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Defined as the percentage of customers that cancel their subscriptions in any given time period, churn rate is an essential metric that can make, or break, the success of your SaaS business.
That's why it's so critical to master churn analysis. No SaaS company can hang on to all its customers forever. But by understanding the nuances of why your customers churn, you can find more effective ways to reduce it.
The basic formula to calculate churn rate is very simple:
Number of customers cancelling their subscription per time interval / Number of customers at the beginning of that interval x 100
Churn should be viewed as a prime opportunity to learn and improve.
Churn analysis allows you to evaluate strengths and weaknesses in your existing processes, while improving your ability to deal with, and prevent, future churn.
Losing a few customers may seem insignificant at first. But churn is a metric that compounds over time. That’s why it's a good idea to conduct a churn analysis whenever you notice something out of the ordinary with your churn rate.
Customer cancellations directly affect your MRR. To clarify this, you can calculate a metric called churn MRR rate , which provides a percentage for the impact of churn on your business.
First add up the MRR of lost customers over a given time period, then divide this number by MRR for the same time period.
The cost of attracting a new customer is always more than maintaining an existing one. LTV is the total value of your customer over the entire length of their relationship with your company.
It's common for new SaaS companies to focus too heavily on acquiring new customers rather than keeping the existing ones, which can be a fatal mistake.
This metric tells you how much you need to spend to acquire a new customer. As we already learned, it typically costs more to acquire a new one than maintain an existing one.
A high churn rate means you’ll have to spend more money on acquiring new customers, which pushes up your CAC.
Unlike regular churn, this metric is one to aspire to. Net negative churn means that total revenue from your existing customers surpasses the revenue lost to churn.
Basically, your existing customers are spending enough extra money to offset the losses from those who churned. You can reach a net negative churn rate in several ways, including by upselling to existing customers, customers renewing their subscriptions or upgrading their plans.
When preparing a churn analysis, it's important to think about churn in relation to both your business and your customers. The following suggested analysis methods will help you achieve this.
Before starting your churn analysis, it's important to ask yourself: what problem am I trying to solve? This will help guide the analysis process and avoid wasting time on doing random searches in the data.
Analyzing churn by cohort is a good way to begin your churn analysis. In cohort reports, you segment your customer base according to a specific time period.
Cohort reports are useful because they produce numbers which are not influenced by new customer acquisition.
They also allow you to easily spot patterns in your customer base. You can easily compare different cohorts to figure out if seasonal trends affect your churn rate.
In this approach, you group your customers according to the length of time they’ve been with your company. Analyzing churn by age is invaluable for identifying patterns across your entire customer base without getting bogged down by too many cohorts.
You can gain important context by examining your customers’ locations. For example, local tax regulations, payment processing methods, and payment gateways vary according to country. It’s essential for SaaS businesses to comply with these rules.
If your customer base is widely spread around the world, you might be losing customers due to a lack of local payment options or lack of compliance with regulations. This is an urgent problem to address.
Analyzing churn by behavior can reveal important patterns related to certain features of your product. Perhaps customers churn right after they use a specific feature. In that case, your product and engineering teams should dig in further to identify the issue and create a fix.
On the other hand, if certain features help to retain customers, then you should focus on further improving and promoting those. Churn analysis of behavior is also a good opportunity to gain a better understanding of customer engagement.
There’s a critical difference between voluntary and involuntary churn. Voluntary churn happens when a customer deliberately cancels or downgrades their subscription.
Involuntary churn is often due to expired or declined payment cards, lack of funds, incorrect payment information, or poor payment routing . The unfortunate customer is left none the wiser. In fact, they’d likely have stayed with you if it weren’t for involuntary churn.
Your business’s approach to taking payments and optimizing for payment acceptance is a vital aspect of driving overall revenue. Even the world’s best sales team can’t overcome a poor payment acceptance workflow.
Your payment acceptance rate is the proportion of successful payments out of the total payments attempted. Here's how to calculate it:
Payment Acceptance= No. of successful payments / No. of attempted payments.
Customer retention rate is the proportion of customers you've retained over a specific time period.
It's the direct opposite of churn rate. For example, if your retention rate is 80%, your churn rate will be 20%.
Here’s how to calculate customer retention rate:
Customer Retention Rate= (No. of customers at the end of the period - No. of customers acquired during the period/ No. of customers at the start of the period) x 100
Net revenue retention rate (NRR), also known as net dollar retention, is expressed as a percentage. It incorporates several types of customer activity, including upgrades, downgrades and churn.
NRR tells you how much monthly or annual recurring revenue you’ve retained from current customers across a certain period. It requires the data of MRR(Monthly Recurring Revenue)
NRR(Net Revenue Retention Rate) can be calculated as:
NRR= Starting MRR-Contraction MRR - Churn MRR + Expansion MRR/Starting MRR x 100
GRR(Gross Revenue Retention Rate) can be calculated as:
GRR=(Starting MRR-Downsell-Churn/Starting MRR
To truly understand the nuances of churn and calculate its impact on your business, it's vital to take a holistic approach that considers all the metrics mentioned above.
Customer retention is especially important, as it’s the flipside of customer churn. Improving retention rates not only cuts down your customer acquisition cost, but also helps you improve on the less tangible measures, such as customer satisfaction.
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