Every business would like to know why their customers cancel, and every business wishes they could predict when customers are on the verge of cancelling. Then every business could be proactive in saving and satisfying their customers, right? Rather than reactively looking at their churn metric to see how much business went out the door.
Unfortunately, just looking at the churn metric doesn’t offer much information. It certainly doesn’t suggest any strategies for being proactive. But cracking open the metric, going a bit beyond reporting to analytics, will reveal a wealth of information about your customer base, the customer lifecycle, and why or when one might cancel.
Here are some examples of churn analysis that will empower you and your team to satisfy more customers, reduce churn, and grow your business.
Go beyond customer count
Measuring churn by the number of customers who cancel is the most basic way — and also the way that yields the least insight.
Tracking a crucial part of your business like churn with such a one-dimensional metric is unwise and ultimately leaves you at a great disadvantage. Why? It doesn’t expose any problem areas or reveal opportunities for your business! It doesn’t guide you to make smarter decisions. It just tells you that you lost X number of accounts.
Getting more advanced with your churn analysis doesn’t have to be complicated, though. There are several simple ways to look at your churn that teach you much more about your business. But let’s start with a baseline change, the necessary way you should measure your churn rate.
As a first step, you should measure your churn by revenue, not absolute customer count.
Customers are not all created equal, as far as how much money they each bring to your business. Some are bigger with more users, some are on a premium plan. With that in mind, doesn’t it make sense to measure churn by how much revenue each customer represents, instead?
With MRR Churn, you can get the most accurate overview of how much business you are losing.
But there is still a way to milk MRR it for even more insight, to get an even clearer (and more raw) picture of your overall churn. If you want to dig a little deeper into best practices, read on about the differences between Net Revenue Churn and Gross Revenue Churn.
Even smarter churn analysis
Identify trends embedded in churn by going a bit further with your analytics. Once you’ve spotted trends, you can take steps toward targeted solutions. This is a perfect example of working smarter, not harder. No need to try to tend to your whole customer base, if you can find the root of the problem in a certain niche or segment. Or, as the common metaphor goes, if you can pinpoint the leaky hole in your bucket!
Let’s explore a few different angles of churn analysis and what you can learn from each one.
“How many customers cancel even though they like our product?”
“What percentage of customers churned simply because their credit card expired?”
Not all churn is created equal. Customers cancel for different reasons and in different ways, and it’s helpful to distinguish between these the major differences.
Active churn: The customer chose to cancel your service. There are a multitude of reasons why a customer might cancel, from internal business changes to choosing a competitor to simply not understanding the product. And this segment of churn is likely where you want to focus most of your energy.
Happy churn: The customer cancels despite a positive experience with your service. Typically, these users finished using your product for their specific use case, be it a campaign, event, or similar short term project. One way to identify happy churners is to look at what percentage of cancelled accounts reactivate at a later date — or simply to ask your customers why they cancelled.* (More on this later!)
Passive churn: The customer didn’t bother to update their credit card information. They slipped into cancellation. This segment of churn is easy enough to reduce by implementing safeguards around payment. A great option is to offer a Direct Debit payment option, using a specialist provider such as GoCardless. You don’t need to worry about expired or incorrect credit card details and chasing down customers for an update. Direct Debit offers by far the lowest failure rates of 1-3%, compared with 5-10% for cards. GoCardless is the Direct Debit industry leader on failure rates with 0.5%.
A second option is to set up a dunning system, by email or SMS or however you communicate with your customers. This proactive outreach to ping users and collect payment is proven to prevent some passive churn.
“Which types of customers are we losing?”
“Do we retain certain types of businesses better?”
Analysing churn by vertical is mainly useful for B2B businesses. It could be crucial to understand if your service is satisfying some types of businesses better than others. If churn is high in certain target industries, you’ll want to dig into it. You can investigate what aspects of your product are “not a fit” for that market. Conversely, if you notice churn is very low in key industries, you can double down your sales and marketing efforts there and reap the benefits.
“Which service plans are losing the most customers?”
“Do we retain more on the basic plan, or the premium plan?”
When you offer various service plans or tiered pricing, it’s worth it to evaluate churn on this point. Customers will cancel out of, or contract from, a service plan when they don’t see the full value. If a certain plan is losing more customers than average, dig into it to figure out why these customers aren’t committed to your service. You may gather information and feedback to inform Customer Success or even Product. Perhaps the features available at that pricing level aren’t used or understood, perhaps the user can’t even find the features that promise to deliver the plan’s value. Whatever the cause, you can design a solution to keep this particular segment of customers on board.
“At which month in their lifecycle are customers most likely to cancel?”
“Did last quarter’s pricing change have any effect on churn?”
Cohort analysis is a key part of any complete look at churn. The beauty of cohort analysis is that it holds insight into the general nature of your business as well as pinpointed information around specific events or decisions.
An area of broad insight could be customer lifecycle trends. For example, you might notice consistently above-average churn in month 5. So you know that in a customer’s fifth month on board, they are high risk for churn. Equipped with this knowledge, you can confidently focus more customer success effort around months 4 and 5 to prevent cancellations before they happen.
An instance of specific insight could revolve around any business change, such as new pricing plans, a new feature release, etc. With cohort analysis, you can see how this decision impacts Is the cohort of customers who came on board after those changes retaining better or worse than the original, “grandfathered” customer base?
“Which marketing channels bring us leads that are most likely to cancel?”
“Did last quarter’s new acquisition strategy attract more successful customers?”
Analysing churn by marketing channel is an excellent way to reform your strategy at the outset of customer acquisition, rather than focusing on later stages of onboarding and customer experience. Find out if your efforts are effectively treating a symptom — unhappy customers — rather than the illness — a low-quality, off-base marketing channel. Correcting any bad-fit marketing channels sets the stage for higher retention and less strain on the customer success team.
*If you want to supplement your churn analysis with some old school customer research, there’s a tried-and-true method you could test out: customer exit surveys. Ask customers who recently churned whether they’d be willing to answer some questions about your product, the service, and their decision to cancel. Your response rate might be low, but you’ll gain feedback and insight you wouldn’t have otherwise!
GoCardless offers a simple, low-cost Direct Debit solution that’s quick for you and your customers to start using. GoCardless helps your business to reduce passive churn rates and spend less time chasing customers to update expired payment information.
For more information about GoCardless, contact the team, or call 020 7183 8674
This post is written by guest author Annie Musgrove of ChartMogul. ChartMogul is an analytics platform for subscription businesses, which helps you monitor and analyse key revenue metrics like churn. Connect your Stripe, Braintree, Recurly, Chargify or PayPal accounts, and start building a better subscription business.