although it seems simple, it can be immensely helpful for your growth strategies in your SaaS.
The calculation for customer churn is: number of churned customers/total customers.
So, if out of 100 customers, eight cancel in a month, you are sitting on 8% churn. There is no determined set standard for average churn if you want to compare yours to an international standard. There are, however, benchmarks Due to every organisation being so different, it is tough to pinpoint what is normal for churn.
4. Ignoring Or Forgetting Revenue Churn
The key reminder here is that small customers churn much quicker than larger customers. This, in turn, could majorly skew your reports at the end of the day. If five small customers drop off, your customer churn rate reports will be impacted, yet your revenue churn report might not get as much of a dent. If it is one big one, however, the revenue report will have the black mark.
Have a look at the 8% churn from the previous calculation. This may not look too bad for your retention rates and the reports could look like they are in your favour. But dig down a bit and you could see that those eight customers are some of your biggest customers taking a huge chunk out of your revenue.
The calculation is digging deeper into your monthly recurring revenue churn: churned MRR / total MRR
5. Not Understanding Why Your Customer Is Churning
There are two main, and simple reasons why customers churn; it has something to do with you, or it has something to do with them. This may seem basic, however, capturing the data of why your customers are churning may assist you in pinpointing where the problem actually lies.
Should the majority of customers be cancelling with you due to their own reasons, you could use the opportunity to develop a retargeting campaign to try and draw them back using the right approach. Should it, however, be an internal problem, this research could assist you in pinpointing a flaw that you are overlooking or have not been aware of.
Understanding why they are churning can also assist you in predicting churn patterns. A comparative analysis is the ideal tool to create accurate forecasts for your churn rate over the upcoming months.
6. Presuming Inactiveness is Churn
Sometimes customers have a tendency to go quiet. They are still lurking around in the background of your organisation, but you just haven’t really heard anything from them in the last few months. Before writing them off completely, check whether you can re-engage them. Not all customers make snap decisions to stop using products unless something has gone wrong. Most times you find that if a product isn’t used repeatedly, it can be forgotten about until they are reminded of it.
The best way to reach out and attempt to re-engage a customer before marking them off as churn, is to create personal, interesting and useful content to try and hook them back in.
7. Using the Wrong Churn Calculation
As you can see, there is more than one way of calculating churn rate. You will need to figure out which fits for your company and matches your unique circumstances.
We previously mentioned the basic customer churn calculation as well as the revenue calculation. There are numerous others, however, that provide for more in-depth analysis of your churn rates.
There are various calculations that you can use to identify your unique position in your SaaS. Many even resort to constructing their own methods to measure their unique circumstance.
Other calculations include but are certainly not limited to:
- Net Churn;
- Monthly Subscription Churn;
- Monthly Churn Rate Calculation;
- Adjusted Churn for Significant Growth;
- Predictive Churn Calculations.
8. You Are Not Taking Into Account Your Growth Rate
Each organisation is at different periods of growth and peaks. A period of high growth will skew your results if you are calculating churn rates. You will notice that suddenly you have a lot more customers signing up, and at the same time, because of the influx of customers, will have a large amount dropping off.
Seasonality is a key factor to keep in mind when considering your churn calculations. It would depend on your organisation and what your product is, but you will know, on a quarterly and annual basis, what your busier seasons are. This needs to be considered when measuring churn.
9. Setting the Wrong Targets
Everyone is chasing the ultimate goal of 0% churn, or, in plain terms, not losing a customer. Going into negative churn is even more desirable. As desirable as this is, though, it is unfortunately unachievable and very unlikely. You can do some research into what churn rates your main competitors are sitting on to get the industry standard, but keep in mind that customers will drop off, no matter what.
The rule of thumb however, is that a low-cost service will usually have higher churn rates than a niche product catering for a particular market. Monthly records of churn rates will assist in accurate targets once you have established data in place.
10. Wrong Time Intervals
As much as you should be monitoring your churn rates monthly, you will need to keep in mind other contributing factors. Seasonality could have large impact on your churn rates, and you could only pick this up if you are looking at quarterly or annual reports.
You have to keep in mind here too, should you be working on an annual subscription basis compared to a monthly subscription basis, the risk of churn is drastically reduced unless something goes terribly wrong with your customer.
11. Panicking About Cancelling Customers
Customers will be lost in any business. No matter how heart-breaking or demoralizing it could be, the fact is, not all customers are there for your lifetime. Churn obsession can, at the end of the day, be severely unhealthy for your organisation and for morale in the team.
The trick here is to keep attracting new customers while saying goodbye to (hopefully) a small portion of your customers. Keep in mind, that you could possibly re-target these customers in a few months with a new offer and personalized package.
12. Being Data Driven and Not Data Informed
You can generate reams of data about your customers, their drop off rates, the amount of revenue churned, and the exact days that you lost customers. If you are not using the data however, your actions are in vain.
Using the data to create predictive churn forecasts can arm you with the strategies to counteract any unexpected churn in the upcoming months. You will also have a keener insight on your customers and their needs of your organisation.
13. You Don’t Have A Retainment Strategy
As they say, the customer is always right, and it could take a minor incident to lose a customer from your company. If you don’t have a retainment strategy in place to attempt to hook back that client and tempt them back to your product, your new customer acquisition will be working overtime to maintain revenue targets.
At the end of the day, it is easier to retain a customer than it is to draw in new ones so keep those customers happy with a great strategy.