Persuading a customer to buy your product is one thing, but convincing them to remain loyal to your business is another.
Customers stop using certain solutions for a variety of reasons. Whether they switched to a competitor or they don’t have enough room in their budget, when a customer stops buying your solution, that loss of business contributes to your churn rate.
What is churn rate?
In its most general form, churn rate is a measure of the number of items moving out of a particular group. In a business sense, churn is known as the rate at which customers stop doing business with a company.
Churn rate is an important sales metric for B2B companies that use a subscription-based pricing model. Whether they collect payment for their solution every month, quarter, or year, they depend on that recurring revenue stream.
So long as the customer continues to use and pay for the solution, the business is in good shape. When a customer decides to discontinue their subscription, however, that is known as churn, and it’s a bad sign for business.
A high rate negatively affects businesses because it means that customers are consistently canceling their subscriptions. Whether they cancel because they switched to a competitor of yours or simply decided they no longer have a need for the solution, it’s bad for profitability and growth.
You can have a solid monthly revenue, but if your customers aren’t sticking around long enough for you to recover from your acquisition cost, your business is in trouble.
How to calculate churn rate
The churn rate formula is as follows: subtract the number of users at the end of a period from the number of users at the beginning of a period. Then, divide that number by the users at the beginning of the period.
You can measure for the month, quarter, or year.
Whatever you decide, make sure you’re consistent with the time period when pulling the number of customers. If you go back and forth between two different time periods, your calculations will be inaccurate.
How to count customers
To accurately calculate your customer churn rate, you need to first define what a customer is in the eyes of your business.
We all know that a customer is someone who pays for our solution. It’s a pretty simple concept. What isn’t simple, however, is defining the exact moment at which a person officially becomes a customer.
There are a lot of different identities that a person can embody during their time as a potential buyer in the sales pipeline (prospect, lead, opportunity, etc.). But when do they actually become a customer?
It’s important to choose a point in your sales cycle where you officially consider someone to be a customer – and stick with it. It might be when they agree to buy, when they sign a contract, or when they make their first payment. Whatever you decide on, be consistent.
How to define the moment of churn
The same goes for defining the moment of churn. There are a lot of different times that seem appropriate to consider as the point at which a customer churns. Here are a few options:
The moment of cancelation
The moment the subscription ends and the customer doesn’t renew for the next time period
The moment the end of the subscription period arrives after they haven’t renewed
Whatever churn moment makes sense for your business, as always, be consistent.
Churn rate example
Let’s go over an example of how a business would calculate their churn rate.
Fake Company ABC started Q1 with 500 customers. At the end of Q1, they had a total of 450 customers. Using the equation above, this would mean that Fake Company ABC would have a customer churn of 10% for Q1.
(500-450) / 500 = 10%
In Q2, Fake Company ABC started with the 450 customers that were remaining after Q1, and then ended Q2 with 425 customers. Their customer churn for Q2 would be 5.5%.
(450-425) / 450 = 5.5%
Because their churn rate decreased, Fake Company ABC did a better job at retaining their customers in Q2 than they did in Q1.
Churn rate calculator
If you don’t have the time to run all of those numbers, don’t worry. Use the churn rate calculator below.
Why churn rate is important
Churn rate directly reflects how satisfied your customers are with your business and has the potential to suppress your growth. As customers or subscribers leave, you simultaneously lose out on revenue, or revenue churn, and opportunities to develop your business.
Retention rate is related to churn in that it represents the amount if existing customers your business was able to resign for another contract.
If that’s not a good enough reason to care and measure it, here are a couple of other reasons why you should always be tracking it:
Provides insight into long-term company health
Shows whether or not the business is improving in customer retention
Helps identify areas of improvement in attempts to retain customers
Determines which customers are seeing the most success with your product
At the end of the day, your churn indicates whether or not your customers are happy. If you look at each customer solely as an opportunity to make a quick buck, they’ll notice and won’t give you the time of day.
However, if you offer a personalized experience and treat each customer as an individual with unique needs that your business can solve, they will feel a connection to your business, increasing the chances of them becoming loyal.
Related: The point of offering a solution to customers is so they can use it successfully to meet their needs. Customer success software can conduct an analysis of customer behavior to see where problems might arise, determine how to solve those problems, and increase customer retention.
What is a good churn rate?
Asking what qualifies as a good [insert sales metric here] is almost always going to give you the same answer: it depends. No business is the same, so their metrics won’t be either. A good churn rate for one company might be devastating for another.
So what does it depend on? Look at your churn over time and compare different periods. If your it has decreased, that’s a good sign for your business.
A bad customer churn rate can be considered as any churn at all. Losing customers is bad, so any churn is negative. However, that isn’t a realistic benchmark - your business is going to lose customers no matter what.
With that in mind, a bad rate is one that exceeds your customer growth rate. This means that you’re losing more customers than you’re gaining, indicating a problem somewhere in your sales process.
What causes customer churn?
Think about the amount of times you have simply stopped using something. It might’ve been because it was too expensive, because you no longer saw a need for it, or because you were simply too lazy to go out and buy it again.
It’s common knowledge that there are a wide array of factors that come into play when deciding to make a purchase - or more importantly, when deciding not to make a purchase. To name a few:
Cost doesn’t match value
Negative experience with onboarding
Poor user interface and user experience
Not enough features
Switching to a competitor’s solution
Bad product design
What affects churn rate?
A business’ churn rate is affected not only by the loss of customers, but also some other factors within the business.
It’s important to understand that there are limitations to the conclusions you can draw from this metric depending on the following factors:
Sample size: Churn rate is a product of sample size, and sometimes, it can take things out of perspective. For example, if you have a churn of 10%, that can apply to businesses that had ten customers and lost one, as well as businesses that had 10,000 customers and lost 1,000.
Time frame: You might measure your churn every week, month, quarter, or year, known as monthly churn rates or annual churn rate. The time frame you choose to measure your churn rate within will affect the results. For example, the rate at which your customers churned throughout an entire year will be different than month churn.
Customer segments: Some businesses like to segment their customer base before they calculate churn. This way, they can get a good look into which customer segment they need to focus on more. This can be done by separating the customers based on the qualities of their business, or depending on the solution they buy.
Seasonality: If your business experiences a busy season, the rate will definitely be affected by that. It’s best to go through several cycles to get an idea of what a good churn rate is for both your busy and slow seasons.
Churn rate impact on SaaS metrics
Losing customers is bad for business – there’s no doubt about it. Not only do you lose out on a valuable and profitable relationship, but a high churn rate can also negatively affect the following SaaS metrics:
Customer lifetime value (CLV): CLV refers to the estimated profit that will result from a relationship with a customer. While this metric might not mean much standing alone, it’s often used to predict how long a customer needs to stick around to make up for acquisition cost. If the customer churns, CLV will suffer.
Customer acquisition cost (CAC): CAC is the cost associated with acquiring a new customer. Between marketing and paying sales reps, it can quickly add up. If a customer churns before contributing enough revenue to cover the amount it cost to acquire them, the business will lose out on that investment.
Monthly recurring revenue (MRR): MRR is the revenue that a business expects on a monthly basis. Businesses might take this expected revenue into account when making business decisions, and if a customer churns and the anticipated revenue isn’t generated, the business will hurt.
Churn rate and cohort analysis
A key purpose of measuring churn rate is to define areas where you need to rethink your customer retention strategy. There will be some customers that’re perfectly happy with the way things are going that have no intention of ending their relationship with you. And of course, there will be others that could use some extra attention.
While you want to give love to all of your customers, you don’t want to waste time trying to retain customers that aren’t going anywhere in the first place.
This is where businesses will start to use cohort analysis.
Cohort analysis is the process of using behavioral data to group customers with similar characteristics, like those that churn and those that don’t. When applied to churn rate, cohort analysis is used to group customers together into related segments based on actions that keep them from churning.
To determine the reason for churning, businesses will compare cohorts based on the following factors:
Acquisition channel: Where are the successful users coming from? (cold calling, content marketing, etc.)
Actions: What actions do these successful users take and how often? (logging in, upgrading, etc.)
Time: How long does it take for the most successful users to take these actions? (three hours, one week, etc.)
Cohort analysis enables you to identify and target problematic moments in the customer’s journey, take action to fix them, and keep customers from churning.
6 ways to reduce customer churn
Now that you’ve got a good understanding of your customer churn rate, you might be looking for some ways to reduce it. It all comes down to offering a valuable product, treating your customers well, and outdoing your competitors.
Here are a couple of actionable steps you can take to reduce your customer churn.
1. Understand why customers churn
Whether it’s because they’re switching to one of your competitors or they no longer have a need for the solution, some of your customers are bound to churn. Instead of moping about another lost customer, use it as a learning opportunity.
Dig into the reason why the customer left. Were they unsatisfied with the product or service? Was the solution too expensive? Were they not receiving the support they needed to succeed?
Whatever the case may be, find the explanation and take action to prevent a customer from churning for the same reasons.
2. Make a good first impression
A good first impression can go a long way. Use it to work on reducing churn from the second you gain a new customer.
Send a personalized welcome email, offer a constructive onboarding process, and provide educational content surrounding the best ways to gain value from the solution they bought. These small gestures can go a long way in your customer relationship.
Jonathan Aufray of GrowthHackers stresses the value of setting expectations from the beginning of your interaction with the customer.
“To reduce customer churn, it’s important to show at the beginning of the collaboration what they will be getting and the results they can expect,” Aufray says.
3. Offer training and support
It seems as if B2B solutions are constantly growing in complexity, and you don’t want your customers to have to guess how to troubleshoot their problems with your product.
Your customer support team needs to be well-equipped to handle a variety of issues that users could potentially run into. Make sure they have established processes and the resources they need to succeed.
Ensuring your customer support team is ready for any situation and can execute when presented with a problem will boost customer satisfaction and reduce churn rate.
4. Ask for feedback and take action
You can’t understand how the customer feels about your solution if you don’t ask. Make sure you’re regularly asking for feedback from customers after certain milestones and periods of time.
Asking for feedback not only shows customers that you care and gives you constructive criticism to bring to the drawing board, but it also re-engages users.
For example, if you’ve identified that customers tend to churn after a certain amount of time without logging into the tool, nudge them and ask for feedback at that particular point. Maybe there is a reason they have left it sitting there unused.
Quincy Smith from Ampjar talks about the importance of sending a personalized review when a customer wants to leave and analyzing how they used the platform, opportunities they might have missed, and big wins since they started using the product. Then, they reach out to the customer.
“We can explain how they can get better use out of the product. We stop about 10% of customers from churning and always come away with great insight into how to better educate our users,” Smith notes.
5. Communicate proactively
Consistently reaching out to customers proactively is a great way to build a positive and mutually beneficial relationship.
Whether you’re sending educational content or informing them of an opportunity to update their solution, they see you as a trusted advisor that truly cares for their success. In turn, they remain a loyal paying customer. It’s a win-win.
Never leave customers in the dark if an issue arises with your solution. Be proactive in alerting them of the situation and offer support where you can. This will help them know they can trust and depend on you.
6. Let some customers churn
This one can be difficult to get on board with, but sometimes it’s best to just let some customers go. This doesn’t mean you shouldn’t focus on retaining customers, because you absolutely should. All this means is that the time may come to let a customer walk, and it’s your responsibility to recognize when that moment comes.
Take a look at the situation with profitability in mind. If a customer buys your more expensive offerings, advocates for your brand on social and review sites, and has established themselves as a loyal customer, those are people more worth hanging on to.
Learn your lesson
Regularly measuring your business’ churn rate is important; however, it’s even more essential to gather insights from the results. Your churn speaks directly to your customer satisfaction rates.
Once you have your churn rate measured, don’t just let it sit there. Use it to analyze the details of your sales process and take action to make it more pleasing for your customers. After all, without them, you don’t have a business.
It’s possible that your customers are churning because they simply aren’t the ideal buyer for your solution. Use G2’s Buyer Intent Data to learn about the companies researching your business so you can target those customers.
Mary Clare Novak is a Content Marketing Specialist at G2 in Chicago, where she is currently exploring topics related to sales and customer relationship management. In her free time, you can find her doing a crossword puzzle, listening to cover bands, or eating fish tacos. (she/her/hers)