A Complete Guide to Analyzing and Reducing Customer Churn

~ 12 min read | November 27

Lost revenue, unhappy investors, and negatively impacted bottom lines… Churn is every business’ nightmare come true. As much as we’d like that, it is impossible to retain all 100% of the customers. While customer attrition is inevitable, analyzing it in time can help curb it significantly and give you critical insights about your business. In this post, we will explore:

What causes customer churn?

4W framework for churn analysis

10 effective ways to reduce customer churn

Before we dive in, let’s get the basics straight.

Customer churn (also known as logo churn) is the ratio of the number of customers lost during a given period (typically a month or a year) and the number of customers present at the beginning of that period. It is usually expressed in percentage terms as an annual or monthly figure.

 

how to calculate customer churn

For reducing it, it’s first important to understand the root causes of customer churn.

What Causes Customer Churn?

Understanding why your customers leave helps in managing churn better by developing focused strategies to tackle it. Here are some reasons why your customers could be churning:

Poor Onboarding

The onboarding process helps new customers ease into using your product and all the neat features that it has to offer. Training materials, video tutorials, product documentation are all part of onboarding. Many businesses metricize onboarding by defining an ‘Aha moment’ in the customer journey of product use. For instance, Hubspot‘s ‘Aha moment’ is when new customers use five key features within the first 30 days of onboarding.

A lack of effort on onboarding can lead to your customers missing out on some of your product’s core offerings and abandoning it, resulting in churn. 

Poor Customer Service

Customer service is an important facet of customer experience. A survey found that 96% of customers will leave you for lousy customer service. And it doesn’t stop there; unhappy or disgruntled customers may take to social media and other platforms to leave bad reviews. That means negative word of mouth, and that’s a slippery slope. Check out this blog to know how you can better your customer service beyond support.

Value Proposition Misalignment

High churn means it is time to reevaluate your messaging and packaging. Sometimes customers churn because they do not get the value they expected out of the product. It can mean they misunderstood/misinterpreted your value proposition, and that’s why it is essential to reassess it periodically.

Here’s an insider view of how we do Continuous Customer Development at Chargebee with the help of a value prop canvas.

Rigorous Competition

Another cause of customer churn is switching over to the competition. It could be because of pricing or a better match of product features with the customer’s needs. It is crucial to keep an eye on competitive activities and keep investing in product development to match the customer’s changing needs and expectations.

Involuntary Churn

A common occurrence for subscription businesses is when a customer’s payment attempt fails and leads to subscription cancellation. It’s called involuntary churn 

Reasons for Involuntary Churn:

  • When an expired card is used
  • Hard declines happen when a card is reported lost or stolen
  • Soft declines occur when a credit card has maxed out its limit
  • Banks can decline the card (due to suspected fraudulent activity, frozen accounts, etc)

Involuntary churn can be reduced, just like voluntary churn, with appropriate strategies in place. 

If you want to jump to how you can prevent and reduce churn, please do so here.

How to Analyze Customer Churn?

Customer churn benchmarks vary across industries. While the SaaS businesses’ churn rate benchmark averages around 5%, a survey with numerous SaaS companies revealed that most companies experience churn rates higher than that.

Customer Churn Benchmarks

Image source

Since B2B sales processes tend to be longer and require more deliberation, B2C companies experience more variance in churn than B2B companies. Customer churn rates also vary with the size of the business. Newer businesses are likely to face higher churn in the early stages, while larger, established companies tend to see lower churn.

Customer churn analysis is the process of analyzing the business’s customer churn rates over a duration to prevent and reduce it. It’s good practice to do churn analysis periodically to spot red flags when something starts to go south.

Early Signs of Customer Churn

There are several KPIs that you can use to understand the leading indicators of churn, such as:

  1. A decrease in the time spent on the product
  2. Increase in missed payments
  3. Increase in plan downgrades
  4. A change of decision-makers in the account may lead to reprioritization and churn

The 4W Framework of Churn Analysis

How do you go about analyzing customer churn? Let’s apply the old (but effective) 4W framework for churn analysis.

Chargebee - 4W framework for churn analysis

Who: Analyze Churn by Customer Segments

Customer segmentation is the process of grouping your customers with various similar traits. It can help you uncover trends in customer churn. Churn analysis using customer segmentation can be done in the following ways:

1.Churn Analysis by Revenue

This type of segmentation divides customers into groups based on their revenue. For example, you can divide your customer base into start-up, scale-up, and enterprise segments. Analyzing churn by revenue segment helps you understand if a specific revenue range is churning more or less and devising specific strategies to curb such churn. For example, early-stage startups might be churning because of budgetary issues and this can be reduced by offering them discounts and flexibility in payment terms.

2.Churn Analysis by Industry

Every industry has a separate set of problems, and hence this type of customer segmentation can uncover churn trends based on specific industries. This analysis helps in preventing churn by implementing specific measures for each sector. For instance, the global downturn induced by the COVID pandemic crippled the travel industry, but eLearning saw a surge as students took to remote learning. To reduce churn in industries facing a slowdown, the following measures can be implemented:

Reducing churn in slowdown

Why: Voluntary vs. Involuntary Churn

It involves analyzing the reasons behind the customer churn. While we spoke about the most common reasons above, you can categorize it as voluntary or involuntary churn. Exploring what % of churn was which category gives excellent insights into churn prevention workflows and strategies you would be setting up.

When: Early vs. Late Stage Churn

Analyzing the timing of the churn adds depth to your churn analysis. There are various ways to look at this. You can start by analyzing churn by activation dates. It tells you how soon (or not) the customer churned after activating the product.

Customer churn report by activation date

Another way to analyze this is by looking at the MRR retention cohorts. The MRR retention cohort can give you a visualization of MRR addition, growth, and churn behavior based on both when you acquired the customer and what happened in a particular month.

MRR Retention cohort - Chargebee

Moving down the first row shows you how much new revenue you could acquire month on month while going across columns shows how much that cohort expanded or contracted. In the cohort above, you can see an adverse impact on revenue growth across customers in April. But what’s more interesting is that customers acquired in the recent months seem to have churned more than the older ones – indicating a high early-stage churn.

Where: Churn Analysis by Geographies

Knowing your customer’s location adds context to why they would be churning. Tax regulations, payment gateways, and payment processing are different for every country, affecting your product’s adoption. For subscription businesses, it is crucial to comply with the local sales tax guidelines. Your subscribers could be churning due to a lack of payment options or a lack of compliance with regulations, and this analysis is a great way to spot such trends.

And that’s the 4W Churn Analysis Framework for you. Next stop: reducing churn.

Ten Effective Ways to Reduce Customer Churn

Reducing customer churn is a long game that requires a deep understanding of your customer base and changing needs. With a well-established customer analysis process, you’ve already won half the battle. The next step is to implement strategies that help mitigate customer churn. Here are a few:

1. Invest in Subscription Analytics

Wouldn’t it be nice to have a dashboard that gives you a picture of your churn scene at a single glance? Subscription analytics tools like Revenuestory do just that and more. You have all your data and metrics in a single dashboard, with multiple ways of slicing and dicing it.

Revenuestory subscription analytics: churn metrics dashboard

Investing in subscription analytics is incredibly beneficial in the long run, as it gives insights that you need to focus on and strategize to curb churn early on. A great example of this is how ScreenCloud course-corrected their churn using Revenuestory subscription analytics.

Chargebee’s Revenuestory is a subscription analytics platform built in tandem with the billing system. Revenuestory allows you to drill-down to the deepest layer of all the metrics and reports, including churn metrics and more. Curious how? Try it out here.

2. Double Down on Customer Engagement

Customer retention is the other side of the churn coin and retaining existing customers starts with engaging them. How can you compel customers to log on and use your product on a day to day basis? The key is creating value with your product that makes customers embed it in their core tech stack. The likelihood of an engaged customer leaving is much lower if you make it difficult for them to leave your product.

3. Nail a Positive Onboarding Experience

Onboarding is often overlooked but holds the key to user retention. How would you retain users if they do not know how to use the product to its fullest potential? That’s where onboarding comes in. Provide your customers with all the training material and tutorials to get them to use your product more and help them see its value. In the long run, this helps reduce churn significantly.

4. Stay One Step Ahead

Identify high-risk customers that are likely to churn. You can do it by tracking the leading indicators of churn mentioned earlier, such as payment failures and slower product adoption. Provide special discounts, coupons, or flexible payment terms to this customer segment. It will help you proactively prevent them from churning.

5. Define High-value Customers

High-value customers are also known as critical accounts. These accounts bring in a significant chunk of your business’ revenue, and that’s why it is essential to hold on to them for long periods. A good CRM tool should give you insights into what is happening at each stage of this customer relationship. You’ll know at all times if they have any unresolved issues and how engaged they are. Use these insights, put your best people on them, go the extra mile to meet their expectations, and turn them into loyal customers.

6. Improve Customer Support

Well, you probably saw this one coming, didn’t you? Invest in a ‘best-in-class’ support team and focus on customer satisfaction. A rapid and positive experience in customer support makes customers feel valued and appreciated. Not only are they less likely to churn, but they will also recommend your product to others, which means lower customer acquisition costs. That’s two birds with a single stone, right there.

7. Learn from Complaints and Tickets

Listen to your customers. What are the most common complaints? Customer complaints are a goldmine of insights when it comes to understanding how your product could improve. Take a cue from this customer feedback to develop your product further, analyze user behavior, and assist them with the necessary resources. Making customers feel heard, and working on their feedback is one step in the right direction to enhance customer loyalty and reduce churn.

8. Offer Annual Contracts

By offering annual plans, you can reduce churn in two ways. First, you charge the credit card for payment only once a year, making payment failures far less likely. Second, your customers are only deciding to stay or leave once a year versus every month for the monthly plan.

Annual plan by Chargebee

9. Implement Smart Dunning Workflows

It’s a strategy aimed explicitly at reducing involuntary churn. It would be best if you weren’t losing revenue because of a failed transaction, and that’s why it calls for a proactive approach. That said, emailing customers over and over again can irritate them and harm your reputation. That’s why you need ‘Smart’ dunning workflows. In smart dunning retries, Chargebee uses transaction patterns and industry best practices to maximize your revenue recovery.

By effective dunning management, businesses can reduce their churn rates by as much as 100% (Based on a true story)

10. Improve Product and Features Consistently

Make it really, really hard for your customers to leave. You can do this by developing new features in your product that go beyond the one-time use. A dashboard that they can use every day is a good example. These sticky features and continual product development to answer their evolving needs will improve user retention and reduce churn in the long run.

Conclusion

For small and large companies alike, customer churn is an important metric to track. Reducing customer churn starts with slicing and dicing the churn data to analyze who is churning, why they’re churning, and when and where the churn is occurring. If you have a customer-centric product coupled with a powerful analytics tool in your arsenal, strategizing for churn reduction becomes easier and more efficient.

Like the Blog?

Nupura Ughade

Of the House Slytherin, First of Her Name, Content Marketer @ Chargebee, and an Admirer of All Things Nerdy