The term ‘churn’ is quite popular across different industries, especially among Software-as-a-Service (SaaS) businesses. In simplest words, Churn (also called customer attrition) is the number of customers who stop using the business’s products, services, or subscriptions.

While the basic concept of churn is quite easy to understand, it is important to have a closer look at this phenomenon to ensure you have a clear idea of what churn means in business. Therefore, the goal of this article is to provide a comprehensive guide to churn meaning, its importance in a business, and some tips and tricks to minimize the churn rate.

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What is Churn in Business?

Churn is the measure of the number of customers who stop the products or services of a business. Customer attrition and customer turnover are some of the other common words used to refer to churn.

It is an important metric in subscription-based models because it is typically calculated over a specific period of time to determine the percentage of customers who fail to renew their subscriptions. This is the reason why the churn rate is often calculated monthly, quarterly, or annually.

High churn means your business is losing too many customers and it has an adverse impact on your bottom line. It is also an indication that your target audience is unhappy with the product or service you are offering.

What Does Churn Mean in Business

It is understandable that every business wants to minimize churn. At the same time, it is important to know that a certain amount of churn is inevitable in every type of business.

Whenever your business gains customers for its products/services, your growth rate will increase. But some of these customers are bound to leave either by canceling the subscription immediately or failing to renew the subscription for a variety of reasons. Hence, these customers who stop paying to your business are considered to be the churn.

Meaning of Churn in a Subscription-Based Business

In a subscription-based business, churn means the rate at which the business is losing subscribers. A high churn rate translates into a loss of revenue. Hence, keeping the churn rate low is vital for the long-term success of any subscription business.

Moreover, the churn rate is also directly linked to the customer lifetime value (LTV) of subscription businesses.

A low churn rate plays a vital role in increasing LTV, which translates into higher returns on customer acquisition costs. This is the reason why minimizing the churn rate is one of the most effective steps a business can take to enhance its performance.

How to Calculate the Churn Rate of a Business?

The percentage of customers who stop using a company’s products or services is called the churn rate. Generally, churn rates are calculated on a monthly, quarterly, or annual basis.

You can easily do so by dividing the number of customers lost at the end of a specific period by the number of customers at the beginning of that period.

Churn Formula

For instance, if your SaaS tool had 400 subscribers and you lost 50 of them during that month, then the monthly churn rate would be 400 / 40 = %10.

Also Read: Understanding Customer Churn Cost

Types of Churn Rates

Now that you are familiar with the core meaning of churn rate in a business, let’s take a look at the key types of churn rates that businesses should track to have a comprehensive performance view:

  • Customer churn rate: Percentage of customers who canceled their subscriptions within a specific period.
  • Revenue churn rate: Percentage of recurring revenue lost from either cancellation of subscriptions or customers downgrading their original plan.
  • Gross MRR churn rate: Percentage of monthly recurring revenue (MRR) lost from cancellations.

Customer Churn vs Revenue Churn: A Detailed Analysis

Customer churn and revenue churn are the two major types of churn in businesses, so let’s take a closer look at them:

AspectCustomer ChurnRevenue Churn
DefinitionThe number of customers who stop doing business with a company during a given period.Amount of revenue lost due to cancellations, non-renewals, or downgrades.
Primary FocusThe number or percentage of customers leaving a businessThe financial value of the revenue lost
Unit of MeasurementPercentage of customers lostCurrency value lost (e.g., dollars)
Standard Formula(Lost Customers ÷ Total Customers at Start of Period) × 100(Revenue Lost ÷ Total Revenue at Start of Period) × 100
ExampleIf you lose 5 customers out of 100, your churn rate is 5%If $1,000 in contracts are lost out of $20,000, your churn rate is 5%
Use CaseUseful to evaluate customer satisfaction and retention strategiesAnalyzes the company’s revenue stability and financial impact of churn
Why It MattersLosing many customers shows service or product dissatisfactionLosing high-value customers, even if few in number, can hurt revenue and profitability
Common CausesPoor onboarding, lack of value, customer support issues, poor usabilityDowngrades, non-renewals, or budget cuts from high-paying clients

Why is it Important to Understand Churn Role in a Business?

All types of churns are important metrics used to evaluate the overall health of a subscription business. It also helps the business in understanding and analyzing other key metrics, such as customer lifetime value.

Most of the modern SaaS companies have a high customer acquisition rate. As a result, there are many companies, including enterprises, that might not fully recover their acquisition costs until several years of a contract. Therefore, a high churn rate and early churn mean the company is losing money on the customers.

Some of the other key reasons why churn analysis is important for businesses are:

  • Improve the Product / Services: Customer dissatisfaction is the core reason behind a high churn rate. Hence, it also provides businesses the opportunity to improve their products, services, and overall customer service.
  • Save Money: A low churn rate means low customer acquisition costs that can save a ton of money for any type of business.
  • Accurate Forecasts: Long-term tracking of churn rates is also useful to forecast a company’s revenue and set realistic targets.
  • Evaluate Operational Goals: Churn rate analysis is also a reliable way of evaluating how well your business is performing against the set operational goals.
  • Identify At-Rish Customer Segments: Churn analysis helps you identify at-risk customer segments, so you can take suitable steps to enhance retention.
  • Company Valuation: The primary objective of all subscription businesses is to grow with time. Churn is the opposite of growth, so being familiar with it is vital to analyze profitability and company valuation.

The good thing is that companies now don’t have to solely rely on manual churn calculations and analysis. Modern platforms like Churnfree can provide detailed product analytics to identify new customer acquisition opportunities and enhance retention strategies to minimize churn.

Importance of Churn for Different Roles

Understanding churn is not only important for executives. It affects every department. Let’s understand the importance of churn for different roles in a business:

  • Salesperson: Sales teams can determine the quality of customer acquisitions through the churn rate. High churn means the sales are closing deals with clients who are not necessarily a great fit for the business.
  • Marketers: Churn is an important signal for marketers to determine the efficiency of their marketing material. A high churn rate means their marketing efforts are attracting the wrong audience.
  • Customer Success Manager: Churn is directly related to this role. The customer success team/manager is responsible for ensuring customers continue to get value from your product/service. They can use the churn rate to identify at-risk customers and optimize their processes.
  • Product Managers: Churn is a great way for product managers to evaluate the product experience and understand user behavior to address product issues. It also helps them fill the gap between product features and customer needs.
  • Finance Team: Churn has a direct impact on a company’s revenue, growth projections, and financial projections.
  • Customer Support Team: The customer support team handles customer complaints and feedback on a regular basis. Churn can help them identify recurring issues. Moreover, they can collaborate with the product development team to address the root cause of recurring issues.

Why Do Customers Churn?

By now, we’ve discussed a lot about different meanings, types, and calculations of churn in business. However, a key question that remains is why customers churn in the first place. In other words, why do customers stop using the products or services of a business? This is an age-old question among all businesses, but there is no one specific answer so we have to look at a number of factors:

1. Lack of Value: It is possible that your customer might not find the product to be valuable after a certain period. This can be either due to issues with your product or a simple change in customer preferences.

2. Temporary Solution: Not all issues and needs are permanent, so the customer might use your product/service for a brief period to address a temporary need.

3. Poor User Experience: The internet is full of SaaS tools and newer AI-powered technologies are emerging on a regular basis. If the customer is not happy with your product’s features or is facing consistent errors, there’s there’s a high chance they will shift to your competitor.

4. Lack of Promised Features: Many times, businesses make the mistake of over promising by including features in their marketing content, but not in the actual product. Similarly, the feature required by the customer might not be very clear or easy-to-use.

5. High Cost: Customers can also leave if the value and benefits provided by your business do not justify the expense.

6. Switch to an Alternative: Since most software categories and also businesses in general have lots of similar options, it is common to lose customers when they find a better alternative.

7. Branding Issue: A company, especially SaaS, can face a variety of issues like cybersecurity threats that can harm its reputation. Similarly, poor reviews from customers can harm a company’s reputation, leading to high churn.

Overall, a variety of reasons cause the customers to churn. Most of these reasons are preventable by improving the quality of your product/service, providing better customer service, and keeping up with the evolving requirements of the customer.

At the same time, you need to remember that some churn is common as there will always be customers trying out your product and leaving, so you need to focus on minimizing churn, but you cannot eliminate it.

Related: Top Six Questions to Ask Churned Customers

7 Key Tips to Reduce Churn in Businesses

Here are some tips and tricks you can follow to reduce the churn rate in your business:

1. Identify Churn Reasons: First of all, you have to identify the major reasons behind high churn in your business to ensure you can take relevant steps.

2. Set Actionable Strategies: Make realistic strategies after identifying at-risk customers. Implement efficient predictive analytics features to start retention efforts.

3. Keep Improving your Offerings: Even if you manage to acquire a lot of customers or high-paying clients in the initial stages, you should not stop working on upgrading your product/service. It is an ongoing process to ensure your customers get the most out of the product and maximum ROI.

4. Market to your Target Audience: Many business owners and marketers have the urge to market their products to a large generic audience. But you need to remember that not all products are right for everyone. So, the marketing and sales team should target the audience precisely to bring quality leads and make them customers for a long period.

5. Set the Right Pricing: The pricing of your product/service must be according to the value it provides to the customers. Customers only care about whether the product is worth it to them, so you need to think from their perspective while setting the price instead of your growth rate.

6. Engage Your Customers: No business should ever take their customers for granted. It is possible for the customers to cancel at any time, so you should engage them to understand what they are liking and/or disliking, so you can improve accordingly.

7. Create Retention Strategies: Keeping up with the customer’s complaints and needs manually can be difficult. So, it is recommended that you use a modern customer retention software to implement a reliable retention workflow to minimize churn in your business.

Conclusion

Churn is an unavoidable metric in any business. The best way to deal with churn is to face it head-on with the help of Churnfree, a comprehensive product experience platform meant to help businesses reduce customer cancellations, retain more clients, and lower the churn rate.

You can use Churnfree to create customized retention strategies and offer discounts based on users’ experiences. Moreover, Churnfree is easy to implement on any website to help you retain your customers.

Ultimately, by using Churnfree and following the tips and strategies discussed throughout this article, you can expect a significant reduction in your churn rate and enjoy higher revenue!

Related: Avoid These Mistakes to Reduce Your SaaS Customer Churn

FAQs

What are the common mistakes in churn calculation?

Some of the key mistakes you need to avoid in churn calculation are using the wrong period length, mismatching the customer populations, using the wrong formula, considering the wrong contract lengths, and not factoring in the business expansion revenue.

How Can I Calculate Customer Lifetime Value (LTV)?

You need to calculate your average monthly revenue rate (MRR) and churn rate. After that, you can easily calculate LTV by dividing the average MRR by the churn rate.

Can I handle churn from a single dashboard?

Yes! You can easily handle churn from the unified dashboard of Churnfree. You can view all the relevant data in the same place and take meaningful action to minimize churn.