What is customer churn?
Customer churn is the rate at which your existing customers stop doing business with you. It can be calculated by the number of customers you lose in a given period divided by the number of customers you had at the beginning of the period. For SaaS businesses, it is the rate at which your customers cancel their subscription.
Customer churn can happen both voluntarily and involuntarily. Voluntary churn has actionable prevention steps by SaaS providers, whereas involuntary churn is mostly unavoidable; like when a user has to stop SaaS subscription services due to dramatic industry shifts or trends, organizational changes within a company, or business or economic model changes within a company.
Why is customer churn prediction important?
While a certain level of churn is unavoidable, it’s important to keep it under control because a high churn can drag down growth and even kill your business. Predicting the likelihood that a customer will churn gives you the opportunity to intervene and attempt to preempt the loss. So what are the benefits?
- You prevent the direct loss of revenue that results from a customer no longer doing business with you.
- You increase the average customer lifetime value (CLV).
- It’s more cost effective. According to a Bain & Company study, it’s vastly cheaper to retain customers than it is to acquire new ones so companies should be wise to spend the time trying to prevent customer breakups.
What are the red flag indicators?
Churn risks can be triggered at any point for various reasons. In order to solve the problems early, you should pay attention to the following red flag indicators, which can help you identify the customers who have a high probability of churn in the future.
🚩 Product usage
Product usage is generally an early indicator of churn. When you notice a sharp drop in customers’ usage rate, churn is often about to happen. Usage indicators vary and include:
- Total users: Downsizing the users within an account.
- User traffic: Number of users per day or per week.
- User logins: Number of login times for each user per day or per week.
- Time spent using the product: The amount of total time a customer is actively using the product, referred to as product stickiness.
- Feature adoption: Every product has some key features that help it stand out from competing products. If certain customers are not using these features, the chances of them churning are higher.
- Customer health score: It’s often difficult to stack rank your customers’ usage of your product because of variations in the size of the account, number of users, etc. A customer health score is an attempt to normalize your customers’ usage data to make it more comparable.
🚩 Customer interaction
How customers interact with your company other than product usage also reflects their potential churn when certain patterns occur as follows:
- Support ticket: One common misunderstanding we have is that customer churn is mostly from those who complain the most, but 70% of customers who churn never talk to a support representative. Silence, therefore, is a crucial indicator. For example, take a user of Chartio, a cloud-based BI (Business Intelligence) tool, who is conspicuous for filing a lot of tickets frequently — a characteristic that may be understood as hating the product when the user may actually be super-interested in this product. When this customer goes from an average of ten tickets per month to only one for the next several months, the silence may be a red flag. You should double check on the product usage to see if the drop in tickets is because the perceived value has gone down and the customer no longer sees the purpose of calling you to fix the problems.
- Customer payment: When a previously good customer has missed two or three payments in a row, it should raise a red flag. It could be as simple as card expiration or a customer forgetting to renew leading to unintentional payment cancellation.
- Traffic to your cancellation page: A customer may search your support database to view articles on canceling before churns. In this case, increased traffic to the cancellation page is practically raising a flag of retreat. Even if you may not be able to pinpoint the exact customers, you can at least get an indication of an overall flaw in your product or negative word-of-mouth from a rise in overall visits.
🚩 Customer feedback
Regularly ask for customers’ feedback. You can either check scores on CSAT (Customer Satisfaction where customers answer the question: “How would you rate your overall satisfaction with the product or service you received?” on a scale of 1-5), and NPS (Net Promoter Score where customers answer the question: “How likely would you recommend our product or service to a friend or colleague?” on a scale of 0-10). Alternatively, you can ask your customers straight out: “Do you intend to renew your subscription?” Either way, you’ll get an indicator of churn.
How to reduce customer churn
So how can you proactively prevent customer churn? Some tips on customer churn prevention:
- Make customer onboarding easy and welcoming.
- Offer tutorials and several types of assistance channels such as webinar training to educate your customers.
- Be proactive in terms of communicating with customers, monitoring their activities, and collecting feedback.
- Be aware of red flags that indicate potential customer churn and fix the problem as soon as possible.
- Keep an eye on your competitors; keep your product/service updated and competitive; keep iterating by working with the product team.
- Know your customers; identify what’s successful for them, then deliver.
- Show gratitude.
- When churn happens, conduct exit surveys/interviews to know exactly why it has happened, what you could have done to prevent it and if there is any possibility of saving the account.
Customers churn for different reasons. Therefore, you can only provide appropriate treatment after figuring out the exact cause. For a more detailed account of reasons for customer churn and corresponding solutions, check out Where Are Customers’ Breaking Points.