Customer churn happens when a customer stops doing business with your company. It is completely normal and every business experiences it. However, excessive churn is something you should not ignore because high churn rates negatively impact profitability, brand reputation, and business growth.
Fortunately, you can identify the cause of high customer churn and eliminate the issues by performing customer churn analysis.
Table of Contents
What is churn analysis?
Churn analysis (or customer attrition analysis) measures how many customers you’ve lost within a given period. With a customer churn analysis, you can identify your customer loss patterns, trends, and causes. The insights from the analysis are crucial for making data-driven decisions and executing strategies to minimize churn.
How does customer churn analytics work?
Churn analytics requires identifying and monitoring relevant metrics. The relevant metrics will reveal the number of customers you’ve lost within a given period and the cost of the loss. Performing the analysis will also help you identify what’s causing your customer attrition so you can fix it.
Depending on your SaaS business model, you can analyze attrition by considering subscription, non-subscription, or revenue churn. Subscription churn is for businesses that offer subscription plans. The analysis will reveal the number of customers who canceled or failed to renew subscriptions.
Non-subscription churn occurs among businesses that do not offer subscriptions, such as ecommerce and freemium SaaS businesses. Such companies monitor metrics that reveal how many recurring visitors quit their website or app.
On the other hand, revenue churn involves measuring how much money your business lost within a given period due to customers quitting your product. Once your company identifies its churn rate and attrition causes, it can implement intervention strategies to minimize churn. The intervention may involve improving your product based on customer complaints and analyzing churn afterward to verify that the improvement yielded the desired results.
The importance of customer churn analysis
Customer churn analysis involves calculating your customer churn rate to understand why customers are leaving and how to turn things around. Churn (or customer attrition) can be due to various factors, such as competitors offering a better product or a lower price.
Surveys indicate that SaaS companies’ acceptable yearly churn rate is between 5 and 7%.
When customer attrition exceeds acceptable levels, your business may experience:
Revenue loss: Losing customers means fewer people buy your product, leading to reduced earnings. Also, existing customers spend 31% more than new customers and are 60 to 70% more likely to buy a product. On the other hand, only 5 to 20% of new customers make purchases.
Higher marketing costs: Losing customers leads to spending more on marketing to replace lost customers. Acquiring a new customer costs 5 to 25x more than retaining an old customer.
Tarnished brand reputation: Medium-sized SaaS companies lose about 5% of revenue to churn annually, while larger companies lose even more. Even worse, churn threatens future revenue because consumers typically avoid patronizing businesses that other customers are abandoning.
While every business experiences customer attrition to some degree, you can minimize yours by performing customer churn analysis. The analysis will reveal why customers don’t return for repeat business. Fixing what’s scaring off customers will help boost your customer retention and increase revenue. In fact, studies show that a 5% increase in retention can double revenue.
Through a churn analysis, you can also gain insights into which customers are most likely to quit your business and the effectiveness of your customer retention tactics. You can then use the insights to make data-driven decisions that improve your product and service delivery. Providing a better customer experience will boost customer retention, brand reputation, and revenue generation.
8 benefits to analyzing customer churn
Minimizing churn is crucial because a high customer churn rate negatively affects business profitability, reputation, and growth. Customer churn analysis can help you avoid such issues in the following ways:
1. Identify customer patterns
Regular churn analysis will provide insights into how customers use your product and the patterns that lead to attrition. For example, if a high percentage of users abandon your SaaS product during the signup stage, it may mean your onboarding process is too long or complex.
Understanding user patterns that lead to churn can help you identify and implement strategies to improve user engagement and minimize churn. Also, you can use customer churn analysis to develop predictive models that forecast when a customer might churn. With these insights, you can develop plans to intervene and prevent churn before it happens.
2. Optimize products and services
Knowing what’s causing churn can help you improve your product and service delivery. For example, customers quitting your product due to usability issues or other problems won’t have to quit if you fix the identified problems. Besides preventing churn, fixing the identified issues will make your product more attractive to prospective customers. The more attractive and valuable your product is to existing and prospective users, the more revenue it can generate.
3. Cost reduction
As we’ve mentioned, acquiring new customers costs more than retaining existing users. Reduce how much you spend on customer acquisition by retaining as many existing customers as possible. The most effective way to accomplish this is to use customer churn analysis to identify churn triggers and eliminate them.
4. Competitive advantage
Proactively identifying and fixing customer concerns that cause churn will give you an edge over your competitors. How? Continuously fixing and upgrading your product to be as perfect as possible will make you more attractive than competitors that offer the same product. Also, users who are happy with your product are more likely to post positive reviews to help you attract more customers.
5. Revenue growth
Losing customers as fast as you get them will prevent your customer base from growing. A declining customer base can’t generate as much revenue as a growing one. Also, the longer you retain a customer, the higher their lifetime value will be. Analyzing churn will help you find new ways to retain customers so they can continue generating revenue for your company.
6. Customer segmentation
The insights from your churn analysis can simplify segmenting customers according to who is most likely to churn. You can then target proactive retention strategies at your most churn-prone customers.
Effective retention strategies you can implement include sending out follow-up surveys and questionnaires that ask users about their experience with your product. The answers provided in the surveys and questionnaires will guide you toward actions you can take to improve your product and prevent churn.
7. Measure customer retention strategies
Regular churn analysis can help measure the effectiveness of your retention strategies. If your current strategies are underperforming, you can stop them and execute new ones to get better results. Besides leading to more customer loss, continuing with underperforming retention strategies wastes valuable resources that your business could put to better use.
8. Build customer-centric culture
96% of customers prioritize customer service when choosing a brand to give their loyalty. You can leverage customer churn analysis to identify your customer service and experience shortcomings and fix them to boost customer loyalty. Also, frequently analyzing churn helps you become a more customer-focused business. This occurs because the analysis shows new ways to improve your products, services, and customer interactions to match your customers’ preferences.
11 metrics that matter when analyzing churn
Performing a customer churn analysis requires identifying and measuring the right metrics. The correct metrics to track typically vary between businesses in various industries. For instance, below are metrics to prioritize if you are a SaaS business:
1. Customer churn rate
Customer churn rate indicates how many customers your business lost within a specified period. The specified period could be a week, month, or year, but most SaaS businesses check this metric monthly.
Measuring customer churn rate requires identifying how many customers canceled or failed to renew subscriptions for your product or service within a specific time period. Divide the number of lost customers by the total customers you had at the beginning of the time period and multiply the answer by 100.
Total Number of Lost Customers/Total Number of Customers for the Same Period x 100 = Customer Churn Rate
2. Revenue churn rate
Your revenue churn rate represents how much your company has lost due to customer attrition within a specific period. Calculating your revenue churn rate requires identifying how many customers you lost within a specific period and the money you lost because those customers left. Divide that amount by your revenue for that time period and multiply it by 100.
Money Lost Due to Attrition/Total Revenue for Same Period x 100 = Revenue Churn Rate
3. New sign-ups
Tracking new sign-ups will reveal how many people have subscribed for your product and the rate at which your customer base is growing. You can segment sign-ups according to the product plan customers selected.
Identify your total number of new sign-ups by checking your subscription records. You can use the information to determine how many new customers you need to offset the loss from customer churn. It also reveals if your marketing efforts to replace lost customers are delivering satisfactory results.
4. Conversion-rate-to-paying-customer
The metric reveals how many of your freemium or free trial customers are upgrading to a paid package. If customers quit your free trial or freemium package without upgrading to a paid plan, it may be due to onboarding issues. Identifying the onboarding issues and eliminating the roadblocks stopping free plan users from upgrading will help minimize your churn rate.
You can calculate your conversion-rate-to-paying-customer by identifying the total number of customers that upgraded to a paid plan. Divide it by the total number of freemium or free trial users for a specific period and multiply it by 100.
Free to Paid Converted Users/Total Number of Free Users x 100 = Conversion Rate
5. Active users
A user signing up for your product does not guarantee that the customer will use the product. Also, some users stop using a product if they find it hard to understand. Unlike other users, active users actually use your product to complete tasks. Distinguishing active users from inactive ones will help you identify customers who are likely to quit your product or keep using it.
You can gain more insights about your active users with metrics like engagement score and usage frequency. These metrics will reveal how engaging users find your product and how often they use it to get their desired results. Customers who frequently use your product and stay engaged are less likely to churn.
6. Average customer lifetime value (LTV)
The average customer LTV refers to the revenue you expect your customers to generate over the course of your relationship with them. The metric helps determine how much you might lose when a customer quits your business. It also provides insights into how much to spend to retain a customer. Ideally, the cost of retention should not exceed a customer’s LTV.
You can calculate LTV by multiplying your average monthly revenue per customer by the average number of months a customer uses your product before quitting.
Average Monthly Revenue from One Customer x Average Number of Months You Retain a Customer = LTV
7. Customer acquisition cost (CAC)
CAC indicates the total cost of acquiring a new customer. The metric covers everything from marketing costs to the cost of onboarding a customer. Knowing your CAC is crucial during customer churn analysis because you need to know the cost of replacing lost customers.
Also, analyzing your CAC and churn rate will reveal your customer segments with the highest acquisition costs and churn rates. The insight will help you make data-driven decisions regarding improving retention.
You can calculate customer acquisition cost by combining the cost of your marketing and sales for a specific time period. Divide the total number by the number of new customers you gained during that same time period.
Total Marketing and Sales Cost for a Specific Period/Total Number of Customers for the Same Period = CAC
8. Monthly recurring revenue (MRR)
Your MRR represents how much you can expect to make from each customer monthly. Without knowing your MRR, you may have trouble identifying how much you lose to customer churn.
You can also use your MRR to measure if your customer acquisition and retention strategies have a satisfactory ROI. Calculate your MRR by multiplying your total number of active customers by your monthly average revenue per user.
Total Number of Active Customers x Average Monthly Revenue per User = MRR
9. Activation rate
The Aha moment is when customers realize the value of your product. It typically occurs when a customer discovers how to solve a problem or improve their life with your product. The sooner customers realize value, the sooner you can convert and onboard them. If it takes too long to experience their Aha moment, a customer will likely leave your product without converting.
The activation rate is the percentage of new users that reach the Aha moment and become paying customers. Businesses track their activation rate to verify if customers are experiencing value and moving along their buyer journey. The metric also reveals how many new users experience value and convert.
Measure your activation rate by identifying the number of users who reached the Aha moment (activated users). Divide the total by the number of users who signed up for your product and multiply the result by 100.
Activated Users/Number of Subscribers x 100 = Activation Rate
10. Number of support tickets by severity or type
Verifying the number of support tickets issued within a specific period will reveal how many users contacted customer support for help. It will also show you how many customers received satisfactory assistance.
If customers have trouble using your product and can’t get help, they are more likely to leave, leading to a high churn rate. In fact, most customers cancel subscriptions because they are unhappy with the received customer service. Your customer support team should have records on the number of support tickets assigned and resolved.
11. Time to recover CAC
Time to recover CAC refers to how long it will take to recuperate the amount you spent to acquire a customer. Your CAC recovery time is crucial during customer churn analysis because if your recovery time is less than the time it takes for customer churn to occur, you’ve broken even.
Most successful SaaS companies recover their CAC within 5 to 7 months. You can calculate the time to recover CAC by identifying your CAC and dividing it by your monthly recurring revenue (MRR).
Customer Acquisition Cost/Monthly Recurring Revenue = CAC Payback Period
A step-by-step process for analyzing customer churn
The steps to execute a customer churn analysis will depend on various factors, such as your available data and SaaS business model. For instance, if you offer multiple products, each product will require a separate churn analysis. Doing so will provide insights into customer attrition for each product so you can identify what’s causing users to leave or stay.
You can get most of the data for a churn analysis from your sales and customer success teams. However, it helps to separate your data according to product, region, client segment, or other relevant categories before analyzing. Segmenting your data will provide more accurate insights into the aspects of your customer acquisition and retention process that might be causing attrition.
Once you have your data, follow these steps to run a customer churn analysis:
Step 1. Define the problem
Identify what counts as customer churn in your SaaS business. It could be customers quitting after the free trial, customers not upgrading from your freemium to paid service, or customers abandoning your product after a while. You should also define the time period to analyze. For instance, are you analyzing user churn for a specific week or month?
Step 2. Verify customer churn rate
You can’t start a churn rate analysis without first identifying your customer attrition rate. Use the formula we provided above to find the percentage of customers who quit using your product during the time period you are analyzing.
Step 3. Gather relevant data
Your customer attrition rate isn’t the only data you need for a churn analysis. Other relevant information you can use include data regarding customer demographics, purchase history, usage data, and support service interaction. It will also help to calculate key metrics, such as active users, customer lifetime value, and conversion rate to paying customers.
After gathering the data for analysis, identify relevant data patterns and trends. Identifying unusual patterns and trends can provide insights into the factors causing customers to churn. It can also reveal which existing customers are most at risk of churning.
Step 4. Analyze your data
Once you have your data, use your preferred analysis technique to break down patterns and trends that reveal who is churning and why they are churning. Data analysis techniques you can use include regression analysis and segmentation.
Alternatively, use statistical methods and visualizations to understand your data and identify patterns related to customer churn. For instance, you may look at active users, usage frequency, and customer lifetime value and plot them against churn to identify engagement and churn patterns.
Step 5. Pinpoint primary drivers of customer churn
Use your gathered data to identify the factors causing customers to churn. B2B SaaS companies typically experience high churn if customers do not experience value quickly. B2B SaaS clients may also churn if they find the onboarding process or customer support unsatisfactory.
B2C clients, on the other hand, typically quit a product if the price is too high or a better alternative is available. Identifying the causes of churn within your company will equip you to devise solutions that effectively minimize attrition and boost customer retention.
Step 6. Develop and implement a customer retention strategy
You can now build a customer retention strategy that addresses the issues identified by your churn analysis. Implement the strategy upon completion and track its performance to identify if it’s fixing the identified problems.
If customer churn does not reduce within a month of launching your customer retention strategy, your strategy may be addressing the wrong issues. Another reason your strategy may fail is implementing the wrong solution to fix the identified issues. Use the insights from tracking your strategy to identify how to improve your solution to deliver better retention results.
Do you want a simpler customer churn analysis process?
An alternative to the above steps would be to use a churn analysis tool like Churnly. Such tools provide easy-to-understand insights into various metrics, including churn rate. You can import relevant customer data and metrics into the tool, which will then process the data to identify customers who are likely to churn. The tool also provides insights into why customers are leaving so you can take action to improve retention.
5 actions to take to improve customer churn
We’ve discussed the dangers of high customer churn and how to identify if your customer attrition is within an acceptable range. If a churn analysis reveals that your customer attrition rate is higher than your industry standard, turn things around by taking these actions:
1. Optimize your onboarding checklist
Onboarding checklists list the tasks you must complete to onboard new customers fully. Completing each item on the list with a customer ensures that they understand your product and how to use it to experience value within the shortest possible time.
The sooner a new customer experiences value in using your product, the sooner they can achieve their goals and the less likely they are to churn. However, this won’t happen if your onboarding checklist has missing or wrongly ordered steps. Missing steps can lead to ineffective onboarding because customers do not have all the information they need to make the most of your product.
If your onboarding checklist does not cover everything new customers need, fix it by optimizing your checklist with these steps:
Measure the effectiveness of the onboarding process: Track customer satisfaction by asking customers to rate your onboarding process. Your customer feedback will help you identify aspects of your checklist to optimize.
Cover essential features: Your onboarding checklist should include training that covers the features and functions of your product. The training will help customers fully understand how your product works and how they can use it to their advantage to experience value quickly.
Customize the onboarding process: If you are a SaaS company with a complex product, consider tailoring your onboarding checklist and process to each customer’s needs. For instance, you can prioritize onboarding tasks according to the needs of each new user.
Simplify your onboarding: Your onboarding checklist provides a roadmap for your onboarding process. The simpler the roadmap, the easier it will be to follow. Also, if onboarding is short, sweet, and effective, new users will find understanding and using your product to experience value easier.
2. Segment your onboarding emails
Segmenting onboarding emails involves dividing new customers into groups based on criteria like interests or behavior. Email segmentation simplifies sending targeted messages to specific customers and reduces churn by giving new users a more personalized onboarding experience.
Segmenting new customers into groups also facilitates identifying the specific pain points of different customers. You can improve your product or service to address identified pain points more effectively and boost customer satisfaction to minimize churn.
Options for segmenting onboarding emails include:
Segment by user role: our onboarding checklist provides a roadmap for your onboarding process. The simpler the roadmap, the easier it will be to follow, and the less likely it is to confuse or frustrate new customers. If onboarding is short, sweet, and effective, new users will find understanding and using your product to experience value easier.
Segment by product usage: Customers with different usage patterns typically require different onboarding experiences. For instance, a user who uses only a few features will not require as much training and support during onboarding as a customer who uses more features.
Segment by customer's industry: Segmenting according to industry ensures that each customer’s onboarding emails contain only information and resources relevant to their industry.
3. Optimize onboarding process
Your onboarding process should be comprehensive without being unnecessarily long and complicated. New customers may churn if they have trouble following your onboarding process and experiencing value. Avoid such an outcome by using these tips to optimize your onboarding process:
Give new users guides and tutorials that discuss how to use your product and its features.
Offer live training and webinars that help customers understand how your product works.
Assign a dedicated onboarding specialist to help customers address issues or concerns they might encounter during onboarding.
Have a customer success plan for tracking each customer’s onboarding progress.
Implement a customer onboarding survey to gather user feedback about aspects of your onboarding that need improvement.
Lastly, follow up with customers after onboarding to check if they are still experiencing value. If a customer has trouble experiencing value after the onboarding process, it may lead to churn.
4. Review Your SaaS pricing model
If your customer churn analysis reveals that customers quit your product when they have to pay for it, you should look into your pricing model. With the right SaaS pricing model, you can inspire trust and stickiness with customers and increase customer loyalty and retention. The higher your customer retention, the more revenue your business can generate.
You don't want to overcharge customers because that might scare them off, and you should not undercharge because that will affect your profitability. Your price should match the value of your product and be reasonable to your target audience so they will not hesitate to pay. Also, paying for your product should be hassle-free with no hidden charges.
Various pricing models are available for SaaS businesses, and the perfect one for your company will depend on factors like your:
Products
Available add-ons and feature options
Target market
Market expectations
Brand
For instance, if you serve small to medium-sized businesses, you could offer flat-rate pricing. On the other hand, if tens or hundreds of employees within your client company use your product, you can charge per active user. Alternatively, offer freemium and paid versions of your product if you are a new brand trying to break into a saturated market.
5. Engage new customers
Reduced customer engagement could mean that a customer is losing interest in your product because they have trouble using it or have found an alternative. Such a customer is more likely to churn, but you can prevent such an outcome by doing the following to keep them engaged:
Have a dedicated customer success team: The team should proactively help customers use your product to achieve their goals. Customers will keep using your product if it’s solving their problems, leading to less churn.
Regularly communicate: Communicate with customers frequently to remind them of the many things they can accomplish with your product. Tailor the communication to include features a customer is yet to try.
Ask for feedback: Continuously gather customer feedback to identify new ways to improve your product and service delivery. Asking and acting on feedback will show your customers you care and help increase customer satisfaction.
Re-engage inactive users: Create targeted campaigns that re-engage inactive users. The campaign should remind these users of your product’s value and how to experience it. You can also offer incentives for customers to renew their subscriptions.
How often should you analyze customer churn?
Depending on your business model, customers, and available resources, you can run a customer churn analysis daily, weekly, monthly, quarterly, or yearly. However, we recommend a monthly churn analysis. A monthly schedule will give you enough time to gather enough data to run an effective analysis.
Waiting longer than a month may lead to excessive data that provides complex or misleading insights. Also, a yearly analysis negates one of the main benefits of a churn analysis – catching and fixing issues that cause churn early before they cause disastrous results.
Lastly, monthly churn analysis allows you to identify growth opportunities and incorporate them into your product through iterative improvement. Continuously improving and upgrading your product will keep customers engaged and maintain customer satisfaction. Engaged customers are essential for minimizing churn.
Leverage customer churn analysis to grow your customer base
Customer churn is unavoidable, regardless of your business type. However, minimizing customer attrition and maximizing customer retention is crucial if you want your customer base to continue growing. With a customer churn analysis, you can identify your attrition rate and why customers are churning.
We recommend performing a churn analysis at least monthly and using insights from the analysis to optimize your customer onboarding and retention strategies. Take the first step toward building a successful SaaS product by contacting DevSquad. Learn more.
