What is Churn? Churn definition, examples, reason, and FAQs.

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What is Churn?

Churn is defined as the percentage of customers that cancel or choose not to renew their subscriptions in a given period of time.

A high churn rate means a drop in the Monthly Recurring Revenue (MRR) and can also indicate dissatisfaction among the customers with any product or service.

How to calculate Churn?

Simply put, the churn rate is the percentage of total customers that stop using or paying for any product over a designated period of time. For example, if there were 1000 total customers in June and 100 of them canceled their subscriptions, the monthly churn rate comes out as 10%.

Churn Rate = (Customers lost in the period) / (Customers present at the beginning of the period)

It is important to calculate the Churn rates frequently, in a month, quarter, and year so that you do not miss any important factor hampering your overall revenue by making you lose out on customers.

Who uses the Churn Rates?

Generally, companies that have customers paying via any monthly recurring payment are the ones that would benefit greatly from calculating churn rates frequently. 

However, this does not mean that companies from other industries can’t benefit from calculating churn rates. As long as any company in any sector has recurring customers and is looking to gain new ones, they can calculate and benefit from churn rates.

Examples of Churn

Let us say that a SaaS company acquired 1000 customers in a month. Let’s say the company lost out on 100 customers because they were not informed about the renewal of the subscription. 

If we take the churn number (100) and divide it by the total number of customers (1000) and multiply it by 100, the churn rate comes out as 10%.

While Churn is mostly calculated by the percentage of customers lost, there can be some other ways too to measure churn rate:

  • Value of the recurring business lost
  • Percentage recurring value lost

Benefits of calculating Churn

The main benefit of calculating churn rate is that it gives a clear idea about the success of a business in retaining its customers, which ultimately reflects how good the quality of service the business provides as well as how useful it is to the users.

If the churn rate keeps on increasing regularly for different periods, it means that the fundamental method of the way the business is running is flawed in some way or another. It could be that the company is providing a faulty product, has poor customer service, or the product may not seem as attractive to the users who concluded that it’s not worth the money.

The churn rate indicates that a company needs to ponder over the fact that why their clients are leaving then and how to fix this. The cost of acquiring new customers is greater than the cost to retain current customers, thus as you make sure that the customers stay with you as paying customers, it makes sense to think about the quality of your whole business.

Why do customers churn?

  • Customer no longer thinks the product is necessary: Whatever thing that caught the eye of the customer the first time and inspired them to use it is no longer working. This could be due to a change in the customer priorities or a change in the product itself.
  • Customer has found an alternative: It may be due to a product of your competitor functioning better or has a cheaper price than your product.
  • Bad user experience: The product design not being intuitive, easy-to-understand, or filled with bugs could amount to a terrible user experience and hence customers abandoning the product.
  • Damage to product reputation: This could be due to a security issue, functionality problems, bad customer experience, or even some bad act by some other department of the company.

How can you reduce the churn rate?

Churn rates can be reduced by increasing the value proposition of the product in the eyes of the users. A few ways to achieve this can be:

  • Customers must receive the best out of the product:- However good your product might be, it is all null and void if the customers are not aware of those abilities or can’t get their head through them easily. Investing in onboarding programs, frequent tutorials, training, and quick customer support can go a long way in making the customers aware of everything about the product.
  • Target the right kind of customers:- Not all products could be right for all kinds of customers. Hence it becomes necessary to work with sales and marketing and target only those customers that could make for the ideal buyer personas. You must make sure that all the messages are clear and highlight the real benefits and capabilities of the product.
  • Set the right price for the product: Customers don’t care about profit margins, sales targets, growth rates, etc. The only thing they care about while investing in a product is they get their money’s worth out of the product. Customer-focused pricing strategies for the product must be employed presenting a clear ROI to the users.
  • Keep adding value to the product: Regular updates to the product and constant bug fixes are some things that could keep the customers indulged in your product for long. A good user experience always works wonders when it comes to making a customer stick to your product.
  • Respecting the customer: At no point should you take the customer for granted. Any renewal should not be considered a given and it is up to the customer to cancel at any time that he seems fit. Thus, try to engage with the customers on a regular basis and understand their likes and dislikes and what more could be done to improve their overall experience with the product.
  • Gather customer feedback: Feedback is an important part of any product’s success, but it becomes much more relevant when talking about churn. The best way to solve any problem is to address it at the same time that it is discovered. This is where customer feedback comes in as it may bring out some facts about what the customers might not be like and hence are choosing to leave.

FAQs

Q: What is the formula for calculating churn rate?

A: Churn rate can be calculated by a simple formula:-
Churn Rate = (Customers lost in the period) / (Customers present at the beginning of the period)

Q: What is an acceptable churn rate for any saas company?

A: Ideally, you would want your churn rate to be about 4-6%.

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