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Churn analysis: A basic guide to reducing churn rate

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Churn analysis: A basic guide to reducing churn rate

Many businesses strive to keep loyal customers so as to be sustainable and profitable in the long run.

Customer retention saves costs, as according to a Harvard Business Review paper, acquiring new customers can cost five to 25 times more than retaining existing customers.

To better understand how your SaaS business is doing in that regard, you need to perform churn analysis, a process where you assess the rate at which you lose customers. This article will show you the underlying concepts behind this analysis, why it is so essential, and some tips on reducing customer churn.

The churn analysis concept

To explain what is customer churn analysis and why it is so important, key concepts need to be mentioned first. As Carl Gold defined in Fighting Churn with Data, Churn is when a customer stops using a service or cancels their subscription. This term churn rate alludes to the proportion of paying customers who stop using your service.

Obviously, customer churn is something companies want to avoid. Ensuring customer satisfaction, keeping track of customer feedback, and ensuring customers engage with your service are some ways you can improve customer retention and reduce customer churn rate.

Customer churn analysis is the process in which the information on customer churn rates is compared with previous churn rates and broken down into detail. This is done to evaluate why churned customers left and if the churn rate is acceptable, and to assess other churn metrics.

The importance of churn analysis

Analyzing and understanding your churn rate is key to running a SaaS business. The information you get when you conduct customer churn analysis is key to knowing what to improve in your business and even what features to cut out of your service if necessary. Here are a couple of reasons why it's essential to do this analysis.

Showcase product problems

Taking an in-depth look into your user engagement and behavioral data can reveal what type of customers are churning and their motivation behind the decision to churn.

It can also help you prioritize which customers to serve better according to whether they are profitable or not. Besides this, you can also use customer churn analysis to identify problems with how the sales team is doing lead qualification or even change the qualification process itself.

Customer behavior insight

With behavioral metrics, you can unravel what your customers most value or not about compared to what you offer them. With this information, you can even find ideas for features to highlight in an ad campaign for the copywriters involved.

Causes of churn

In customer churn analysis, the causes for customer churn can vary. Here are the six leading causes of customer churn, which must be identified to better analyze customer churn.

Bad fit

This cause of customer churn happens when customers who subscribe to your service don't find the utility they were expecting. This occurs when you don't attract the correct leads to your offer.

The way they don't fit into your buyer persona might happen in different ways. They could be of a different age group (e.g., a saas gardening platform geared towards people in their 40s but your sales team is acquiring leads that are in their 20s), different income levels, a different lifestyle, or a different location are some examples of poor lead qualification.

Missing functionality

Here, customer churn occurs because of a feature that the customer expects to be there in the service offered but is not present. Losing customers with this type of churn can happen when the goals of the service aren't decided and you do not have a clear idea of the solution your service will provide. Better road mapping for the product tends to alleviate this kind of customer churn.

The customer does not find value in the service

Sometimes the customers acquire what they need with the service but are not getting the most from it. This is a very serious case of customer churn because losing customers is what happens when they don't get the best your offer has in store for them. This causes them to look for that value in your competitor's products.

Price

In this case, your customer's perception of the service they are subscribing to is not matching the actual customer experience your company aims to provide them. Their belief is that the amount they are paying is not yielding the return they want.

As always, onboarding needs to be done the right way to make it clear what it is that you are offering and how they can make the most out of it. Customer churn analysis here can feel tricky because it's easy to mistake this for the bad fit type of customer attrition.

Looking more carefully into the client's historical data can give you insight into whether they left because their income is not what you were meant to target or they didn't make the most out of the service to justify its cost.

Ways to combat churn

Now that you understand why you should analyze churn and some of its possible causes, here are some ways you can tackle it.

Product improvement

In business, it's no secret that you need to understand what your customer most desires and focuses on regarding what you offer. With saas, you can get insights into customer behavior through behavior metrics, and customer data that reveals what they most focus on while they are logged in.

Examples of those metrics you can check to identify what customers most approve of your service include breadth of adoption, documentation used, and most importantly, the time to value (i.e., how long it takes for them to realize the value and experience it as well).

Analyzing these alongside recurring complaints from customer support and other metrics shows what you can improve in your product.

Engagement marketing

With so much that companies need to pay attention to, it can be possible for many customers to miss out on what they really need to focus on. Customer engagement is a good way to retain more customers.

The most reliable, long-term way to do it is through content marketing. By educating your audience about the issues of whatever industry you are involved in and how your service can tackle them, you are giving them value upfront and making it clear that you are the right option for their needs.

Pricing and packaging

No matter how much you go into detail about a specific buyer persona or target audience when coming up with your offers, different people will buy your service for different reasons.

After you segment your customers according to the behavior metrics regarding how they use your service, you can create different packages with different pricing so as to appeal to these different groups while still keeping true to the concept of what you offer.

Customer success

Nobody knows your service better than your own company. The job of people in charge of guiding your customers in their journey is to make sure they are on the same page as you as much as possible.

Customers feel valued when they have the resources they need to get on board. Identify "at-risk customers "with your metrics (i.e. customers who have been engaging less with your service, a sign that they could churn), see why and where they are failing, and provide help or training if needed.

According to the United States SBA, 68% of consumers leave because of bad support or treatment. Poor customer service will be a factor of impending customer churn

Channel targeting

Communication is a key aspect when maintaining a relationship. Data regarding where this communication takes place is key so that your customers can be engaged in whatever channel they are most used to.

Use their data to identify which channels of communication they most frequently use and then adjust the procedures for your customer success team accordingly. Getting the help they need will make them feel at ease with relying on your support.

Implementation of the churn analysis process

Now that you understand customer churn analysis and the importance of keeping up with churn rates, it's time to put it into action.

You can carry out a customer churn analysis that will reveal your company's weaknesses, strengths, opportunities for improvement and growth, and threats to it. Here are some basic steps.

Subscription analytics

For this initial step, you will need a subscription analytics tool and analyze the data in detail for signs of customer churn.

Pay attention not just to the number of customers churning but also to the MRR (monthly recurring revenue). This lets you know how much is effectively lost in revenue for your saas business.

If possible, try to integrate it into the analysis with your CRM. This can help in letting you know how much churn is going on in each customer segment by looking into the cause of an unsubscription, which is usually an option chosen in those unsubscription forms.

Segmentation breakdown

Here you should create an ideal customer profile. Whether it is a breakdown based on income or earning levels, company size, or type of package subscribed, you should focus on whichever characteristic affects the customer's experience of your product,

For example, if your software reaches out to different industries and there is one with particularly high churn, you could see what can be improved in your product to make it appeal more to customers from that industry. Especially if they are among your most profitable customers.

Find out the types of customer churn and their causes

With a detailed breakdown of your churn rates, you can now dive deep into what traits have impacted the most of your customer's decisions to unsubscribe. The behavior metrics, alongside the insights mentioned above from CRM, can help you determine the type of customer churn and its causes.

This can help you see which customer churn that is happening is acceptable or not. Involuntary passive churn, for example, is not necessarily negative churn up to a certain amount in a moment of financial difficulty for everyone, like at the beginning of the pandemic.

Sometimes certain kinds of churn can be tolerated, and you can see which ones are or are not in this breakdown.

An acceptable churn rate: How much is too much?

This question is a very reasonable, common question for business owners. A lot of people might point out a different churn rate as acceptable based on how much customer acquisition effort has to be put into replacing those churned customers.

This is a complex question that should be evaluated from the company's perspective. Totango's 2016 analysis shows different churn rates as most frequent depending on how much a company grew. 40% of companies with medium growth (25% to 75% of growth in a year) had a yearly churn rate of 5% to 10%.

Another way to analyze an acceptable churn rate is to see the most frequent rates within your industry. Whatever criterion you choose to use as a benchmark for your company, you should strive for a better churn rate than the most frequent results. That is an excellent way to stay ahead of your competitors in this metric.

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