There’s so much data that you can track and analyze within your SaaS business, but none of it is more important than churn analysis. Your customer churn rate indicates how quickly customers stop using your product — and in a subscription-based business model, churn can be deadly. Research has shown that even a 5% reduction in customer churn can increase profits from 25-125%. Of course, you can’t reduce what you don’t understand. And that’s why customer churn analysis is so important.
Let’s take a deep dive into customer churn analysis: what it is, why it matters, what data you should actually take the time to analyze, and what strategies you can use to take your churn analysis and turn it into churn reduction.
What is customer churn analysis?
Customer churn analysis is the evaluation and examination of your churn rates, with the goal of reducing your business' overall churn. A company’s customer churn rate is a measurement of how many customers they lose during a given time period. By analyzing that rate (and other key indicators of churn), valuable insights into why customers cancel can be gained. That knowledge can then be used to develop effective strategies for fighting and reducing overall customer churn.
What are causes of customer churn?
Part of customer churn analysis is recognizing the different types or causes of customer churn and determining which of those causes are most affecting your business. There are many potential causes of customer churn, but we’ll break down a few here.
One of the leading causes of churn is actually a type of involuntary churn: failed payments. In fact, payment failures could account for anywhere from 20-40% of your customer churn. Payment failures, or failed payments, happen when a customer’s card transaction fails to complete because of an issue in the payment process. This failed payment then leads to the cancellation of the customer account. Payment failures can be the result of card expiration, insufficient funds, or even simply having incorrect card information registered to the account.
Switching to a competitor
Another major cause of customer churn is when a customer leaves your product in favor a competitor’s. This is a largely preventable type of churn since it means the customer didn’t stop wanting or needing the functionality of your product — they just saw more value in someone else’s. That’s why it’s vital to understand where you fit in your particular market and to determine how you can best compete with the other products around you.
Onboarding is a crucial step in the customer journey. When a customer isn’t onboarded well, then it’s more likely that they’ll have a hard time seeing and experiencing the full value of your product, which can eventually lead to customer churn. That’s why it’s imperative to construct a smooth and informative onboarding process with lots of access to high-quality customer service.
Poor customer service
Speaking of customer service… it’s an absolute necessity because a lack of it is a major contributor to churn. If your customer isn’t receiving adequate service or assistance with troubleshooting, then they’ll likely begin to feel, sooner or later, that they’re not getting adequate value for their money.
What are the effects of customer churn?
Customer churn analysis matters because, in a SaaS business, customer churn matters. Your company’s overall revenue is tied directly to sustaining that recurring customer relationship. Let’s look at some of the negative effects of customer churn.
Here’s the deal: it’s always more expensive to acquire new customers than it is to sustain existing ones. Customer acquisition cost, or CAC, refers to the total cost of sales and marketing that you need to bring in new customers. A successful SaaS business needs to have a CAC that is significantly lower than your customer lifetime value (LTV). And in order to increase your LTV and decrease your CAC, you need to lower customer churn.
When customers churn, it reduces your recurring revenue. And monthly recurring revenue, or MRR, is what sustains a SaaS business. Without this recurring revenue, it will be impossible to produce long-term growth.
Not only is it more expensive to acquire new customers than to keep existing ones — you’re also more likely to get more engagement and more revenue from your current customers. That’s because existing customers are more likely to spend more money than new customers. Basically, it’s easier to upsell than close a new sale. But when you have a problem with customer churn, it can make it significantly more difficult to improve the engagement of your current customers.
How do you conduct churn analysis?
In order to effectively conduct your churn analysis, you have to know what data to measure and analyze — otherwise you’ll just be wasting your time. There are a few different SaaS metrics and KPIs that you should look at during your churn analysis.
Customer churn rate
You’re probably not surprised to learn that one of the most important metrics to look at for customer churn analysis is your actual customer churn rate. After all, if you want to reduce customer churn then you’ll need to know where you’re starting.
Calculating your customer churn rate is pretty simple. You just need to know two things: the total number of customers you had at the beginning of a given period, and then the number of customers you lost during that same period.
Customer health score
A customer health score is a metric that SaaS companies can track in order to keep an eye on overall customer health and use as an indicator of customers potentially at risk of churning (more on that in a little bit) or customers who are good candidates for upselling. This value measures a customer’s engagement and satisfaction with your company in general and your product. For a look at some different ways to measure your customer health score, click here.
It’s also important to go a step beyond customer engagement and take a more wide-scale look at overall customer behavior when you’re conducting churn analysis. In order to do this, you’ll want to sort and filter your various customer types based on their similarities in behavior and then analyze the patterns and preferences of each group. The best way to accomplish this is by using cohort analysis.
What do you do with your customer churn analysis?
If you don’t take the findings of your churn analysis and use it to combat churn and strengthen your bottom line, then there’s not much point in doing it at all. Of course, the strategies or tactics that you choose will be based entirely on the specific findings from your customer churn analysis. And it’s always a good idea to test a few different strategies and track your results, so you can see which are most effective. Let’s talk about a few that you might try…
Examine your pricing model
If you don’t currently offer tiered pricing, then this is a good opportunity to re-evaluate your pricing model. Depending on what your churn analysis revealed, you might want to consider redirecting customers who are attempting to cancel to a more appropriate pricing tier. If necessary, with a tiered pricing model, you could even offer to switch them to a lower pricing tier than they’re currently on.
You could also consider offering providing an annual pricing option. Customers who subscribe to annual plans tend to have a longer customer lifespan than ones on monthly plans, which allows you to safeguard your cash flow and reduce your CAC, along with providing savings to your customers.
Identify at-risk customers
We mentioned earlier that your customer health score could provide you with data that allows you to identify at-risk customers before they actually churn. Well, here’s where you can implement that knowledge.
When you identify customers who seem to be on the brink of cancellation, it gives you the opportunity to act early and (ideally) keep them as customers. You can accomplish that by providing exceptional customer service, emphasizing and improving product value, and asking for feedback from at-risk customers.
Create effective cancellation flows
If the only thing standing between your customers and cancellation is a big Cancel button, then you’re missing out on a prime opportunity to prevent customer churn before it ever happens. That’s why an effective, streamlined cancellation flow is so important. You can begin by offering a short-form, simple exit survey that asks questions designed to glean as much information as possible from customers attempting to churn. This survey can help you inform product development and highlight where your product has the opportunity to improve. You can then move forward into targeted, personalized offers that could entice the customer into keeping their subscription.
Conduct customer churn analysis and reduce your churn with Churnkey
Customer churn analysis can be a big job. If you want helping monitoring and reporting customer analytics, Churnkey has you covered. Our platform offers a detailed, visual view of your customer’s journey, helping you easily reveal customer patterns as they emerge and maintain a comprehensive understanding of your customer’s behaviors. Start with a free trial today.