The Churnstile of Death

Aug 13

Churn is a silent killer. When customers depart through the product turnstile by failing to renew, it’s your life blood that’s seeping out. You’re going to need a transfusion of new customers to replace it.

Here we discuss the existential issue of churn including its measurement, benchmark rates, and management approaches.

Defining Churn

Churn measures the rate at which customers are leaving you either voluntarily (EG choosing not to renew) or involuntarily (EG a failed credit card transaction). Churn rate is generally measured on a per month basis. A 3% churn rate means that 3% of your customers are failing to renew each month.

Churn Rate = Customers lost during period/ Customers at start of period

EG: 30/1000= 3% Churn Rate (monthly)

I’ll discuss typical churn rates in more detail later, but important to note now is the great difference we find between B2C churn rates and B2B rates. While B2C rates are often above 5%, the churn rates in B2B Enterprise SaaS products are typically about 1%. Again, more about this later.

Churn’s companion concept is Retention Rate which is usually expressed as an annual rate.

Retention Rate = (Customers at end of period – New customers acquired during period)/ Customers at start of period

EG: (1970-1070)/1000 = 90% Retention Rate (annual)

Understanding the relationship between Churn Rate and Retention Rate is key, because (particularly in B2C) there can be spikes or seasonality in customer churn. Customers may periodically leave through the turnstile but return again later. So, in the above example your B2C customers might be churning at a 3% rate (per month) but you are getting most of them back before year-end, such that your annual Retention Rate is 90%

What’s Important About Churn

Churn is a key, monthly leading indicator for what will likely happen to the bottom-line, and a signal about how consistently customers need your product.

The bottom-line issue for churn is its impact on the bottom-line. That’s measured by the metric: Net Revenue Retention (NRR) which tells the fuller story of what’s happening to revenue due to customers churning out and in and what additional revenues you earn from those customers. But we’ll save the discussion of NRR for a subsequent article. For now, let’s focus on what is causing the baseline revenue impact- churn.

Churn Rate and Retention Rate metrics also help you to understand customer behavior. For example, if you see high churn but also high retention it may indicate that customers want or need your services for only periods of time. Those customers might cancel when they don’t want your service and return later when they again do. That tells you something important about how your product is used, and that can help you find ways to make the product more consistently relevant so customers all year long don’t want to churn.

Types

It’s important to note that the bleeding comes in two types: Voluntary and Involuntary.

Voluntary churners are customers who choose to discontinue their service even though they may come back in the future. Involuntary churners are customers that want to continue doing business with you but something in their renewal process prevented it- the most common reason being a failed credit card transaction due to expiration, over limit, or credit card hold. Of course, this kind of churn applies primarily to B2C products where involuntary churn alone often accounts for about a 1% churn.

In addition to causes such as periodic product need and involuntary churn, churn happens for many other reasons such as: product inconsistency or quality issues, new competitive offerings, customer job or workflow changes, budget constraints, familiarity-weakened delight with your product, and others. Churn is a leading indicator of a problem.

Which begs the question: Just what is a good churn rate?

Churn Benchmarks

Predictably, the answer to this question is: It depends.

For perspective, consumer streaming services exhibit a wide range of churn rates. Netflix currently has the lowest churn rate among these services- a relatively healthy 3%, while Stars has the highest at a nearly suicidal 12%.

Cross-industry churn rates

The Consumer Goods & Retail sector churns at about a 7.6% rate while Software has an average rate of 4.8% across consumer and business markets. Industries like Healthcare, Business & Professional Services, Education, and Digital Media & Entertainment range between those figures with that notable divide between B2C and B2B.

Source Data: Recurly Research

I won’t explore the reasons for each variance here, but let’s take a closer look at the lowest churn category- Software.

Software/ SaaS On Average

Averaged across all types of software/SaaS, the category suffers a relatively low average churn rate although there are distinct differences among B2C, B2B, and B2B enterprise SaaS. The combined, two B2B software sub-groups encompass solutions for small, medium, and large businesses and together average 4.5% churn. By contrast, B2C averages 5.7%. Part of that difference is due to the fickle nature of consumers, but about 40% of the differential is due consumer’s higher involuntary churn.

Of course, not all software is created equal as shown by the distribution of churn rates across the spectrum of software products. In the quartile of products that have the lowest churn rates the average is about 3% for both B2B and B2C, while the best of the best have churn rates even lower than that. Meanwhile, products in the highest churning quartile suffer rates of 7.2% for B2B products and 9.7% for B2C. That’s a lot of bleeding.

Enterprise SaaS

But B2B enterprise software lives in a more rarified churn domain than do offerings for smaller businesses and certainly those for consumers. While smaller SaaS providers average about 5% monthly churn due to shorter subscription cycles and less entrenched customer relationships, large, established SaaS providers delivering enterprise solutions to larger customers typically experience 1% or lower monthly churn. (Source: Vitality)

This low churn rate reflects the long-term contracts and deeper integration of enterprise SaaS products into the clients' operations, making switching more cumbersome. Then too, enterprise buying cycles are much longer. These customers take the time and diligence needed to carefully assess the product to assure the right one is being selected, and often vet the choice through a pre-purchase pilot program. Purchased systems are then often integrated with other systems used by the enterprise, adding tremendous stickiness. Meanwhile, dedicated Customer Success teams work to assure that customers understand and utilize the value of the product on an ongoing basis. All these factors combine to assure that churn in enterprise SaaS is the lowest of any software category.

Enterprise SaaS companies should target achieving a monthly churn well below 1%.

Managing Churn

There are many potential solutions to address churn rates that are too high.

To combat involuntary churn you must assure that renewal transactions can process, that they do process, and that you communicate promptly and recurrently with customers when they don’t. In enterprise products, if willing customers are not executing renewal agreements promptly it’s time for an examination of your process and team.

Voluntary churn is the larger and far more vexing problem. To combat voluntary churn you must first discover why customers are churning. Exit surveys can help to collect this information and product usage analysis can help illuminate the situation, but interviews with customers who have cancelled will give you the best understanding of their motivations. You need to gain a deep understanding of the “why” behind churn, be it the availability of new substitute products, budget issues or pricing, changes in the customer’s needs, product quality issues, or other matters.

Some valuable approaches for circumventing churn (dependent upon the reason for churn) include:

Allow customers to pause their subscription to accommodate seasonal/ periodic use, temporary budget constraints, or other issues. Better to pause than to have them leave for a competitor.

Provide downscale subscription options to accommodate customers who discover that they don’t need as robust a product as they are paying for.
Encourage customer loyalty by offering rewards for continued use.
Reexplore how customers use the product now so you may adapt product features and design to accommodate evolving needs.
Create a dashboard to monitor customer usage including such metrics such as use frequency, the features used, how much time is spent using, paths taken, abandon points, and direct user feedback. Use this data to create a dashboard that classifies customers into groups by churn rate so you may monitor and take action on customers when their metrics dip to levels that signal risk of churn.