FUNDAMENTALS OF CHURN
INTRODUCTION TO CHURN
Hi! This is John from Subscription Academy. Today I will be talking to you about Churn.
So what is churn?
Annette Franz, the CEO of CX Journey, believes one needs to clarify the present to decide upon how things will shape up in the future. Whether you come from a B2B or B2C ecosystem, all of us are familiar with this fly in the ointment, Churn. And you can’t fix this unless you understand what churn is.
Churn may sound like a nightmare to those who haven't RTFM (Read the friendly manual).
To understand why customers are leaving, one needs to understand human emotions, customer's behaviour and some bit of data analysis.
And finally, if there is poor retention, then it is time to raise the alert.
It Is Important To Investigate Why Churn Happens!
When I began my career, I used to wonder if churn is too complicated to understand?
Well, the good news is it is not if you know the root causes of churn.
Some of the reasons customers quit are negative experience with the business, a poor product-market fit, lack of great messaging and branding strategy, or even a customer credit card expiring.
Let’s dive slightly deeper into why customers may leave a business.
Clearly, in most cases, the culprit is a gap, either a communication gap or a product-market misfit.
If it’s the former, then you have to focus on your messaging.
Plus, both your employee morale and customer satisfaction have to be better halves to each other. When employees respond with enough empathy, it starts reflecting in their conversations as well as with customers. The enthusiasm and hospitality just come naturally. This healthy response translates into helping customers resolve their problems.
In the latter case, which is a gap in the product-market fit, it’s all about working on your product or service offerings.
In SaaS, When Does Churn Come Into The Limelight?
If churn is such a critical factor impacting SaaS businesses, why is it not spoken more often?
The answer is unbelievably simple.
Churn becomes a hot topic for a business when the monthly recurring revenue or MRR shows a significant fall. The MRR gets hit by two kinds of churn customer churn and revenue churn. So let's understand what these two are.
What is CUSTOMER CHURN or CUSTOMER ATTRITION?
Customer Churn, also called Rate of Attrition or Customer Attrition, is the number of customers who stop using a product or service in a given time frame.
The reasons for this kind of churn are mostly to do with inferior products not matching up to business requirements, attracting incorrect customer segments, poor customer support, and frequent downtimes.
All of this points to a bad UX. And the aftershocks of customer churn are felt even long after the customer leaves because they decided to drop negative reviews on sites like G2. So your prospects are going to be reading these. It is good to avoid this chain of responses as far as possible.
Though it may logically seem wise to think that revenue churn or revenue goes away due to repercussions of customer churn, this won’t be a fair statement to make.
But before that, let’s quickly look at what revenue churn is.
What is REVENUE CHURN?
Revenue churn is the sum of lost revenue, which could be due to downgraded subscriptions or churned customers, or even a combination of both.
Since revenue churn derives from multiple elements, there are insufficient grounds to establish that customer churn always causes revenue churn.
In the beginning, I said churn is not difficult to understand if the root causes are rightly spotted. Similarly, churn is not complex to calculate either if you look at the right metrics.
Since we are considering accurate metrics, let's also quickly glance at precisely what they are.
CAC or customer acquisition cost is something any business would incur during a business lifetime. It is usually 5x higher than retaining an existing customer!
So, your odds of selling to an existing customer are between 60-70%. For new customers, that figure drops to 5-20%. In short, you’re better off ensuring that you don’t let your customers churn.
When we talk about new and existing customers, the payback period is an important metric that needs to be on the tab.
To understand what the payback period means, let's dissect this measure Customer Acquisition Cost (CAC).
The term Customer Acquisition Cost is self-explanatory. Every healthy business understands that acquiring customers comes with a cost. However, it's essential to put a cap on this expense.
CAC is the average cost incurred by the company to acquire a customer. So any price incurred to acquire a customer gets added to CAC.
It will never be enough to say calculations need counting from the roots. Any expenses incurred at any stage have to have records.
Total sales and marketing spent include two types of expenses that need to be under CAC—blended fees and costs paid.
Blended expense accounts for all the invisible and intangible expenses for customer acquisition. Paid expenses are the ones spent on paid channels like Facebook, Instagram or similar media.
A sum of blended and paid CAC should add to total sales and marketing spend as a rule of thumb.
So, CAC is the total sales and marketing spend for a given period divided by the number of customers you acquired in that time frame.
Let’s circle back to the payback period.
The Payback Period is the amount of time taken to recover CAC, i.e. the cost inferred to acquire a new customer.
When we talk about churn, we should be interested in how long it will take for the business to earn back the CAC from a customer. Let me elaborate on this with an example.
So there’s this customer who signs up for a $25 per month plan.
If the CAC for the SaaS company is $200, it will take a customer eight months to pay back the cost it took to acquire them.
I was wondering how this happened? It is $200 divided by 25.
Simple math! So this business needs to ensure that they can keep the customer without
churning for at least eight months to recover the CAC.
After that, any revenues they make are over, and above the costs, they spent to acquire the customer.
Now, here’s where you need to think about how much revenue your customer brings on an average—CLV or Customer Lifetime Value.
What is CLV (CUSTOMER LIFETIME VALUE)?
CLV (Customer Lifetime Value) is the average revenue earned by the company during the account lifespan before the customer churns.
Now that we have two exciting metrics, CLV and CAC, we can infer another insight from these two. I’m going to divide CLV upon CAC. This ratio will tell you if you can recover CAC through the revenues earned from the customer.
If CLV: CAC is 1, it means that you’re making just about enough revenue from your customers to recover your CAC.
If CLV: CAC is less than 1, then this has to get your alarming bells ringing because you’re not making enough revenues from your customers. And you’re spending more than what you get from them. So either you find a way to spend less or increase your income.
Ideally, CLV: CAC should be 3, which must be considered a standard in the industry. So how do you use these metrics together?
Let’s assume there’s a SaaS business that has a CLV: CAC ratio equalling 3.
If the payback period for the business is 24 months, and if they feel that it’s a little too long to recover the CAC, there are two insights here.
1)Customers have to stay longer to pay back the CAC
2) Customers are indeed staying back to cover the CAC, which is why their CLV is high. It can still be a risk for the business because you’re in the impact zone if the CLV reduces.
So in such a scenario, you might want to tinker a little bit and ensure that the payback period compensates faster.
You might want to play around with the pricing plans in this case.
While we are at CLV, let me leave you with another aspect here, which is that:
1. When you lose a customer, you just don’t lose the monthly subscription amount that they pay.
2. You’re going to lose the cumulative sum of all revenues that are going to come from them.
3. And guess what, they could upgrade to a higher plan mid-way, so you lose those upgrade revenues as well.
Alrighty, let’s hop on to the next section then the types of churn.
TYPES OF CHURN
Engagement is a significant factor for churn. However, that is not the only determining factor of a customer’s lifetime relationship with a company; several other factors cause churn.
Broadly, they fall into two types.
1. Voluntary Churn
2. Involuntary Churn
Customers make a conscious decision to leave when they feel dissatisfied with the service or product offered. Lack of good onboarding is the easiest to spot lack of enough communication with customers after onboarding.
Targeting the wrong audience could add more to the chaos. Tweaking pricing models solve for poor pricing to retain customers. Retaining customers to take care of CAC and CLV is the fourth reason. The final cause could be mediocre customer support.
If you take a closer look at them, most of these factors have the same impact customers feeling abandoned can cause friction. So it’s always essential to ensure that the customer has been onboarded smoothly with sufficient information. When you fix onboarding, a lot of other factors also get resolved. Of course, things like your customer support still need a different strategy and attention to improve.
But let’s talk about onboarding for a moment.
Great user onboarding does three things:
- it educates users about the problem
- showcases the features of your solution, and
- drives users to take action
Collectively, the hope is that these three things will get users to the promised land—for that better life they signed.
Between balancing these elements and making them work for your context, it’s challenging to figure out where to start and build an onboarding flow.
There are big overarching questions like how long an onboarding flow should be, what design approach to take, which parts of it to make mandatory, and where to draw the line between user onboarding and customer success.
Five pointers to keep in mind while designing an onboarding process-
● Turn unpleasant requests into thoughtful requests
● User action needs to tie to the big picture
● Anticipate user action with intelligent defaults
● Let the product features solve problems
● Take every opportunity to reinforce the value proposition that users signed up for
Let’s now talk about them quickly, one by one.
1. Turning unpleasant requests into thoughtful requests.
When you provide a great onboarding experience, you hit a sweet spot in your relationship with customers. At this point, many apps slip in questions as part of the onboarding flow.
However, it’s better to avoid annoying the customer with too many random
questions that may not serve any purpose ultimately.
Instead, do your homework. Find a set of common questions that could apply to a larger group of the target audience. Now frame them in such a way that it adds more value to their experience. As in, whatever information they give you has to enrich the UX ultimately.
Also, make sure this does not consume too much of their time.
The exercise helps both sides. And your customers experience what they have asked.
For example, let’s take the example of Calm, which is the 2017 Apple App of the Year. Calm has specially picked up post-pandemic because it helps you settle anxiety and also assures good mental health. So you just subscribe, and you’re able to experience the stories, music, podcast on the app.
When you are a first-time user, the app asks you a few basic questions, like what brings you to their app. Based on your input, the app will recommend content in music, podcast, meditation of your choice.
As Elizabeth Ballou from UX Planet believes, users would be comfortable through permission priming. Well! Everybody appreciates basic politeness.
A simply beautiful way of tackling human psychology! Isn’t it! I would like to remind you that you can tackle churn a lot easier if you understand customer psychology. Let us try and understand how a customer is about to perceive and experience.
Essentially, permission priming lets a user know that you’re going to need to ask them for permission for access to the space they own.
Now let me take you back to the example of Calm. It sets up a context about what the customer is supposed to feel. Do you see that? This way, you are not leaving the customer halfway. You are holding their hand and helping them and helping them use the product the way you want.
Let's move on to the next pointer thinking about how user actions can tie to the bigger picture.
2.User action needs to tie to the big picture
Samuel Hulick believes in “guiding the uninitiated to their own personal promised lands.” The critical point here is the word ‘personal promised lands.’ That’s because no two users might use your app the same way.
Like we discussed, permission priming helps the customer progress in their journey. It prepares the customers mentally to answer our questions without any hesitations.
While you seek permission, you are also setting the stage to explain how these questions contribute to their destination. Couple this with
significant actions that
you expect your users to take; users will have a definite bunch of questions and activities to perform. They are going to help them use the app better!
And every action that a user performs, it’s got to be tied to a bigger picture. So what does this bigger picture mean?
Retaking the example of Calm, the bigger picture for the business is making their users practice mindfulness because that, in turn, means less stress and happier users.
So the onboarding flow is broken down into more simple and short questions, which will ultimately bucket the user into one category.
So you see, Calm will recommend stuff specifically for you based on your inputs. So it's nice to know that based on these inputs, you get fed with customised content.
But the whole point I am trying to make here is, ultimately, there is a bigger picture. In the case of Calm, it wants its customers to destress.
In short, give your customers a clear set of steps because they decided to join hands with you by tying every action to the bigger picture.
3.Anticipate user action with intelligent defaults
Intelligent defaults are to help someone make decisions in an unfamiliar situation. It is also sometimes meant to make it easier and faster for both parties to get to the promised land. You just want the customer to say yes or no as answers instead of responding with an enormous paragraph that still doesn't answer the question.
Some intelligent defaults are auto-filling the country field based on the IP address or Chrome suggesting auto-fill values in the address field. It's good to speed up the action for end-users and help them get stuff done faster.
Another good example is adding tailored content as intelligent defaults based on the customer’s choices earlier. For example, Canva shows the recent dimensions used when you want to create a new design. Simple and saves time for users, doesn’t it?
In short, keep them happy with such subtle touches to the user interface that elevates the product experience.
4. Make the most of your onboarding tutorial by using your features to frame the problem
Customers often come to a business with a problem. The product is assigned to solve it, meaning a product should design around solving problems. The features of the product should collectively answer the customer’s pain point.
So, in short, the problem of the customer and the features of a product should marry each other.
Onboarding becomes crucial for them to understand how well your features can solve their pain points. Or is there any need to further customise the plan?
You’re creating a bridge between the more significant benefits of your product and the concrete ways for your customer to get there, using a finite set of features.
Let's talk about Chargebee’s Revenue Story. During onboarding, Revenue Story asks you to pick an option that you fit into the best. E.g., Marketing, customer success, and a lot more. Based on this choice, the analytics tool will display the best-suited dashboard.
So users would land on a dashboard with all the metrics that are relevant to them. This process of customising a comfortable language is a great starting point for users because they can now pick and choose metrics to customise dashboards to derive actionable insights.
So with this step, you have started educating your customer about their journey once they start using the product in full swing. Most customers know what they want.
Smart defaults just accelerate the whole trip so that they use all the features efficiently.
5. Take every opportunity to reinforce the value proposition that users signed up for
It’s essential to communicate your core value proposition at different points in the customer’s journey.
A customer journey starts right when they hear about you and decide to engage with the app or website. And though it doesn’t end, the last significant milestone is a customer upgrading to another plan or buying another product from your suite.
But why should cross-selling be given attention? Because only customers who have the trust and relationship building with your business are going to be ready to spend their budgets on another contract with your business.
Naturally, this can reduce the churn rate for you because of the increased stickiness with your business.
Website
Onboarding Emails Product Emails
Communication
Better product adoption
Highly engaged customers
Stickiness / Low Churn Upgrades
So all the oranges can possibly drive messaging around value proposition in the customer journey. The second half in green is the expected positive milestones that an excellent value reinforcement can bring into your business.
DID YOU KNOW?
Involuntary Churn is also called Passive Churn
Involuntary Churn is a type of churn that is in our control. It happens not because the customer decided to move away on purpose but because of a payment or a transaction failure on renewal.
Involuntary churn can also happen due to a card expiry if a card is stolen or lost, if a credit card has exhausted its limits, or it could be the bank is declining a transaction due to suspected fraud.
The idea is that if the churn happens involuntarily, there is room for convincing or nudging.
The good news is that there are ways to tackle this type of churn. The solution is pretty simple a subscription billing tool, like Chargebee or Zuora, or Chargify.
Your subscription billing tool should allow you to send payment reminders to your customers when a transaction gets declined. This process is called dunning and is a popular feature with most billing tools out there.
Apart from these payment reminder emails, your billing tool will also allow you to set up payment retries when dunning kicks in.
So payment reminder emails and payment retries can happen independently, increasing the chances of winning back the customer. You can also mail a secure link to your customers so they can update their payment method when their renewals fail. This way, you can do manual reach outs if needed.
Alright, now that we’ve seen what the types of churn are, let’s look at how to analyse churn.
CHURN ANALYSIS
Customer churn analysis is the process of using your churn data to understand:
- Which customers are leaving?
- Why are they leaving?
- Which customers are likely to churn shortly?
- What can you do to reduce churn?
As you may have guessed, churn analysis goes beyond just looking at churn rates. It’s about understanding the underlying cause and curbing churn in time using data.
Sure, customer attrition is inevitable. But what if we see it as an opportunity to learn, improve customer retention, and close any leaks in your revenue stream? That’s what churn analysis helps you do. To perform churn analysis you need to do the following. Step 1: Invest in subscription analytics.
Step 2: Analyze Customers by Segments
Step 3: Find Out When and Why Churn is Occurring
Let’s quickly run through these steps.
1. Invest In Subscription Analytics
Subscription analytics tools like RevenueStory and ProfitWell Metrics allow you to see all your metrics – including churn – at a single glance. You have all your data and metrics in one place, with multiple slicing methods and dicing it. Take a look at the ‘Churn watch’ dashboard here:
Churn analysis helps you proactively identify customers who are likely to churn. Creating alerts to notify you about any adverse change in real-time is a great way to stay on top of your churn metrics. You can create such custom alerts in your subscription analytics tool.
Your analytics software should allow you to drill down to the deepest layer of all the metrics and reports, including churn metrics and more.
2. Analyze Customers by Segments
Customer segmentation is the process of grouping your customers with various similar traits. It can help you uncover trends in customer churn.
Choose a tool that allows configurable segmented analysis of churn. You should be able to analyse churn by revenue, business type, or demographics.
You can conduct churn analysis across customer segments in the following ways:
● Churn Analysis by Revenue
This type of segmentation divides customers into groups based on their revenue. Early-stage startups might be churning because of
budgetary issues, and you can reduce this churn by offering them discounts and flexibility in payment
terms.
For enterprises, you need to ensure that your product has scaled along with the company’s growth.
● Churn Analysis by Industry
This analysis helps in preventing churn by implementing specific measures for each sector. For instance, the global downturn induced by the COVID pandemic crippled the travel industry, but e-learning saw a surge as students took to remote learning.
If yours is a business that is facing a slowdown, you can try these three techniques.
1. Pause instead of cancelling subscriptions
2. Offer flexible payment terms to accommodate customer preferences
3. Provide free feature trials on higher pricing plans
● Churn Analysis by Geography
Knowing your customer’s location adds context to why they would be churning. Tax regulations, payment gateways, and payment processing are different for every country, affecting your product’s adoption.
For SaaS businesses, it is crucial to comply with the local sales tax guidelines. Your subscribers could be churning due to a lack of payment options or a lack of compliance with regulations, and this analysis is a great way to spot such trends.
Find Out When and Why Churn is Occurring
Only when you know why the churn occurred will you formulate pointed strategies to curb it. There are majorly two types of churn. We’ve already covered this bit before. Churn can be voluntary or involuntary.
Exploring what percentage of churn is voluntary and involuntary gives excellent insights into churn prevention workflows and strategies you would be setting up.
Early vs Late Stage Churn
Analysing the timing of the churn adds depth to your churn analysis. There are various ways to look at this. You can start by analysing churn by activation dates. It tells you how soon (or not) the customer churned after activating the product.
Another way to analyse this is by looking at the MRR retention cohorts. The MRR retention cohort can visualise MRR addition, growth, and churn behaviour based on both when you acquired the customer and what happened in a particular month.
Moving down the first row shows you how much new revenue you could acquire month on month while going across columns shows how much that cohort expanded or contracted. In the cohort above, you can see an adverse impact on revenue growth across customers in a month. But what’s more interesting is that customers acquired in the recent months seem to have churned more than the older ones – indicating a high early-stage churn.
There are so many ways the churn data can be sliced and diced. The 3-step guide we discussed covers the main aspects of churn:
Who is churning? Where are they churning? When and why are they churning? Equipped with this information, you’re all set to reduce customer churn and improve retention.
There are, of course, plenty of other metrics that can help you track, understand and reduce churn. I think we’ll have a dedicated class for that. So keep an eye out for that.
With that, we come to the end of this course. I hope it was informative. Thank you for watching, and stay tuned for another lesson!
This is John signing off for now.