Everybody Hates Churn

Understanding How a Churn Occurs

Uma versão em Português deste texto pode ser encontrada aqui

Digital products in SaaS companies normally are developed focusing not only in acquisition (selling to more customers) but also in retention (keeping customers engaged).

There are people that even say that retention is the new expansion. And they are right. Frederick Reichheld of Bain & Company, inventor of NPS, did a research that showed that increasing client’s retention rate in 5%, statistically can be achieved a profit between 25% and 95% (details here).

Then how can we grow customer retention? The first step is to identify how a churn occurs and quantify how this fact can affect business goals. This can be seen as trivial, however, normally it is not that easy to find out the main cause on why a client is unsatisfied, stops using your product and eventually change to a competitor who meets his/her needs. Below, I try to dissect all aspects concerning churn and what can be done in order to regain trust in your product.

“Churn measures the ultimate failure in SaaS — all of the customers who tried out your product and decided it isn’t worth paying for” — Steli Efti, CEO of Close.io

What is churn?

Firstly, it is needed to establish some ground concepts. Broadly, churn is a SaaS metric that measures the amount or lost sum regarding client’s cancellations. This implicates in, first, the customer knowing the product, second, he/she purchasing/subscribing the product and last, a payment is made. If the cancellation happens before this, it can be considered as a client giving up or lost sale. That is, churn is a customer who had contact with the product, saw value in it, acquired it and ultimately decided to not use it anymore.

Churn is a lagging indicator, which means that it demonstrates the result of an action that took place in the past. It indicates consequence, not cause. It is passionate, not premeditated. When we see a cancellation happening now, that reveals that it already occurred long before and only now we have the confirmation that the client is leaving.

Churn can be displayed as a “leak” in the customer’s journey funnel referring to your product. This funnel (better represented nowadays as an hourglass) has several steps:

• Awareness — awaken and address the potential customer’s problem with the product’s value;
• Consideration — develop a relationship with the potential customer, indicating the differentials and benefits that the product has;
• Conversion — convince the potential customer to purchase/subscribe to the product;
• Loyalty — periodically solve the customer’s problem with the product and offer new value in order to gain their loyalty;
• Advocacy — make the customer a promoter of the product where he recommends it to other potential customers.

Churn is a problem since conversion until retention. If the user is not satisfied with the product he/she will no longer be loyal to your company and neither will he/she advocate for it. The user can even become a detractor.

“Hence, churn results in a leaky growth funnel. Churn is bad. Churn is your enemy. And it needs to be tackled in a systematic way” — Arpit Rai, VP Products of WebEngage

Active churn vs. passive churn

Churn can be categorized as either active or passive. Active churn is when the customer notifies the company the desire to cancel the product informing the motive. He/she actively communicates his/her discontent and asks for an end to product availability. Passive churn, on the other hand, is when the client simply stops paying for and using the product, without expressing what caused this behaviour.

The active cancellation policy should be encouraged so that the reasons are accounted for and action can be taken to revert or reactivate the churn.
Conversely, making explicit or facilitating the cancellation on the part of the user must be treated with great discretion not to encourage this conduct.

There is also involuntary churn (a subcategory of passive churn) which is when the customer “unintentionally” cancels. If the number of cases related to this type is increasing, it may indicate difficulty or flaws in the company’s billing flow.

Early churn vs. late churn

Churn can take place right after the conversion or long after the purchase/subscription of the product. Early churns occur when the user has not been yet activated (has not used the core feature or has not performed a key action) or the product delivers less than the expected. Late churns, on the flip side, happen when, in the recurring use of the product, the customer is not succeeding in basic actions or sees more value in a competing solution than in the current one.

When the risk of churn involves new customers, the actions to be taken must contribute to or encourage the use of the product, aiming to improve the user’s first experience.

For older customers, oppositely, you must identify which churn stage they are in (more in the topic below) and take targeted action, aiming to improve the user’s recurring experience.

Churn vs. bad fit

We always have to pay attention to whether cancellations are not masked with customers who leave, but they never saw value in the solution. A bad fit is a user who may have even purchased/subscribed to the product, but his/her pain is not resolved with any of the features offered. In other words, a bad fit is a customer who is a certain churn.

If this type of churn appears on the reasons for cancellation as a growing number, the acquisition and sale process should be revisited or redirected so as not to attract users who will never meet business expectations.

5 stages of a churn

As churn indicates a result and not a trend (lead indicator), it is needed to understand how the process starts and what are the stages that a customer goes through, before cancelling the product.

Commonly there is a pattern for active churns (those who present a motive) that can be summarized in 5 steps:

1- Failure 🙁

The first stage of churn derives from an action that causes failure. For Lincoln Murphy, success for a client (called the desired outcome) is having:

Required Result (what customers need to achieve) +
Appropriate Experience (how they need to achieve it)

Any flaw in the result or experience can generate frustration in the customer. An action that is not possible to be performed (a bug, for instance) or that is very difficult to be fulfilled (bad UX, for instance) are considered examples of failure.

By itself, unsuccess does not pose a risk. Although, the more problems are solved or demands are met, the less chance that the client will move to the next stage.

2- Frustration ☹️

When the customer repeatedly or periodically does not obtain success, there is a risk of progressing to the frustration stage. Accumulated failure encourages dissatisfaction and customer loyalty plummets.

Frustration can be perceived in several ways:

• Users with low NPS;
• Complaints to the Customer Success team;
• Record of repeated error logs;
• Decreased use of the product.

This can be mitigated by addressing the alleged thwarted pinpoints and by maintaining a dialogue with users. When the customer feels heard and the problem is resolved or at least acknowledged, there is a chance to reverse the situation.

3- Churn risk 😒

In the third stage, we have the risk of churn, which is when the customer starts to consider other options and analyze competitors with greater commitment. This point is very similar to the Consideration step in the funnel presented at the beginning of the text, with a negative point: the customer has already used the product and is disappointed with the current result.

If this stage is reached, in addition to restoring success as quickly as possible, it is paramount to demonstrate other values that the customer may not be aware of.

A recommended strategy is to apply FOMO (fear of missing out) techniques. Make it clear to the customer what they will lose when they stop using the product and remember what the competitive differential is.

4- Churn request 😖

The risk of churn can evolve into a request of churn, which is very critical. It is the very last chance to win over a customer who is already vexed and probably chose another option to replace the product.

At this stage, it is essential to have systematic actions of reversion headed mainly by the Customer Success team. Negotiating discounts, offering benefits and even reprioritizing backlog can be considered in order to retain customers.

5- Churn confirmation 😔

The last stage happens when no alternative is successful and the customer decides, definitively, to cancel the product and we have confirmation of the churn.

It is possible to have actions of reactivation to try to bring the customer back, but if the main reason has not been solved, the chances of successful results are minimal.

“Churn doesn’t just hurt current revenue, it also puts future revenue at risk” — Brooke Goodbary, Customer Success consultant

Does healthy churn exist?

How many customers your company have and ultimately cancel are acceptable without being a problem? The answer is, like most questions in this regard, it depends. Mainly of:

• The business model adopted by the company — there are models where the margin can be higher and others where the margin is very restricted;
• The acquisition cost — if the cost is high, a healthy churn rate should be lower than that of a company with a low CAC;
• The product’s ARPA — if the average ticket is low, a higher volume of cancellations is less perceived;
• The capacity to expand the portfolio — if the expansion does not represent much in the organization’s Net New MRR, losing customers does not improve the situation.

To check if the numbers are healthy, in addition to considering the churn history, we can use benchmarking. Two good articles show that a SaaS churn rate has to be between 3% and 4%:

• Tomasz Tunguz’s The Innovator’s Dilemma for SaaS Startups
• Recurly Research’s Is your churn rate within a healthy range?

Focus on Retention

Understanding how churn happens is the first step. Next, we must take specific actions aimed at customer retention. Among them are:

• Create a great first impression;
• Align customer expectations;
• Deliver the best experience possible;
• Pay attention to what the customer has to say;
• Cognize why your customers don’t use your product;
• Identify customers who are most likely to cancel.

I must go deeper into these strategies in my following article.

If you have related to this text or have any suggestions or criticisms related to how to recognize the reasons for cancellations in your company, please comment! We must keep our customers happy when building a product that really makes a difference in their lives.