Product churn is the bane of SaaS companies and other businesses. Why? Excessive churn negatively impacts your bottom line and slows business growth.
Even if you manage to replace churned customers, brand-new customers are not immediately as profitable as existing customers. We know this because studies show that the probability of selling to a new customer is 5% to 20%, while an existing customer is 60% to 70%. Also, existing customers are 31% more likely to spend more than new customers.
While every business would like to experience zero product churn, that’s not happening. However, there are proven customer retention strategies for minimizing churn. Effectively implementing these strategies requires first fully understanding churn and what causes it. Our guide will help you do that by explaining product churn and how to measure it before delving into churn minimization tactics.
Table of Content
- What is product churn?
- What are the different types of churn?
- How to calculate product churn
- Top product churn metrics to monitor
- How bad design impacts product churn
- Other factors that drive product churn
- The best retention strategies to reduce churn
What is product churn?
Churn (attrition) occurs when a customer abandons your product, while churn rate is the percentage or number of customers who stopped using your product within a given period. Customers quit products or brands for several reasons, and the reason isn’t always one a business can fix.
For instance, if you have a high churn rate because of product functionality issues, you can lower churn by fixing your product. On the other hand, a customer who bought your product to solve a one-time problem will likely stop using your product after achieving their goal. Such product churn is natural, but you can attempt to retain such a customer by keeping them engaged with new features or an upsell.
While you can’t completely eliminate product churn, your business should strive to keep it to a minimum. Minimizing churn and boosting customer retention protects profitability and competitiveness by ensuring you have a customer base that can meet your revenue generation goals.
Also, less churn is great for brand reputation. How? When potential customers see that your customer loyalty is high and your customer base is growing, they’ll believe you are doing something right. These prospects are more likely to patronize your business because they want to experience the same quality service that’s making your current customers happy.
What are the different types of churn?
As we’ve mentioned, various types of churn exist. Identifying the exact types of churn occurring in your business will facilitate developing a plan to plug the leak and boost customer retention. Below are the most common forms of churn that SaaS businesses experience.
1. Voluntary churn
Voluntary churn or deliberate churn covers customers who deliberately quit using your product. These customers may quit your product because they no longer need it or have found a better alternative. Another example of deliberate churn is customers who subscribed to take advantage of a freebie (free trial or discount) and churned afterward.
2. Involuntary churn
Unlike voluntary churn, involuntary churn involves customers abandoning your product for reasons beyond their control. Examples of such customers include users with an expired credit card. These users will churn when your system cancels their subscription until they update their payment details.
3. Passive churn
Passive churn covers users who stop using your product without necessarily unsubscribing or closing their account. An example would be Netflix subscribers with zero activity on their accounts. A customer may passively churn because they lost interest in your product, forgot about it, or have no current need for it.
Passive churn can occur with free and paid products but is more common with free products because the customer has less to lose. Also, identifying passive churn can be tricky because such customers may renew their subscriptions without using the product.
4. Early churn
Early churn occurs when users abandon your product during the beginning stages of the customer journey. Customers quitting your product within a few days of subscribing or buying your product may occur because your product didn’t meet the user’s expectations. It may also occur because the user found your product hard to use or your onboarding process tedious.
5. Revenue churn
Revenue churn covers how much money you lost due to customers abandoning your product. Tracking revenue churn lets you identify your high-value customers and the cost of losing them. Why do you need this? Losing high-value customers, such as premium subscribers, will adversely affect your bottom line far more than losing the same number of freemium or basic subscribers (low-value users).
How to calculate product churn
Calculating product churn involves identifying the number of users who no longer use your product. You can get answers by monitoring various metrics, such as daily or monthly active users. A drop in this number will reveal how many users you’ve lost within a specific period of time. Other metrics to monitor are lost customers (churned customers) and total customers at the start of the time period.
With this information, you can calculate your product churn rate. Knowing your product churn rate will help you verify if your rate of customer attrition (churn) falls within an acceptable margin. A healthy product or revenue churn rate for SaaS companies is under 8% monthly. Companies with a higher churn rate will struggle to grow and meet financial goals.
Calculate your daily, weekly, monthly, or annual churn rate with the below formula:
Customers Lost within a Specified Period / Total Customers at the Start of that Period x 100 = Churn Rate (%)
For example, if you had 113 customers at the start of June and lost 24 users in the same month, that month's churn rate would be 21.2%.
Top product churn metrics to monitor
Besides your customer churn rate, below are other metrics for monitoring how badly your business hemorrhages users and the cost of your customer loss.
1. Customer acquisition costs (CAC)
CAC refers to how much you spend to acquire each new customer, including the cost of marketing and onboarding customers. Monitoring this metric is crucial because it tells you the cost of replacing lost customers and how it will affect your bottom line.
Also, tracking your CAC will reveal your customer segments with the highest acquisition costs. With this insight, you can improve your cost-effectiveness by targeting marketing and retention strategies at customers that deliver more ROI.
2. Customer lifetime value (CLV)
CLV is how much you expect to earn from each customer during the lifetime of their relationship with your company. Tracking the metric lets you know how much to expect to lose when a customer stops using your product. Also, tracking the metric will help you make well-informed decisions regarding how much to spend to retain a customer. Ideally, the customer retention cost shouldn’t exceed a customer’s lifetime value.
3. Customer satisfaction score (CSAT)
CSAT helps you identify how well your product and brand satisfies customers’ needs. The happier customers are with your company and product, the less likely they are to churn. You can use customer satisfaction surveys to obtain the CSAT and monitor user happiness with specific features, customer support, the overall product, and more.
4. Active users
You can measure daily, weekly, or monthly active users to keep track of the number of customers who use your product. Monitoring this metric will provide useful insights into voluntary, involuntary, and passive churn. You can also use insights from the metric to create customer segments that represent customers who are likely to churn or stay. For example, users with long periods of inactivity are usually more likely to churn.
You can gain even more active user insights by monitoring metrics like engagement score and usage frequency. High customer engagement scores and usage frequency will imply customers are less likely to churn because they find your product valuable and useful.
5. New sign-ups
Tracking new sign-ups will reveal how many new users subscribed to your product and the rate at which your customer base is growing. Subscription businesses can segment sign-ups according to the product plan customers select. The information is useful for measuring how effectively your current marketing tactics replace churned customers.
6. Monthly recurring revenue (MRR)
The monthly recurring revenue is how much you expect to earn from your current customers each month. Monitoring your MRR will keep you updated about customer churn because more users quitting your product will lead to less MRR. On the other hand, less customer churn will lead to a higher MRR because more customers are sticking around and renewing subscriptions.
7. Net promoter score (NPS)
Companies, including subscription businesses, use net promoter score (NPS) to measure customer loyalty and sentiment. You can get the score by giving your current customers an NPS survey to fill out. The questions in the survey should lead customers to share how they genuinely feel about your business or product.
For instance, you can ask customers to rate their satisfaction with your product on a scale of one to ten. Ten would be the highest score a happy customer can give, while one would be the lowest. You can use such surveys to identify aspects of your product to improve to reduce churn and boost customer engagement.
8. Customer retention rate
Unlike product churn, which shows how many users you’ve lost, customer retention rate reveals the percentage of customers who renewed subscriptions or remained active users. You can calculate the metric by dividing your number of paying customers at the end of a specified period by the total number of customers at the start of that period. Multiply the result by 100 to get the percentage of customers you retained.
9. Negative churn rate
Negative churn is a positive metric that SaaS businesses use. The metric reveals if the revenue generated by existing customers exceeds the revenue lost from product churn. If the revenue from existing customers exceeds losses to churn, the company is doing well.
How bad design impacts product churn
A badly designed product means your creation doesn’t satisfy customers’ needs. If target users struggle with using your product to solve problems or achieve goals, they have no reason to keep using it, leading to churn. In fact, studies show that 88% of users are unlikely to return to a website with a bad UX.
Bad user experience may be due to your SaaS product being user-unfriendly, slow, clunky, hard to navigate, or buggy. These are issues that typically cause users to abandon SaaS products and ecommerce brands. Even worse, a bad customer experience can have a domino effect where the displeased user shares negative reviews.
These negative reviews count as user-generated content, which other users rely on to make purchase decisions. An overwhelming number of such reviews can scare off existing customers and prospects.
Other factors that drive product churn
Bad UX design isn’t the only factor that drives product churn. Below are other reasons why customers typically abandon products:
1. Failed expectations
Customers are more likely to churn if they don’t get the benefits they expected from your product. The same thing will happen if your product doesn’t work the way users anticipated. Proof of this is clear in the YouGov study that showed 31% of users will leave a brand that lies about product performance.
2. Poor onboarding
23% of the average customer churn is due to ineffective onboarding. Your onboarding process should help users quickly understand your product so they can experience value as soon as possible. A long, tedious, or unclear onboarding process will delay experiencing product value, increasing the likelihood of user attrition.
3. Poor customer service
Effective customer support is essential for achieving optimal customer satisfaction. A Microsoft study revealed that 96% of the global population is more likely to become loyal customers of brands that provide quality customer support. The same study showed that 56% of respondents churned because of poor customer service.
4. Lack of features
Your product should launch with features that help users experience value quickly. Also, adding new features over time will boost your product’s functionality and facilitate customer engagement. If you launch your product with the wrong features due to poor feature prioritization or delay feature updates, users may abandon your product for more attractive alternatives.
5. Damage to product reputation
A scandal can tank your brand’s reputation, and most consumers don’t want to associate with such companies. The scandal may be related to cybersecurity issues, product performance problems, terrible customer service, poor treatment of employees, or social irresponsibility.
6. Unattractive pricing
If customers feel your product isn’t worth the price, they will seek more cost-effective alternatives. For example, Netflix lost over a million subscribers in 2022 after it increased subscription prices.
The best retention strategies to reduce churn
Now that you understand product churn and what can cause it, you probably would like to know how to keep it to a minimum. Here are effective retention strategies you can implement to reduce churn in your SaaS business.
Have a customer success team
A customer success team assists new customers with understanding the product so they can experience value quickly. Without a customer success team, your new users may have a slow or clumsy onboarding process. Also, users may have trouble figuring out how to use your product to achieve their goals.
Since such issues increase the likelihood of new customers churning, drive customer retention and loyalty by setting up a proactive customer success team. The team will be responsible for onboarding new users. The team will also engage users to understand their needs and provide solutions that fast-track experiencing value.
Collect user feedback
Collecting user feedback will provide insights into options to improve your product to ensure optimal customer satisfaction. Continuously improving your product will also help ensure you consistently deliver the best customer experience. Customers will have fewer reasons to switch to your competitors if they are perpetually happy with your product and service delivery.
Improve customer support
A customer that experiences issues while using your product should be able to get help quickly. If getting help is difficult, customers will assume you don’t care, driving them to take their business elsewhere. Avoid scaring off customers by providing friendly and effective customer support that users can easily reach at their convenience.
A 2022 study revealed that almost 60% of consumers prefer reaching customer support via phone. Other popular choices for contacting customer support are social media, email, and live chat. Just as importantly, your customer support team should have the resources to help users resolve issues quickly. 60% of consumers expect customer support to resolve their issues within ten minutes of asking for help.
Perform regular churn analysis
A churn analysis involves processing your churn data to understand which customers leave, why they leave, and how to prevent losing more customers. Once you know your monthly churn rate and what’s causing churn, you can eliminate the roadblocks in the customer journey that cause attrition. You can also improve your product or services to boost customer retention, engagement, and satisfaction.
Agile product development
Ideally, your product should start winning over target users before and after launch. One of the most effective tactics for achieving this is to follow an agile development lifecycle. Agile product development requires frequently creating working iterations of your product until launch.
Frequent iteration facilitates testing features before adding new ones to your product. Doing so increases the chances of launching a final product with fewer issues. Agile product development also helps reduce churn by letting users test each iteration and provide feedback.
You can then use insights from the feedback to make your product more customer-centric and a perfect fit for your target users. Customers are more likely to find the final product appealing and valuable because it has their desired features. Such a product is less likely to experience excessive product churn after launch.
Build sticky products with DevSquad
Studies show that increasing retention by just 5% can double your revenue. Avoid product churn and increase retention by building a product your target users find engaging, valuable, and user-friendly. How? Talk to DevSqaud. Our development agency provides industry-leading product strategy and design services to SaaS companies that want to build a user-centric product.
We make building SaaS products as hassle-free as possible by handling the entire development process – from ideation and strategy to launch and beyond. Do you already have a SaaS product but are unhappy with its performance? If so, let us revitalize your digital product so it better attracts, engages, converts, and retains your target users.
Contact us today to schedule a consultation and learn more about how we can help you launch your dream SaaS product.