The Essential Guide to Churn

What is the Difference between Customer Churn and Revenue Churn?

Your customer churn rate may not always be the same as your revenue churn rate. This is especially true for companies that have different product lines or different service packages, because those items almost certainly have different price points. Thus, some customers are more valuable— in terms of recurring revenue— than others. Let’s look at another example inspired by evergage: Say your company has two product lines. Your basic service has 10,000 customers at $200 a month per customer. So your MRR for that line is: (10,000) X ($200) = 2,000,000 Your premium service has 5,000 customers at $500 a month per customer. Therefore, your MRR for that line is: (5,000) X ($500) = $2,500,000 So, in total, you have 15,000 customers and $4,500,000 MRR. Now, let’s say that over the course of a month, you lose 500 basic customers and 100 premium customers. That means your customer churn rate would be:

(500 + 100) ÷ (15,000) = (600) ÷ (15,000) = .04 = 4%

To calculate your revenue churn rate, add in the associated dollar amounts: ((500 X $200) + (100 X $500)) ÷ ($4,500,000) = ($100,000 + $50,000) ÷ ($4,500,000) = ($150,000) ÷ ($4,500,000) = 0.033 = 3.3%

As you can see, your customer attrition rate (4%) is slightly higher than your revenue attrition rate (3.3%). It’s important to distinguish between these two metrics because each figure provides different information about your business. Furthermore, separating out the product lines can help you see where your business is strongest in terms of customer retention and revenue generation. For example, even if you lose a relatively high number of basic service customers—thus producing a relatively high customer attrition rate—your revenue attrition rate might not look as bad, comparatively speaking. Why? Because if you are focused on retaining your premium customers (i.e., the customers with the highest monetary value), then losing some of your basic customers might not have a huge financial impact.

Why is Customer Retention Important?

Your customer retention rate can tell you a lot about the current health of your business. Namely, you can get a solid snapshot of how many customers are bailing on your business—and how fast they’re departing. You also can get a sense of the immediate impact those lost customers are having on your company’s bottom line. But the impact of customer retention extends beyond the here and now. Just as it’s easier—and less expensive—for a business to retain its current employees than it is to go through the rigmarole of hiring and training new ones, it’s much less costly for a business to retain its current customers than to try and replace those customers with new ones. In fact, according to Kissmetrics, it can cost seven times more to acquire new customers than to retain current ones. Furthermore, customer attrition decelerates your business’s growth, because for each lost customer, you must acquire one new customer just to maintain an even growth rate. For example, if your customer base grew by 15% over the course of a month, but you had a attrition rate of 10%, then your actual growth would not be nearly as impressive—or as worthy of celebration. And while a single churned customer might not seem like a big deal in the short term, the impact is much more significant once a business moves beyond the early stages of growth. That’s because the more customers a business has—and the more monthly revenue the business is pulling in—the greater the financial loss associated with each percentage point of churn. To illustrate this crucial point, this For Entrepreneurs article provides an example of a startup SaaS company that generates $10,000 in bookings in its first month of business and increases its monthly revenue amount by $2,000 each month after that. In the first few months, the company’s customer attrition rate of 2.5% doesn’t put a huge dent in total revenue. As the company continues to grow its MRR, however, that all changes: “…as the company gets towards the end of its fifth year, even at a relatively low customer attrition rate of 2.5%, you are losing $64k a month which is extremely hard to replace with new customer bookings,” the article explains. And that’s exactly why it’s so worthwhile for a company to invest in customer retention in the earliest stages of business—before the effects become crippling to growth. Finally, if you’re trying to get funding, it’s worth noting that venture capital (VC) firms pay close attention to client retention rates, because those numbers provide a solid indicator of whether a company has a good product and is a good market fit. And while growth rate is paramount to SaaS valuation, customer retention is a strong secondary factor.

What is Negative Churn?

Yes, there is such a thing as negative churn, and it’s pretty much the holy grail of all things churn. Essentially, negative churn occurs “when the expansions/up-sells/cross-sells to your current customer base exceed the revenue that you are losing because of Churn,” states the For Entrepreneurs article. To continue with the example cited in the above paragraphs, if in addition to the revenue you’re getting from new customers, you’re tacking on 2.5% worth of revenue expansion from your current customer base, you could be generating nearly $180,000 a month in expansion revenue by your fifth year in business—a number that more than makes up for revenue losses due to lost customers. So, how do you achieve this magical churn status? As For Entrepreneurs explains, you must do at least one of the following three things: Keep in mind that if you plan to emphasize upselling and cross-selling with your sales department, you may benefit from establishing a dedicated team whose focus is on closing additional sales with existing clients. Furthermore, remember that upselling and cross-selling shouldn’t necessarily be top priorities for businesses that are still in the early stages of growth. Startups are better off focusing on driving broad customer adoption of their main product offering and doing everything they can to keep those customers (i.e., prevent customer attrition). And for fledgling companies, that means sticking with a simplistic approach to pricing, products, and support. Once you’ve successfully gotten your business off the ground and on solid footing, you can start building strategy around negative churn.

What are Some Strategies for Reducing Customer Attrition?

For most companies, some degree of churn is inevitable. But, there are actions you can take to keep your churn rate at a minimum. Here are a few suggestions on how to defeat churn.

Talk to your quitters.

When a customer decides to cut ties with your business, don’t just let that customer walk out the back door without saying anything. This is an opportunity for you to glean valuable feedback; take it! That advice rings especially true for businesses in the early startup stages. When a customer quits, make sure you connect with that customer and find out how he or she came to the decision to part ways with your company. Many times, customers abandon a product because it didn’t solve their problems the way they had anticipated it would. Other times, they had trouble implementing and using it. Either way, you’ll learn what you need to do to improve the actual product as well as your onboarding and customer service models Allison Picken's article further details the procedures Gainsight takes when a customer churns.

Keep a pulse on customer engagement.

This is easier said than done, but when done well, it can do wonders to ward off churn. Engaged customers—the ones who are interacting with your product and your company—tend to be more satisfied customers. If they’re using your product consistently, chances are good that they’re getting something out of it—and that makes them less likely to leave. Similarly, if they’re interacting with your business, then you have ample opportunity to continue winning back their business with your stellar customer service—another major churn deterrent. But how do you track and analyze such complex data? Probably the easiest, most efficient way is implementing a Customer Success solution to dig into your customers’ behavior for you. Such solutions can actually pinpoint customers who are churn risks well before they give your company the boot—and that gives you a major leg-up in the quest for customer retention.

Make it hard to leave.

The more barriers that exist between a customer and his or her exit point, the less likely it is that the customer actually will walk away. That means making your product “sticky,” i.e., eliminate “one and done” solutions. If new customers can get everything they need out of your product in the first month—or even the first year—then what’s the incentive for them to continue giving you their business (and their money)? On the other hand, if your product is integral to your customers’ daily lives or workflows, then they’ll have a much tougher time saying goodbye. Furthermore, it behooves you to track whether your customers are using your company’s “stickiest” features. If they’re not, then it’s time to open up the lines of communication before it’s too late.

Remember that it’s not over ’til it’s over.

When a customer calls to cancel, you still have one last chance to save him or her from falling into the abyss of churn. This is where you need your A-players—your reps who not only know your product line inside and out, but also are skilled customer advocates. If they can diffuse the customer’s frustration, offer a clear path to fixing the problems that are causing the customer to be dissatisfied, and lead the customer back to seeing the value of your product, then that customer might just give you one more chance.

Test out long-term contracts.

Yes, contracts deter sales, so it’s important to take this suggestion with a grain of salt. But in some cases, it might be worth testing. After all, a long-term contract (six to 12 months) gives your customers time to get out of the precarious “rookie” stage. By the time the contract is up for renewal, ideally they will have successfully implemented your product and worked through any hiccups. Even better: at this point, they hopefully will have already started seeing results. All of these factors work to increase customer retention.

Look deeper into the factors that contribute to Customer churn.

You might find certain types of customers—or those in certain markets or verticals—are more likely to churn. For example, B2B companies that target a variety of business sizes often find that small business customers are more likley to leave than their larger counterparts because they go out of business more often and are quicker to cut costs when revenue is down. The data around these trends can help inform your product and marketing strategies and help ensure you’re focusing your energies on the right types of prospects and customers—thus making it less likely that those customers will bid you adieu at some point down the road.