Churn: What Is It, Why Does It Occur, And How To Reduce This Rate?

Churn: What Is It, Why Does It Occur, And How To Reduce This Rate?

Decreasing the number of churns is something that every company, especially SaaS, needs to pursue. It is essential for the growth and health of any operation.

How to project growth, and attract investors if customer retention fails within organizations.

When a user churns, and this is repeated with other people, a very big warning signal needs to be turned on.

And a question must be answered: What are we doing wrong?

Customers talk to each other. The information is accessible to everyone. Therefore, working to have an ever-lower churn, close to zero, is a tireless pursuit.

More than that. Understanding the impact (especially financial) of this metric is vital. It’s what will keep financial health and a safer walk for any business.

In this context, we will talk about what churn is and why it cannot be ignored within companies.

Still, we’ll talk about how to calculate it, the most frequent reasons, and what actions can be taken to reduce these numbers.

Let’s go.

Good reading!

 

What is churn and why is this metric important?

Churn, churn rate, or churning. The 3 expressions refer to the same thing. It is the rate or rate of unsubscriptions by customers within organizations that work with MRR.

The term, originally from the English language, can be understood as “to move” or “to shake”. If we think about its application, therefore, the sense of rotation comes to mind.

In B2B sales especially, this is a metric that simply cannot be ignored. SaaS platforms are – or at least should be – aware of this.

That’s because it directly impacts billing and compromises the sales forecast, for example.

If the churn is high, it is a sign that there is a lot wrong with the operations.

To know how healthy these numbers are, you need to monitor them correctly. But we’ll talk about that later…

But, the fact is the need to identify these flaws and immediately try to correct them. Because if you don’t, your competition will.

So, how to reverse a bad image and recover lost customers?

Difficult, right? Even expensive. Therefore, better to be safe than sorry.

 

How does the churn rate work?

The churn rate works simply: the higher your index, the greater the risks for your company.

Cancellations are normal in any business, however, a very high churn rate means revenue losses, which directly impact your goals.

Briefly, we can say that the churn rate works as a kind of compass.

In other words, an instrument that serves to guide your company in the direction of sustainable growth.

 

Why is this metric so important?

You probably know what CAC is, don’t you? The cost to retain a customer is lower than the Customer Acquisition Cost, in general.

That said, let’s go to a simple thought.

If the mission of how to retain customers requires fewer resources than attracting customers, it will not help to put new users on the platform as a way to compensate those who leave.

He understands?

You will always be losing money. New users will cost much more than maintenance.

Companies would have to bring in a much, much larger number of new customers in proportion to their churn rate.

Of course, there are many reasons why a customer leaves a brand. Usually, a set of reasons explains the evasion.

The obligation of managers is, once this is noticed, to map their entire internal process to identify the failures that may have generated this.

This assessment, as we have said and reinforced, is essential for not only success but also long-term financial health.

Therefore, constant attention and review of internal processes must be a practice, a routine within any business.

 

How to calculate the churn rate?

How to calculate churn rate?

To understand how the churning rates are within the company, it is necessary to know how to calculate them.

And this is quite simple to do. Want to see?

For this mission you:

  • divide the number of cancellations at the end of the desired period (we will do it monthly) by the number of customers, in this same period, who remain active.

With an example you will understand better:

Let’s say a company has 500 active customers at the end of June. In this same 30-day period, 15 users requested the cancellation of their subscriptions.

How is this account? 15 / 500 = 0.03. This number, when multiplied by 100, gives the company’s churn rate: of 3%.

Important: This calculation does not consider the amount spent by each customer leaving.

If, of the 15 customers that left, 3 are responsible for, for example, half of the business’s revenue, the “traditional” churn rate calculation does not take these amounts into account.

For that, you need to do the Revenue Churn Rate.

If we think about the example above, of the loss of 15 clients in a universe of 500 assets, we will have the following calculation.

Take into account that the 500 users leave an amount of $10,260 in the company. If these 15 who canceled represent a value of $ 2,462.00, how is this account?

2,462 / 50,000 =0. 049 This number, when multiplied by 100, gives a revenue churn rate of: 4.9%.

 

What numbers are acceptable?

You will surely answer that ZERO is the acceptable number. And we will certainly have to agree with that.

However, this is very unlikely to be an achievable rate.

Despite this, it is common to think of an average that goes from 0.5% to a maximum of 7%.

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But obviously, it will depend on the number of customers the company has. The higher this number is, the higher the % of people who leave the company can be.

That’s because there won’t be a big financial commitment and the impact may be less felt than in companies with fewer users.

And, in order not to end the year at a loss, the company needs not only to recover the number of users but also the amounts they used to pay.

As we mentioned above, the CAC needs to be taken into account.

For the equation not to be in the red, therefore, you will have to bring in more customers than you lost.

If the number is equal (both in the number of customers and in the amount they pay), you will inevitably be at a loss due to the cost of prospecting and selling.

 

What is the ideal Churn rate?

Despite all your ongoing efforts to keep your customer base stable, keep in mind that some cancellations are unavoidable.

A high rate of cancellations can generate considerable financial losses for your company and, in some cases, damage your brand image.

Therefore, to build a positive image in the market and keep the business healthy, you need to ensure that your churn rate is as low as possible.

There is no ideal churn rate for all companies, after all, this index can vary according to each segment.

According to the SaaS Churn Rates survey, the average churn rate among startups is between 4 to 5% per month, which would be unsustainable for other types of companies.

In general, companies that work with long-term contracts tend to have lower rates.

 

What is the difference between Churn and Revenue Churn (or MRR Churn)?

A lot of people don’t know, but there is a small difference between churn and revenue churn, also called MRR churn or Monthly Recurring Revenue.

Churn is related to the number of cancellations your business has had in a given period.

Revenue churn encompasses the financial losses generated by these cancellations.

Revenue churn can be obtained by dividing the lost revenue in the period by the total revenue at the beginning of the same period.

Like traditional churn, revenue churn should be closely monitored, especially when you offer different products or service packages.

To help you understand better, let’s look at an example!

Imagine that you own a marketing agency and offer your clients 3 types of monthly plans for managing social networks:

  • Basic: $102.00
  • Intermediate: $410.00
  • Advanced: $718.00

Comparing the values ​​above, it is clear that losing 3 customers from the advanced plan ($718.00) can generate a greater financial loss for your company than losing 5 customers from the basic plan ($102.00).

In addition to helping you keep your business healthy in the short, medium, and long term, tracking revenue churn can provide the basis for your customer retention and acquisition strategies.

Remember that, to have a broader view of your business performance, you must monitor both churn and revenue churn.

 

Is there negative churn?

There is negative churn, however, this does not mean that your business did not suffer from any cancellations in the period.

Negative churn means that the percentage of lost customers was overcome by the increase in revenue, generated by the increase in sales for the current base.

Going back to the previous example, imagine that 5 customers who used the intermediate plan ($ 410.00) canceled the services, totaling a loss of $ 2050.00.

But, after these cancellations, another 5 customers who used the intermediate plan ($ 410.00) decided to migrate to the advanced plan ($ 718.00).

In this case, even after losing 5 customers, your billing increased due to the upgrades.

This example proves that increasing the average ticket is an effective way to reduce the financial loss, that is, revenue churn.

 

How to identify churn?

Now that you know how to measure churn, how about finding out how to identify it in your business day-to-day?

Below, we’ve brought some practical tips that can help you with these tasks! Check out:

 

Analyzing the upsell

Do you know what upsell means?

Upselling is nothing more than a sales technique focused on increasing your average ticket, offering the possibility for the customer to purchase a product or hire a service with greater added value.

In general, companies with a low churn rate tend to be quite successful with this strategy.

Therefore, if you do not see ways to apply upsell in your company, start monitoring this metric closely.

 

Asking for feedbacks

Feedback from your customers is a valuable tool to control and reduce the churn rate of your business, as it makes it possible to understand in depth each need and desire.

When you know your audience, it’s easier to improve your products and services, as well as improve the customer experience as a whole – actions that can prevent cancellations.

Capturing feedback may seem difficult, but with the support of technology, this task becomes easy.

 

Reasons that lead to churning

There doesn’t have to be a single reason why a customer unsubscribes. There could be a series of small, commonplace factors that generated this dissatisfaction.

But, not always the factor needs to be within the company that provides the service.

The client may, for example, have gone through a restructuring process and whoever decides within the company may have a preferred platform to work on.

Either the client’s business simply “broke down”, or else it is undergoing drastic cost-cutting.

These are external, macro reasons and the service provider cannot act directly to avoid this.

Below are some of the most common reasons why churning occurs. Internal reasons, from who provides the platform. These, yes, can be measured and corrected.

Check out:

 

1. Selling to the wrong customer

A very common mistake is to sell only to the target audience and not to the persona of the business.

There is a difference between the two and it needs to be made clear. We count, of course, that you are not selling to someone who simply has nothing to do with your business, right?

That said, the difference between the two exists. There may be confusion and think they are the same thing, but it is not true.

Let’s explain using an example of a SaaS company that sells a platform for financial control for startups.

  • Target audience – Entrepreneurs, aged 20 to 35, who want to control the finances of their small business
  • Persona – Victor, 25 years old, single. He owns a startup that helps companies produce content for inbound marketing. His objective is to be able to control the financial flow of his company, which today is done via spreadsheet, to concentrate efforts and investments to grow.
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Did you notice the difference?

If you only sell to people who might be interested in your business, the chance of churn is much higher.

It is necessary to map the business persona (which is different from the ideal customer profile ) and focus efforts only on prospecting this type of person.

 

2. Not delivering the amount that was promised

Promise and not deliver. What a fatal mistake – but a very common one in many companies that need to improve their results every month.

It is recurrent, to guarantee the sale to the prospect, to say that the platform addresses 100% of the customer’s pain points when, in fact, it falls far short of that.

The deal can be closed, the sales commission paid… but the problem will soon appear.

Sooner or later the customer will realize that the purchase was in vain. That the tool did not correct its problems on a day-to-day basis – at least, not completely – as promised.

That consumer will immediately become dissatisfied and request to cancel their subscription.

 

3. Zero concern for customer success

Care for customer success takes place at every touch point – from strategy to lead generation, all the time.

But it occurs especially in post-sales through onboarding – which is the moment customers enter.

What practices are necessary for the consumer to have the best possible experience with the brand?

Going back to SaaS companies, they certainly tend to provide the customer with all kinds of information about the contracted platform.

Leave the customer without,

  • content that helps you better understand the platform;
  • support for questions and immediate needs;
  • the feeling that the company cares about him

It’s a free path for him to seek, in the competition, everything you left aside.

4. Negligence of details

It’s cliché, but true – especially in the relationship between the brand and the consumer: the details make the difference.

Even more so when companies work with plans with a high average ticket and so-called “enterprise” plans – selling to large accounts.

The latter, by the way, is quite demanding. After all, he will spend more money on hiring the solution and wants – and deserves – for everything to go smoothly.

And that’s where the details that can’t be neglected come in.

  • Bugs in the system;
  • Delay in loading screens;
  • Misconfigured screens;
  • Features changed without prior notice;
  • Bureaucratic processes;
  • Delays in supports, etc.

These are all factors that lead a customer to churn. If it’s an enterprise subscription, you can already imagine the financial impact it will bring, can’t you?

 

5. Price increase

Raising the price is one of the reasons that can cause customer evasion to occur. It can be for several reasons, from the company’s need to earn more to a change in the customer profile.

It doesn’t matter.

The fact of raising the price will inevitably generate a reaction in which he is already a user of your solution. Some will understand, accept, and stay with you.

Others will look at the competition, analyze it, and see if it delivers what you deliver for less. If yes, they will leave. If not, they will probably stay.

But if you’ve raised your price without delivering value to customers, then prepare for a record churning rate.

 

6. Changing customer needs

If your business changes, the customers can change too. And your platform may fall short of current customer needs.

He may as well need something bigger, more complete, or otherwise. Business may have slowed down and it no longer makes sense for him to have such a robust tool.

There, the service becomes unnecessary – at least for the current moment.

This is a churning customer, and it’s not necessarily your fault.

However, it is necessary to map this user’s profile and see if there are others similar in your client portfolio.

It is possible to work on content that helps you see the value that your platform has, for example.

This will make him think a little more before requesting the cancellation.

 

When does churn become worrisome?

As we mentioned earlier, no manager likes to lose clients, but this is part of the dynamics of all companies.

Churn becomes a concern when a considerable number of customers cancel early. For example, up to 3 months after closing the contract.

These cancellations are often motivated by problems in the qualification stage, misaligned expectations, and lack of quality of the product or service offered.

Keeping a close eye on your churn rate is essential to spot these issues and act to fix them quickly.

Depending on the number of lost customers, it may be necessary to rethink your customer prospecting and retention strategy, to avoid further losses.

 

The less, the better: How to avoid churn in companies?

We listed some reasons in the previous paragraph. Now, how to act, internally, to avoid churn within the company?

The focus, almost obsession, needs to be to try to reduce this rate to zero.

Without, obviously, committing madness by committing resources (promising discounts), or displacing professionals for this.

Correction is from the inside out. Improvement of processes to communicate value to the market.

Here are some actions to reduce churning as much as possible:

 

1. Understand the whys

The basic starting point – and you would certainly agree – is to understand why cancellations happened.

Therefore, whenever a customer asks to leave, ask why. Sometimes it’s a simple reason that can be easily fixed.

But, without asking the consumer, it is impossible to identify patterns and reach these gaps, do you agree?

 

2. Qualification of leads

Many churns can simply occur due to a pre-sales gap when qualifying the generated leads.

The customer may even fit into the business persona and understand that the solution makes sense but simply wasn’t ready to buy.

That’s why it’s so important to structure a pre-sales team focused on “empowering” the lead. Leaving you safe and confident that the right decision is to accept your company’s proposal.

To help with the mission, produce content that is relevant and helps with this mission.

Texts, infographics, eBooks, and especially videos that better explain the platform, features, and everything that involves your application.

Then, at the time of the call to qualify, the SDR has the ammunition to be able to qualify the lead and schedule an appointment with the inside sales seller.

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3. Sell Value

Why is the tool so good? What sets it apart from competitors? Why is hiring a success and will it solve the client’s “pains”?

These are questions that, in the sales pitch, need to be answered by the seller. But actively, to have a greater power of persuasion.

The seller also needs to use mental triggers that highlight what is good about the service offered.

Perhaps the speech, within a normal negotiation context, does not have as much impact. So some sales techniques are essential right now.

4. Structure the success area

Selling doesn’t mean stopping having a good relationship with the customer. Quite the opposite, the customer success area is essential and needs to exist within companies.

After all, there is no point in mapping and understanding the reasons for churning if nothing is effectively done to avoid it.

A professional in this area will anticipate problems, as he will be in constant contact with customers.

Knowing what they need, he will act accordingly to always ensure the best experience for the user.

The customer has subscribed to a service, say software, but has not accessed his login for 2 months.

Garlic is wrong, isn’t it? There may be difficulty in using the platform and the cancellation can happen at any time.

It is in this opportunity, being proactive, that the success area will come into action, available to give the customer the necessary subsidy for him to continue using what he signed.

This is focusing on the user experience. It means being proactive, going after the customer, showing how important he is, and delivering all kinds of information so that he stays with the company.

 

5. Use technology to your advantage

To help measure the churning rate, and identify patterns, and actions to be taken, it is necessary to have technology in your favor.

An effective action is to set up a specific churn funnel within your CRM system. Provided, of course, that it doesn’t limit you to just one pipeline.

Within it, set up the necessary steps to contact the customer who is a potential opt-out.

Leave emails configured for an initial approach to marking an agenda to apply the solutions mentioned in the item above.

Then perform the follow-up. Ask if there are still doubts and try to clarify them.

An alternative, too, is to create a stage for some kind of negotiation – but this will depend on each company, and its results, among others.

In it, you can propose some discount on an annuity, for example, seeking, thus, the loyalty of this customer who was about to leave.

 

6. Align expectations

To avoid a high churn rate, you must align your customer’s expectations from the first contact, as dissatisfaction is one of the main reasons that lead to cancellation.

Before closing any deal, make sure you are capable of meeting the customer’s needs and, if possible, exceeding their expectations over time.

False promises contribute to increasing your churn and hurt how the public sees your brand.

Therefore, one of the best ways to retain your base and avoid a high churn rate is to be honest at all stages of the funnel, from the first contact to closing the sale.

Invest in clear communication and train your salespeople to assertively qualify your leads. Do not forget that this phase is crucial to confirm whether the company can offer what the potential customer is looking for.

 

The after churn

Even if you offer good proposals and conditions to reverse the cancellation, your client may simply not accept them.

This means that you and your team must be prepared to face this scenario.

After churn, the best thing to do is respect the customer’s decision and keep the door open for a future business opportunity.

After canceling, don’t forget to collect feedback to understand the main reasons that led you to make that decision.

The problem may not be in your product or service but in a time of financial difficulties. You can only find out by asking the customer!

Check the checklist below to act after churn:

  1. Try to understand the reason for the cancellation;
  2. If relevant, offer a proposal for the customer to stay with you;
  3. If not, respect the decision and proceed with the cancellation process;
  4. Collect feedback to have a clearer view of how the customer feels about your company and the applied process;
  5. Analyze feedback and apply improvements to your operation, if necessary.

 

Count on technology to lower your churn and increase your sales

Without the support of technology, it is very difficult to monitor your churn and, consequently, take the necessary actions to reduce this rate.

You can create a churn funnel and set up specific actions to try to reverse potential churn.

You can set up emails and even schedule an appointment with the customer to better understand their pain.

PipeRun also helps you negotiate assertively with your customers, creating possibilities for discounts and special conditions.

Want to lower your churn rate and boost your sales? Talk to one of our consultants today!

Conclusion

As you just saw, closely monitoring the churn rate is crucial to keeping your business healthy.

After all, dealing with a high number of cancellations in a short period can harm your company’s growth and your brand image.

As with many performance indicators, we recommend monitoring your churn rate frequently.

If your company is suffering from high churn, start applying the best practices we share in this content today.

For more tips like this, keep following our blog!

 

FAQ – Frequently Asked Questions

See the most common questions about churn:

 

What is churn?

In short, churn is a metric that represents the number of customers who decide to stop buying your product or cancel your service.

 

What is churn for Customer Success?

Churn for Customer Success (CS) is a metric that indicates the number of customers that the company has lost in a given period.

To prevent this number from increasing over time, it is essential that the CS team closely monitor the health of the base.

 

What causes churn?

Several reasons cause churn, such as poor customer service, loss of interest in the company, false promises, low-quality products and services, bureaucracy, inefficient post-sales, and even personal reasons, such as financial difficulties or changes in hiring objectives.

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