Understanding Churn Prediction: A Comprehensive Guide

Introduction

Churn prediction can be a powerful tool in your company’s arsenal for retaining customers. By accurately identifying potential churn, you can proactively mitigate customer loss, increase subscriber loyalty, and improve financial performance. In this guide, we’ll examine churn prediction, exploring its significance, methodologies, and impact on customer retention and business profitability. 

What is churn prediction?

Churn prediction is the process of forecasting which customers are likely to discontinue their subscription or stop using a service. In the SaaS industry, where subscription-based revenue models are prevalent, accurately predicting churn is essential for maintaining a healthy customer base. By leveraging historical data, behavioral patterns, and predictive analytics, you can identify signals that indicate potential churn, allowing you to proactively intervene before it’s too late. In the near future, we will offer predictive models built based on billing data and with billing and product usage data, that will make them even more powerful in predicting churn proactively. 

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Why churn prediction matters for SaaS

Churn prediction holds significant importance for Software as a Service (SaaS) companies for various reasons. By leveraging churn prediction, you can effectively pinpoint customers showing signs of potential churn early in their interaction with your product or service. This early identification enables you to proactively deploy tailored retention tactics, such as crafting personalized offers or initiating proactive customer support measures to mitigate churn rates. 

Understanding customer churn

As you are likely aware, customer churn occurs when customers cease their relationship with a company. Churn can be categorized into voluntary churn, where customers actively decide to cancel their subscription, and involuntary churn, which occurs due to factors beyond the customer’s control, such as payment issues or service disruptions. Understanding the drivers of churn is important for developing effective retention strategies tailored to address at-risk customers’ specific needs and pain points.

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Fundamentals of Churn

The impact of churn on SaaS businesses

The impact of churn on SaaS businesses cannot be overstated. High churn rates result in the loss of recurring revenue and hinder growth and scalability. Churn can have ripple effects across an organization, affecting customer acquisition costs, brand reputation, and investor confidence. High churn rates in subscription businesses can significantly lower future revenue potential and ultimately negatively impact valuations. It is crucial for businesses to effectively manage churn to maintain a strong valuation and sustainable growth. 

According to the 2024 State of Subscriptions and Revenue Growth Report, 60% of subscription leaders expect churn to increase, 30% expect it to decrease, and 10% expect it to remain flat. 86% of subscription leaders agree that customer retention is a higher or equal priority than acquisition. 47% of leaders are prioritizing customer retention, using technology to creatively improve subscriber loyalty and revenue. 43% are focused on converting one-time purchases into subscribers to maximize CLTV (customer lifetime value). Based on these findings, we expect increased investments in existing customers to maximize revenue per user.

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Masterclass for SaaS Businesses to Manage Churn Better

Key challenges for subscription leaders include staying up-to-date with technology (14%), maintaining growth trajectories (11%), and boosting profitability (11%). Leaders are looking to actively improve customer engagement by adopting loyalty programs (31%), implementing pauses, discounts, and other incentives (29%) to prevent cancellations, and investing in automation and tools (27%) to improve the online customer experience. These strategies include testing a range of discount offers at the point of cancellation to engage at-risk customers proactively. By evaluating the impact of these save offers, you can gain insights that help extend customer retention strategies throughout the entire customer lifecycle to cover end-to-end use cases beyond just the point of cancellation.

Why customers churn 

We know the reasons for customer churn are varied and can be complex. However, our latest retention benchmarks uncover critical insights into consumer behavior and market dynamics by highlighting the primary reasons for subscription cancellations.

The top reasons include the following:

1. Pricing (31%)
2. Not enough time (16%)
3. No longer needed (15%)
4. Integration issues (8%)

The good news is all these churn reasons can be mitigated with an effective retention strategy that identifies the signs of potential churn early and proactively addresses them with a tailored subscriber experience. Churn prediction is the engine that makes your retention strategy hum.

Challenges in churn prediction

While churn prediction offers significant benefits, it also presents several challenges for Software as a Service (SaaS) companies. 

Many predictive endeavors fall short, leaving you unable to fully harness churn prediction’s potential. While building a model and predicting churn is achievable, translating those insights into actionable strategies can be a huge lift. Turning predictions into actionable strategies is where companies often struggle, despite being able to predict outcomes. Many organizations abandon the effort of obtaining practical predictions prematurely due to its time-intensive nature. Many internal predictive initiatives falter or get deprioritized because of the lack of quantification or the ability to instrument the models, leading organizations to redirect their engineering and data science expertise toward their core offerings, often overlooking the immediate value of predictive churn.

That’s what sets subscription and revenue growth platforms like Chargebee apart. The power of Chargebee comes from pairing an organization’s predictions (or using ours) with our retention lifecycle product to drive engagement and action to mitigate churn. Many homebuilt models can take months or even years to provide solid churn predictions. Chargebee drastically reduces that time to value by providing a framework to drive action and results, enabling you to cross that last mile many organizations struggle to reach. And you get it in weeks, not months or years.

Chargebee offers a comprehensive production model with the added perks of all machine-learning operations. By tapping into our extensive pattern knowledge gained from serving millions of subscribers across thousands of companies, we can analyze your unique patterns and provide insights into what truly counts. This is the potential of predictive churn on a large scale.

Another challenge many companies face is data integration. Companies often grapple with consolidating data from various sources, such as customer interactions, subscription details, and usage patterns, into a cohesive and holistic view of customer behavior. This combination of data is crucial for accurate predictive modeling and decision-making processes.

Maintaining predictive models’ accuracy and relevance demands continuous monitoring and refinement. This involves analyzing customer feedback, tracking market trends, and making timely adjustments to the algorithms to ensure they remain aligned with evolving customer preferences and industry dynamics. By dedicating resources to these efforts, you can improve your predictive capabilities and better anticipate and mitigate customer churn.

As explained earlier, subscription and revenue growth management platforms often offer proactive retention and predictive churn capabilities. Managing predictive churn will likely be a pain point if you have a homegrown subscription management system.

Building effective churn prediction models

Building effective churn prediction models requires a systematic approach and the right mix of data science techniques. If you do it yourself, you can start by collecting and preprocessing relevant data, including customer demographics, usage patterns, and engagement metrics. Next, you can leverage machine learning algorithms to train predictive models to accurately identify churn signals.

As we covered in the challenges section above, there are significant factors to consider when assessing whether to build a predictive churn model yourself or to partner with an expert who has the infrastructure and expertise to do it at scale, saving you time and enabling you and your team to focus on what you do best.

Leveraging analytics for better retention

Analytics play a crucial role in helping you identify at-risk customers and create targeted retention strategies. By analyzing customer interactions, feedback, and sentiment data, you can gain valuable insights into the factors driving churn and prioritize interventions accordingly. Advanced analytics techniques such as cohort analysis, survival analysis, and propensity modeling can also improve the precision and effectiveness of your retention efforts.

You should leverage subscription analytics tools that offer predictive capabilities. These tools enable you to identify at-risk customers through data-driven insights. By integrating predictive analytics into the churn analysis framework, you can create more effective, personalized strategies for customer retention, addressing issues before they lead to churn. That’s where partnering with a solution like Chargebee helps. We can implement your model or take charge of the model for you and give you both the prediction and the action framework, freeing you to focus on your core product and service.

Churn analytics explained

You can conduct churn analysis across customer segments in 3 main ways. 

1. Churn analysis by revenue

Segment customers by revenue to effectively address their needs. Offer discounts and flexible payment terms to retain early-stage start-ups facing budget challenges. For enterprises, ensure your product scales with their growth.

2. Churn analysis by industry

Industry analysis aids in preventing customer churn by tailoring measures for different sectors. During the global downturn due to COVID-19, travel suffered while e-learning thrived. Implement these strategies to reduce churn in slow sectors.

3. Churn analysis by geography

Understanding customer location provides insights into potential reasons for churn. Varying tax regulations, payment gateways, and processing methods across countries impact product adoption. Ensuring adherence to local sales tax rules is critical. Subscriber churn may result from payment option limitations or non-compliance with regulations. Analyzing data can help identify these trends effectively.

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Churn prediction tools and technologies

Many tools and technologies are available to support churn prediction efforts, ranging from specialized analytics platforms to off-the-shelf software solutions. These tools leverage cutting-edge technologies such as artificial intelligence (AI), machine learning, and predictive analytics to automate data analysis, generate actionable insights, and facilitate decision-making. Investing in the right tools can streamline your churn prediction processes and unlock new opportunities for innovation and growth.

The role of AI in churn prediction

Data from the 2024 State of Subscriptions and Revenue Growth indicates that 46% of businesses are investing in AI technology, primarily to increase productivity, and are seeing promising growth in finance automation, business intelligence, and subscription billing services. Predictive analytics stands out as the top AI investment across the board, as key players in the predictive space either acquire or integrate AI into their services. Larger businesses with over $100 million in revenue are focusing investments on developing new messaging and content to drive organic growth. In contrast, smaller firms under $100 million prioritize investing in collaboration and productivity tools.

Klarna expects to save $40 million by automating its support operations with AI, showcasing the economic impact of these technologies.

Chargebee uses AI-driven technology to proactively predict churn and help you create scalable save offers. This saves you the time and effort of building models, analyzing the data, and taking action. With Chargebee Retention, you can address customer concerns before customers cancel with an automated, scalable, and personalized experience.

Chargebee Retention offers a diverse range of offer categories, including discounts, subscription pauses, plan extensions,  and the ability to combine multiple actions into a single offer. By understanding your customer cohorts, you can select the most appropriate offer category. 

Using Chargebee, you can harness the power of data science and continuously evaluate your retention strategy. You can present different experiences to customers based on multiple attributes. Chargebee Retention allows you to run randomized, rules-based, or ML-based (Smart Targeting) tests, so your experimentation isn’t restricted.

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Upcoming trends in churn prediction

Churn prediction is continuously evolving, spurred by the rapid advancements in AI, machine learning, and big data analytics. The landscape of customer retention is being reshaped by emerging trends such as predictive maintenance, proactive customer service strategies, and hyper-personalization techniques. These trends offer you new opportunities to stand out, provide your subscribers with memorable subscription experiences, and provide value throughout the customer journey.

By keeping up-to-date with these trends and fostering a culture of innovation within your organization, you can proactively future-proof your churn prediction strategies, ensuring you remain competitive and agile.

Churn prediction case studies and success stories

Nothing is more inspiring than seeing real-life examples of growing SaaS companies that are tackling the tough challenges of churn head-on. 

How Chargebee powered a 63% save rate lift for Powtoon

Powtoon’s core business proposition revolves around speed. Its rapid do-it-yourself platform has the potential to assist countless individuals in creating instant videos. Unsurprisingly, the company extended this rapid pace to its expansion. However, with growth came an increase in customer churn challenges.

Powtoon faced challenges with customer retention. Some customers only required a single video and canceled without exploring further use cases. Despite efforts like adding an exit survey, the company needed help to educate customers and improve customer lifetime value. Additionally, the only way to cancel was by calling customer support. Not a winning experience for its users.

“We wanted to show customers that Powtoon could meet their needs long-term, but we weren’t reaching customers at the right time or place,” said Co-founder Daniel Zaturansk. “We tried email and messaging, but we weren’t cutting through the noise, and our win-backs were low, and our exit survey was elementary.”

When Powtoon realized the point of cancellation was a sincere opportunity to educate, re-engage, empathize with, and retain customers, they onboarded Chargebee Retention.

With the help of Chargebee Retention, Powtoon upgraded its static cancel page into a dynamic, engaging cancel flow. This meant understanding each customer’s specific reason to cancel, deploying appropriate messaging, and presenting them with relevant offers to stay. The results were dramatic. Introducing Chargebee Retention to their cancel flow helped Powtoon improve its customer save rate from 8% to 13% at the point of cancellation (a 63% increase).

“Chargebee Retention helps us constantly optimize our Save Rates. Previously, it was difficult to determine the effectiveness of our strategies and identify the next steps. However, Chargebee provides us with data-driven intelligence to guide our decision-making process.”

– Daniel Zaturansky, Co-founder, Powtoon

A better cancel experience to engage and delight customers at Unbounce

Since 2009, Unbounce’s conversion intelligence has delivered its 120,000+ customers over 1.5 billion conversions through AI-engineered landing pages and copywriting solutions geared to stun and awe customers.

Unbounce faced challenges managing churn and delivering tailored customer experiences. They sought a tool to minimize cancellations and extract crucial feedback from the customer journey. With its ability to analyze and contextualize customer journeys across multiple stages and variables and penchant for fluid integrations, Chargebee Retention ticked all the right boxes for Unbounce. This kicked off a new initiative to reimagine the cancel experience for their customers.

“We ran Chargebee Retention side-by-side with our original cancel flow and learned right away that we could deflect cancellations without introducing friction,” said Max Tims, Unbounce’s (former) Director of Revenue Ops and Strategy. “Now we understand that when customers hit cancel, they’re raising their hand for a lifeline. With Chargebee Retention, we’re able to deflect 11% of cancellations by being there for our customers when that hand goes up.”

Chargebee integrated into Unbounce’s tech stack like a dream. Unbounce placed Chargebee Retention right into its suite of tools already in use. Orchestrating workflows in Salesforce, Zendesk, and Slack, Chargebee Retention works with Unbounce’s customer experience stack to keep teams informed about customer feedback and cancellations.

Chargebee Retention integrates with Unbounce’s Salesforce instance to keep all customer-facing teams on the same page. Data gathered in Chargebee Retention is exported to Salesforce, where accounts are updated with new details about when a customer canceled and why. This helps the team have more context when speaking with previous or current customers.

Today, Unbounce proactively helps customers at the moment of cancellation while also deflecting a double-digit amount of those cancellations.

“Before using Chargebee Retention, we couldn’t take action on data our customers gave us at such an important moment. Chargebee Retention has changed the way we operate.” 

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A better cancel experience to engage and delight customers at Unbounce

Conclusion

Churn prediction is a powerful tool that can help you improve customer retention and drive revenue growth and results. By understanding the dynamics of churn, leveraging advanced analytics, and investing in the right tools and technologies, you can proactively identify and address churn risks. This will enable you to provide a better user experience, drive efficient growth, and stay up-to-date with technology to achieve your ambitious goals.

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