How to Calculate and Reduce Customer Churn
Calculating the churn rate metric in a timely and actionable way is the first step in addressing churn
Ignoring customer churn to focus more on user acquisition moves a startup from running a marathon to running on a treadmill that takes the company nowhere. Customer churn has a huge impact on future revenues and profits. With more customers leaving the platform you will need to bring in new users faster to keep the company on the growth path.
When customers are unhappy with your product or service they move on to a better alternative. Several startups that I speak to know about churn but have lesser resources allocated to it, even though they know that churn is impacting growth. Quite often churn is not calculated correctly. At times the focus is more on tightening the funnels and discovering new channels for user acquisition and churn is defocused.
The latest figures from Appsflyer show that the 30 day uninstall rate across countries is over 50%.
Trying to grow with a high churn erodes profits and impacts ROI. The greatest SaaS companies have negative revenue churn which means that retained customers end up paying more in the next year than what they did in the previous year.
Why Focus on Customer Churn?
To start with, here is a startling figure. According to Accenture, companies lost over USD 1.6 trillion per year due to customer churn. The main reason for churn? Poor customer service. With existing paid acquisition channels becoming costlier every year, it is 5X more costly to acquire a new customer than to retain an existing one*.
As per emarketer, users typically uninstall the app if they do not use it for more than 6 days.
However, this isn’t all that bad. Companies that reinvested in their churned user got 4 out of 10 users back. This cost (and the notional revenue loss) could have been avoided if churn was stemmed in the first place.
Bringing focus to churn can improve the Customer Lifetime Value (CLTV) and improve the Monthly Recurring Revenue (MRR). By addressing the churn rate, a startup can better understand the different customer segments. Pricing and customer service for high-value segments which are about to churn can be improved. It can also build insights on which customers love to continue with its products despite the shortcoming which leads to churn.
If the churn rate is tracked closely, it can also help the product team in understanding which product changes decreased or increased churn across segments. Often it also leads to companies building focussed solutions for different segments.
What is Churn Rate?
Churn rate is the percentage of customers that stop using your service or product over a given time period. A simple calculation is to divide the number of customers lost over the past month (or quarter) by the number of users at the start of that period.
For example, if you have 100 customers at the beginning of July and by the end of July you have retained only 95 customers, the churn rate, in this case, would be 5/ 100 or 5%
The complexity arises due to the following reasons:
In any given month your transacting users comprise of:
New users - who signed up during the month
Existing users - who have been in the system before the month started
Reactivated users - who came back this month after not having transacted for a long period of time
If your company has accelerated user acquisition in this month, the total number of users at the start and at the end of the month will be very different and this will impact the churn rate calculation and not give a true picture. Therefore, the question arises do we need to exclude the new users added this month to churn calculations?
Additionally, new users may typically churn at a faster rate, this will further affect the true churn figure.
Churn rate calculations help build a better understanding of the business and impact strategic decisions. The time period for calculating churn, therefore, becomes even more important. For example, a news content app may calculate churn on a monthly basis while a SaaS company may calculate using a year as a base period.
Moment of Churn:
At what point in time do we tag the customer as churned? When he stops using the product even if he has paid for the yearly subscription or when he has uninstalled the app or when the subscription ends? Some companies do not tag users as churned until the subscription period ends. Which means that the company will never have users who have churned in the first month. This is sometimes misleading.
In another case, a startup tagged users as churned after a period of a month when it was a daily use app. A shorter time period would have helped win back some users.
How to Calculate Churn Rate?
Given the complexity in counting customers, figuring out the time period to calculate churn and identifying the moment of churn, each company will need to develop a framework to calculate churn.
It is important to calculate the churn rate metric so that it is a direct reflection of your customer behaviour and it is used to take suitable actions which create more value for the company. This metric should not be used from an accountant’s perspective for book keeping purposes.
The good folks at Shopify have documented their thought process on churn. Let’s delve into the different methods to calculate churn rate. The Shopify team shared 4 ways to calculate churn
This is the most straight forward way and was described earlier. Divide the churned users by the number of users at the start of the period (we’ll assume a 30-day month).
Though simple, this formula does not give the right picture during times of rapid growth
Here’s an example which shows the issue with this formula.
Even though the existing churn and the new user churn is same across months the effective churn rate gets distorted in a high growth month even though nothing has changed in the product or the user acquisition strategy.
To overcome the problem faced in the simple method, this churn rate formula takes an average of the starting number of users and the number of users at the end of the period. This normalises the change in the number of customers during the period.
Even with different customer bases the calculated churn every month is in line with the overall churn.
Though this approach to calculate churn helps with the first problem, it does not give the correct picture when comparing churn across different time intervals.
This approach assumes that the churn is evenly spread across the time period hence it falters when we try to compare churn across time intervals as seen in the table.
Use this churn rate calculator to compare the churn rates between the Simple and Adjusted approaches
The predictive approach allows the churn rate formula to adjust itself to the time period. Here we predict the number of customers who will churn over the next 30 days by taking a weighted average of the number of churned customers for a given day.
Yeah, things get a big complicated in calculating churn here. This approach enables us to compare churn across week, months and quarters. However, this approach does not provide data in a timely manner as you will be able to calculate churn only for the previous month and not the current month. Thus, this approach, though more accurate is not actionable.
This is Shopify’s most preferred method. It is timely, actionable and can be compared across time periods. This approach gives a good estimate of how many customers will leave your platform in the next month. All that’s needed for this approach is the daily churn and the number of customers on the platform each day.
The best way to move forward is to see which method best suits your company while keeping it simple. The main reason to calculate churn rate is to address the different causes for churn and ultimately reduce churn.
Top Reasons Why Customers Churn
By calculating churn rate you’ve established how leaky the customer retention bucket is at your startup. It is now important to delve deeper to understand the reason for the churn.
68% of customers leave because they think the company doesn’t care about them
Here are some of the top problems responsible for customer churn:
1. Bad onboarding experience
The two key events when a user installs the app or goes to a website are 'signup' and 'first success'. The former being quite self-explanatory, the latter is when the customer first experiences the product or service that solves his problem. Efficient onboarding shortens the path between signup and first success. Get the user to experience the value of the product as soon as possible.
Onboarding is the first time the customer is interacting with your product. Make an impact by:
Using guided walkthroughs
Creating engaging onboarding videos and content
Embedding training modules in the product for complex features
Mapping the onboarding journey, A/B test and constantly improve
There are three keys to successful onboarding - speed, value and satisfaction. A customer needs to experience success with the product, it needs to be in the areas that he values and it needs to happen as soon as possible.
2. Poor Customer Experience & Service
Even though a sale has been made, poor customer experience is one of the leading reasons for customer churn. This can stem from something as simple as bad in-app user experience or poor customer support.
For a food delivery company, not being able to connect with a call centre when the delivery is delayed can cause a customer to move to a competing platform. Sometimes a product feature like live order tracking can solve the issue and improve the experience even when the order is delayed.
It is important to have a customer success culture in the company which unifies product, tech, sales, marketing and operations teams towards achieving customer delight. Amazon drives this by starting every product idea with a customer story and by wanting to become the most customer centric company in the world.
3. Product Problems
Crashes and downtime impacts the customer experience. A leading payments app would often face crashes in India and saw significant churn when users were unable to use the app during offline purchases. The company responded by acknowledging the problem, focussing teams on solving it and then launching a cashback program to win users back.
Another key product problem is the lack of key features. This leaves the door open for the user to churn and move to the competition. A cab aggregator in India saw users moving to the competitor due to lack of safety features, which was not a required feature when the company started up in the country but soon became a differentiator. The company took time to develop the feature but lost a sizeable female userbase over the months.
Sometimes the competition comes up with innovations and product features which draws users to its platform. Even though your company has done well in meeting the customer expectations, often competition can beat you in pricing, customer experience, building trust or execution.
It is important for product managers and sales teams to have their ear to the ground to understand the competitive landscape and tactics being used to attract users.
5. Poor Product/Market Fit
In the early days when the startup sees a huge churn, it is worthwhile to go back to the drawing board and see what’s broken in the product-market fit. The initial hypothesis on user problems and perceived solutions may be wrong. It may be beneficial to start improving on the product and pricing so that the users do not churn.
We have frequently seen how pricing can impact churn. At times, merely a 5% increase in the pricing can lead to a significant churn. It is important to understand the price elasticity of the customers before deploying a new pricing strategy. Understand price sensitivity by talking to customers or trying out A/B testing with pricing.
Often a competitor’s pricing strategy (by moving from a fixed price to a variable pricing model) can cause churn on your platform.
Analysing the reasons for churn is the first step in reducing it.
Tactics to Reduce Customer Churn
We just covered some key areas that you need focus to reduce churn. Here are some additional tactics which can further reduce churn.
1. Know who are the churn probables
Analyse churn as it occurs. Invest in a marketing analytics solution to identify user behaviour just before users are about to churn. At a grocery app, the growth team identified that reduction in the frequency of purchase below a certain threshold would cause over 70% of those users to churn.
With this behaviour identified, journey campaigns were built using a marketing automation platform which helped stem the churn. While this helped to an extent, the data science team helped develop a model which included average basket size and number of categories that the user shopped in to be included. Post this analysis, the growth team did a deep dive to identify markers (stockouts, damaged goods or delivery delays) which would lead to such behaviour and addressed these issues to stem the churn.
2. Figure out your most valuable customers
It is best to have a different churn reduction strategy across various user segments. Focus your attention on your best customers and allocate more resources to winning them back. Sometimes it is fine to let the unprofitable users churn. A leading telecom operator decided that it was best to let go of a segment of users who were net negative for the company while it rolled out new features for its best customers.
3. Build Personalisation
75% of consumers are more likely to buy from a retailer that recognizes them by name and recommends products based on their purchase history. It is not always about recommendations for new products, personalization an also be used on the pricing front and the user experience. Create how-to guides for features that the user has not experienced. Show these guides post a success event in the app or the website
4. Make your best people deal with cancellations
How many times have customers had to go through a series of recorded messages before they are able to cancel the service they have subscribed to? Many companies make it difficult for users to cancel their subscriptions (cue some leading telecom operators). This not only impacts customer experience but also generates an adverse word of mouth.
On the contrary, get your best agents to talk to users when they try to cancel. Train them to win back customer who want to leave. Human interaction will make a huge difference.
5. Create a community
Building a community around your product or service will create a sense of belonging amongst the customers. They get to hear positive stories about your company. Additionally, the community also leans on each other to solve product-related problems. The community is a great sandbox to test new ideas that can reduce churn and build loyalty.
A leading cycle manufacturer has a robust community which not only organises weekly bike rides but also helps community members to source spares and solve product niggles which otherwise would have been a cause for customer pain.
6. Surprise and delight your customers
Create a user journey which has discounts or gifts when a customer enters the ‘churn probable’ bucket. Make the customer feel special and get him to experience a success event that will convert him into becoming a loyal customer. A food delivery app extended the loyalty program for users who were expected to churn and saw over 23% increase in retention when compared to the control group. A grocery delivery app delivered free personal care product samples to users who had not transacted for over a month to win back over 18% of the users.