What is Churn?
Churn is the enemy of any subscription company.
In a general definition, churn is the number or percentage of subscribers to a service that discontinues their subscription to that service in a given time period. In order for a company to expand its clients base, its growth rate (number of new customers) must exceed its churn rate (number of lost customers).
Why customers churn?
Churn is inevitable. It’s impossible to guarantee that all your customers will remain to be your customers forever because churn happens for a variety of reasons. A few examples of why your customers may discontinue their subscription to your service:
- Your customer is simply out of budget and can’t afford the subscription fee;
- Your customer can’t see/get the value proposition of your product anymore;
- Your product or service doesn’t meet the expectation or lacks quality/features;
- Your product is good but customer service is not;
- Your customer has chosen to change your product to a competitor’s product;
- Your B2B customer is bankrupted and the company doesn’t exist anymore;
- Your B2B customer has been acquired and the buyer uses a different service.
As you can see there are some events and variables that are out of your control and there’s almost nothing you can do. But the good news is that – in most cases – customer churn reason is under your control, like product quality, price and customer service.
How to reduce churn?
Your challenge is to deeply understand your customers’ engagement and satisfaction (like measuring NPS) and then try to fix the problems that are under your control to prevent and reduce churn. Churn analysis may lead to a new product roadmap to include/exclude product features, to invest in a higher quality product support or even changing your pricing model.
The best way of doing it is by making your product indispensable. It should make part of users daily workflow. Provide frequent value that they can’t live without. A good strategy is to engage with your customers using email, SMS and any kind of notifications to remind them you’re there for them.
Considering creating an email report showing the most important information/value your product provides to them.
Customer Churn vs. Revenue Churn
It’s important to notice that Customer Churn is different from Revenue Churn. Customer Churn refers to the number of customers that have discontinued their subscription on a given period. Revenue Churn is how much those lost customers represents in revenue.
Let’s say your product has a $10/mo and a $100 pricing plan. Loosing 5 customers paying $10/mo still good if compared to losing one single customer paying $100/mo. That’s why Revenue Churn (usually referred to as MRR Churn) is more important than Customer or User Churn.
How to calculate Churn?
For example, if 1 out of every 20 subscribers to your service discontinued his or her subscription every month, the churn rate for your service would be 5%. See that churn rate must be calculated for a given period, usually a year or a month.
To calculate churn, all you should do is to sum the number of customers that have discontinued their subscription on a given period. In case you sum all the churned customers in a month you’ll have monthly churn, or if you sum all the customers churned in a year, you’ll have yearly churn – and so on.
Churn = Total # of Churned Customers
Or you can calculate churn rate, representing the percentage of churned customers compared to the total number of customers.
Churn Rate = Total # of Churned Customers / Last Month Total # of Customers
Let’s say that 3 customers have discontinued their subscriptions to your service on a given month. Now let’s consider that the first customer was paying $10/mo, the second was paying $50/mo and the third was paying $100/mo.
Your revenue churn would be the sum of this subscription fees that will no longer come into your pockets next month, so $160.
MRR Churn = SUM (MRR of Churned Customers)
MRR Churn can also be represented in a percentage, referring to how much it represents of your total MRR.
MRR Churn % = Churned MRR / Last Month’s Ending MRR
Negative Churn is the dream of every SaaS/subscription entrepreneur. It happens when the expansions/up-sells/cross-sells to your current customer base exceed the revenue that you are losing because of Churn.
Getting to negative churn requires that you can do one or more of the following three things:
- Expansions: by having a pricing model that increases the pricing according to usage growth;
- Up-sell: customers moving to a more highly featured version of your product;
- Cross-sell: customers to purchase additional products or services.
Keep in mind that is not easy to make negative churn happen. As David Skok has said in his blog post “Why churn is critical in SaaS”, in the first 12-24 months of your business it is frequently too early to figure this out. At this stage, it is more important to get broad customer adoption, and that often means simple pricing that leaves something on the table for your customers.
What’s an acceptable Churn Rate?
Off course the best answer to this question is “as low as possible”, but we know things are not that simple.
An acceptable churn rate depends on two main factors: your target customers and your company’s size/moment. Keep in mind that – if you’re doing a good job – your churn rate tends to drop over the time, so this references I’m about to give you should be considered for companies around 2 years old.
Very Small Business
If you’re selling to in selling to VSBs (very small business) even the most valuable services will churn at a significant rate no matter what. Unlike large companies, a VSB will have very little upsell opportunities unless the company itself grows, and many will go under or change business direction.
Small and Medium Business
If your selling to SMBs (small and medium business) an acceptable churn rate reference would be around 3-5% monthly, but you really should target zero or negative churn. Another good reference would be < 10% annually for a more healthy business.
If your targeting big corps with tickets higher than 5-digit/mo your churn rate should be under 1% and going down proportionally to your revenue growth. Enterprise SaaS is only a success if you are adding more net revenue from large-ish customers each year than you had the year before.