A Founders Guide to Churn
Churn is probably one of the most critical metrics founders need to pay attention to, as it largely determines the outcome of a company. But what does this term mean, and how can startups prevent churn?
Customer churn also referred to as customer attrition or customer defection, is defined as the loss or outflow of customers from the customer base. It essentially refers to all your customers/users who tried out your product or service and decided it isn’t worth using again or worth paying for.
Churn seems straightforward but is quite tricky. Many factors might cause customers to churn, such as product pricing, competitor activities, market changes, poor product/market fit, inability to meet customer expectations, poor user experience, and lack of relevant feature updates. Some of these factors are not in your control, but for those that are, it may be worthwhile to revisit them and understand the impact they have on your startups’ customer retention plans. You might think that any sort of customer loss is negative, but it is important to note that not all churn is bad. Sometimes your startup loses customers who are bad fits for your product or who have gotten all the necessary value they can. This is “good” churn, and with the loss of this group, you can focus your efforts on your core customer base. Regardless of how you view customer loss, it is crucial to monitor churn as it can directly impact your company’s profitability. Reducing churn by just 5% can boost profitability by 25%-95% and influence other metrics such as customer retention rate and lifetime value.
If your company wants to tackle customer loss, the first step in churn-proofing your business is to calculate and understand your churn rate.
Churn rate, also known as the rate of attrition, is the percentage of users who stopped using your product within a given period. A simple way to calculate this is:
Some studies put the average churn rate between 2% — 8% of MRR, with a low-end churn of 2% being “good”, but we suggest you determine what a reasonable churn rate is for your company. Keep in mind that customer loss is inevitable, but certain actions can help keep your churn rate low. Here are some suggestions:
Fix your onboarding processes: First impressions matter even for products. Having a well-designed onboarding process that familiarises users with your product can help. If customers know how to navigate and get the most value from your product, they are more likely to stick with your service. A combination of user support features such as tutorials, FAQs, and demos can elevate your onboarding process. If users know how to use your product, they are more likely to use your product.
Conduct a churn analysis: Predicting a customer’s likelihood of churn can give you enough time to win them over, but you’ll need to conduct a churn analysis to do this. Churn analysis is a process of using data to understand why your customers have stopped using your product or service. To do this, you can also look into customer engagement and usage; how frequently is your product used, for how long, and what for? If usage drops, this can be a churn signal. Once you know which customers have a high probability of churning, you can launch a targeted retention campaign. Your retention plan can include offering discounts, sending tutorial videos, and providing additional service bundles.
Funnel Analysis: You can conduct a funnel analysis to understand where your product users become inactive. For example, if you run an e-learning company and users typically stop using the platform after reaching biology modules, try to understand why this is happening and build a corresponding solution. From this, you can develop a plan to improve the user experience. If you can successfully tackle this problem, a user might be more likely to continue using your product.
Make a product users love: When a customer is about to churn, sending follow-up emails might actually motivate them to abandon your service. Another approach will be to iterate your product, focusing on issues long-term users have faced. If you can keep improving your product, you stand a higher chance of retaining customers who are about to churn. Utilize the customers you’ve already lost; ask this group what went wrong and what can you do better. Use their feedback to build product features users will love; you never know they might come back to your improved product.
Pay attention to existing customers: Often, startups focus on attracting new customers and expensive marketing campaigns while ignoring existing customers. This approach is erroneous for various reasons. Typically attracting new customers can cost up to five times more than retaining existing customers and is not an optimal use of your startup’s limited finances. A better approach will be to focus on existing users. Firstly, existing customers have a strong sense of brand loyalty and are less likely to churn. They are also your best advertisers as they often refer new customers to your company and are less sensitive to competitor marketing. Spend some time reaching out to this group and solving any issues they face. This will go a long way in ensuring your company’s growth and retaining your most loyal customers.
Managing churn is a consistent process that involves trial and error. No matter your company’s lifecycle, it is always a good idea to monitor churn and provide users with the best experience possible.
In subsequent editions, we will explore churn in the context of specific business models and the different ways to calculate churn.
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What are we reading?
Customer Success: How Innovative Companies Are Reducing Churn and Growing Recurring Revenue by Dan Steinman, Lincoln Murphy, and Nick Mehta
HYPERGROWTH: How the Customer-Driven Model Is Revolutionizing the Way Businesses Build Products, Teams, & Brands by David Cancel
