What is churn rate?
Churn rate is defined as the rate at which your customers stop doing business with you.
Always represented as a percentage and for a specific period, churn rate is a metric that tells you how to what extent customers are seeing value in your product.
Churn rate impacts revenue, customer acquisition value, and customer lifetime value. As Brian Balfour, former VP for growth at Hubspot, put it, “If your retention is poor, nothing else matters.”
Churn rate is also known as attrition rate, and some people also refer to it as customer churn rate.
The universe of customer retention metrics
Churn rate is a customer retention metric. The family of customer retention metrics also includes
- Retention rate
- Revenue churn rate
- Existing customer revenue growth rate
- Repeat purchase ratio
- Time between purchases
- Net promoter score, which relates to the likelihood to recommend
Retention rate and revenue churn rate are related to our discussion on churn rate. Let’s look at how they fit in.
Churn rate vs retention rate
These are two sides of the same coin. Simply put, higher churn rate is bad, and higher retention rate is good. For example, if you had 100 customers last month and you’re left with 97 this month, you have a 97 percent retention rate and a 3 percent churn rate.
Customer churn rate vs revenue churn rate
Again, these are related terms, but revenue churn is the actual business value lost. For example, if you had 100 customers last quarter and lost 3 of them this quarter, and each of these customers paid you $500 per month, your churn rate for the quarter is 3 percent, but the revenue churned is $500 x 3 months x 3 customers = $4,500.
How to calculate churn rate
Before you dive into the churn rate formula, you need to decide the period for which you want to calculate the churn rate - this can be anything from a week to a few months, depending on your context. If your product has a weekly subscription, then weekly works. If not, opt for a monthly, quarterly, or annual churn rate calculation.
You also need figures for customers at the beginning and end of your chosen period.
Churn rate formula
What is a good churn rate?
For B2B SaaS companies, a good annual churn rate is 5 percent or less, and a palatable churn rate is 10 percent or less. This translates to less than 1 percent per month, more like 0.0042 percent or 0.0084 percent.
The ideal B2B SaaS churn rate is around 4 percent (or lower) annually, and the ideal B2C SaaS churn rate hovers around 4 percent annually.
Possible reasons for a high churn rate
Sales teams work hard to pitch, negotiate, battle competitor mentions, and convince a sales prospect to convert into a paying customer.
But if the product does not perform as promised, the customer is likely to drop you at the first available opportunity. Churn rate is not necessarily a marker of sales success or the lack of it. It can often be a sign of bigger, deeper problems.
There are three possible reasons for churn that emerges from product dissatisfaction:
- The sales team is overpromising
- The product team is under-delivering
- Customer service is lacking
Meanwhile, competition-related reasons for churn include:
- Special offers and/ or better pricing or packages
- A product that has some value additions or additional features
- Aggressive marketing or messaging that resonates with customers better than you
- Better integration with other tools
Churn can sometimes really not be anyone’s fault. For example:
- Your customer does not have the budget to afford your product anymore
- They are redefining their internal processes such that your solution is not necessary anymore
- They are changing their business, and your solution is not relevant to the new business
Of course, your customers could also be churning simply because the world has changed, and this is the hardest kind of churn to fix.
Churn rate analysis and reduction
Fixing churn rate is an inward journey and going over customer conversations is the best way to retrace your steps and figure out where you – as an organization – slipped.
The objective of the exercise is not to assign blame but rather to find out where your organization needs to improve.
Conversation intelligence can help you examine what is causing your customers to churn. A call library with recordings, transcripts, and summaries of sales calls allows you to take a closer look at your processes and practices
Some organizations also use conversation intelligence across departments like sales and customer service. This gives you the whole picture (over and above sales conversations) of interactions with churning customers.
Here are 4 ways to reduce churn rate, linked to various underlying reasons:
- If the sales department is overpromising, you need to make more realistic claims. Remember, your customer feels lied to and cheated when you promise something and do not deliver. Have confidence in your product’s genuine attributes.
Take action: Listen to your sales conversations. What did you say? Did you overpromise?
- If the product itself is lacking, or the competition has better features, the product team needs to be roped into discussions (with real information from customer interactions or market research) to improve the product.
Take action: Talk to customers to document what is lacking. Conversation intelligence can deliver “from the horse’s mouth” details that your product team will have an easier time digesting than “unfounded/ unproven criticism” from the sales team, which might sometimes come across as a blame-shifting exercise.
- Price wars can kill a market and bankrupt promising companies, so avoid undercutting your peers in a bid to retain customers. Instead, see how you can deliver additional value or recalibrate your segmentation strategy to appeal to a segment that will be willing to pay a viable price for your product.
Take action: Listen to lots of sales calls with a variety of customers to discover goals and struggles that remain unaddressed by your competitors. This is great raw material for you to change your pitch or for the product team to draw inspiration from.
- Poor customer service can negate all the hard work that the product development team and sales & marketing teams input to bring in customers.
Take action: Customer service call recordings can tell a company’s management if the service team is actually helping customers or just getting rid of them as soon as possible and with as little effort as possible.
What’s next
To minimize your churn rate, you need to take a magnifying glass to your customer interactions to find out what is going wrong. This means analyzing conversations that your sales and customer service teams have with customers.That’s where data plays a pivotal role.
Clari’s revenue platform can help you bring all sales data regarding the past, present and future in one place. Clari gives sales leaders the ammunition to make fully-informed arguments and fully-informed decisions on minimizing churn rate.
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