In this article I will demonstrate how subscriber churn is the difference between success and bankruptcy, then provide advice on how product managers can make a difference.
Customer retention is key to all profit sustainability and growth. There is plenty of research, typically from the marketing function, that speaks to a 5% increase in customer retention delivering up to 95% increase in profits.
In subscription business models such as SaaS, customer retention is called “churn”. Churn is the % of subscribers who have cancelled or failed to renew their subscription.
There are many factors causing subscribers to churn. Beyond price a common churn factor is the subscriber is simply not getting value from the product. Product can directly impact churn rates.
It is important that we fully understand the impact on growth we can create through products customers love.
To illustrate the impact of churn consider the growth in total customers for two products, in year one they both have 2400 customers, both products acquire 2400 new customers a year, but one churns customers 1% a month the other at 5% a month. The graph below illustrates after 6 years the product with 1% churn has 7,307 more customers than the product with 5% churn. Assuming the same investment in acquisition churn directly impacts profit and sustainability of the organisation.
Focusing on just one year, if you have a churn of 5% of customers a month, you need to grow a staggering 45% in a year just to remain stable. In absolute numbers, starting in January with 2,000 customers suffering a monthly 5% churn and acquiring no new customers, results at the end of December in only 1,080 customers.
The graph below shows the impact of 5% monthly churn on a company starting the year with 2,000 customers, acquiring 83 new customers a month (1000 new customers a year), the year end is 153 fewer customers that the start or a 8% decline. You could imagine celebrating the 1000 new customers while the business is in 8% decline. Too many products have made this mistake.
The graph below illustrates the impact in a 12 month period of reducing monthly churn from 5% to 1%. As in the previous example, this product starts the year with 2000 customers and enjoys the same growth rate of 83 customers a month. But with a 1% monthly churn this product can celebrate annual growth of 715 customers, or 36% growth. The difference between annual 8% decline and 36% growth is 1% or 5% monthly churn.
If the above examples were competitors, the product with a 5% monthly churn needs to achieve 113% greater customer acquisition over the 12 months to stay level with the product churning at 1%. Which product do you expect to survive? High churn is not only a competitive disadvantage it can kill businesses by limiting growth.
If churn rate is too high, investing in customer acquisition is wasting money, the business is performing poorly, despite customer acquisition rates.
So why do customers churn? There are many reasons including price, mis-sold benefits, too difficult to use, key features missing or simply fails to solve a customer problem.
Churn is a key indicator of product market fit. There are three options improve the product, sell to a different market or kill the product. As a product manager you must use the churn indicator as a prompt to discover product market fit issue.
The good news is all the typical product management processes and techniques can be focused towards churn. You must understand why customers are churning, you need to interview elapsed customers, read customer complaints, listen to customer support recordings, read customer support chats and take customer reviews more seriously.
In your quest to learn why customers cancel you must consider if the market really has the problem you are trying to solve. Do your cancelled customers go to a competitor or do they no longer feel they need a product like yours? If they are not going to competitors, you need to learn what is different between your customers who leave and those that stay. Learning this difference may identify your key customer segment which will give you new marketing opportunities and a redefined target market, or it may inform you that the true addressable market is too small leading to a more innovative pivot or kill decision.
If churning customers are going to a competitor which one, what is it about the competitor that is attracting them. As you discover more about your customers problem through investigating churn you may need to revise your product strategy and roadmap plans. Try to avoid copying competitors features, the ‘me too’ trap will likely see you fail. If you understand why their features are valuable you can innovate and achieve better results and increase your competitive position.
Don’t settle for parity. As you prototype and user test improvements to address market fit it is a good idea to include cancelled customers in your experiments. If you hope you reduce churn, you need to validate your hypothesis with the customer segment that cancels and the customer segment that enjoys your product.
So how do you know if your improvements are working? Easy right, your churn will go down? While this is true, it can be difficult to have visibility that you have impacted churn with a single feature tweak. This is where cohort analysis provides faster and clearer visibility into the impact of your changes on users churn.
To summarise, churn matters, use churn as a market fit indicator, cancelled customers are a goldmine of knowledge, avoid “me too”, validate with loyal and cancelled customers and embrace cohort analysis to accelerate your feedback learning loop.