Customer Churn: A Complete Guide (2021)

Last Updated: April 26, 2021

You might be hitting good sales revenues year on year, but is your profitability increasing by the same proportion? If not, it’s time to check on your churn rates. Customer attrition has a significant impact on your business as it lowers revenue and profits. 

Consider the following data:

  1. New customer acquisition costs 6 to 7 times more than retaining an existing one. (Bain & Company)
  2. Not only are satisfied customers less likely to cancel a subscription, but they are also willing to upgrade or add services to their existing package. (McKinsey)

In this blog, we will look at what customer churn is, the types of churn, and ways you can stop your customers from turning their backs on you forever.

What is Customer Churn, and how to calculate it?

Customer churn is a measure of loss of customers or loss of revenue to the business during a given period. Churn rate can be defined in various ways as per the dynamic nature of subscriptions and business model. Most of the SaaS companies define churn rate as follows:

  • Total number of lost customers during a specific period
  • Percentage of customers lost compared to total customer count during a particular period
  • Recurring business revenue lost
  • Percentage of recurring revenue lost

Churn Calculation:

churn rate = (number of customers at the beginning of the month) - (number of customers at the end of the month)/(Number of customers at the beginning of the month)

Let’s say you have 1000 customers at the beginning of the month, and you lost 20 customers in the month, then your churn rate is 2%.

This is just one of the many ways to calculate the monthly churn rate.

Generally, high churn rates mean a lot of customers aren’t satisfied with what they’re getting. However, the churn rate should not just be a number or a percentage, but it should instead be a measure that can tell us what’s needed to improve our business and profitability. We can factor in churn rates to measure different objectives like the company’s health, Customer Lifetime Value(CLV), customer retention, and so on.

Now that you are aware of what churn is and how to compute it let’s understand the various types of churn. 

Revenue Churn vs. Customer(Logo) Churn

When people talk about churn, they mainly refer to Logo churn, but it’s also essential to look at the revenue churn.

Customer(Logo) churn:  Customer churn rate is the measure of how many customers cancel or fail to renew their subscriptions during a given period.

Revenue churn: A measure of how much revenue is lost by customers not renewing, downgrading, or canceling during a given period.

Revenue churn can be classified as Gross and Net revenue. Gross revenue calculates the total lost revenue due to cancellation, whereas net revenue factors in upgrades and cross purchases from existing customers.

Let’s assume your business generates $50000 at the beginning of the month and reduces to $45000 at the month-end. However, the company earns $10000 on upgrades. Then the net revenue churn rate can be calculated as:

Revenue churn = (Revenue at the beginning of the month - Revenue at the end of the month - Revenue from upgrades)/Revenue at the beginning of the month

You can notice a negative churn rate here cause the loss of revenue of $5000 is compensated by customer upgrades($10000) during that period. One of the most potent ways to build a SaaS growth engine is through net negative Monthly Recurring Revenue(MRR) churn. 

Voluntary vs. Involuntary Churn

Voluntary churn is the loss a company incurs due to the customer directly refusing to continue with the service offered due to a specific reason. The reason can be attributed to a problem lurking within the product or the service engagement that makes customers unhappy. 

Involuntary churn is the passive rate when a customer loses their account and membership to a service unintentionally. This can occur due to many seemingly small reasons but can slowly eat away revenue streams and profits.

Steps to Reduce Voluntary Churn

Even though it’s impossible to get the churn to be zero, we can try to maintain a “good” or acceptable churn rate. Many companies make the mistake of waiting until the actual moment of attrition to deal with churn. But churn can be identified and mitigated early with proactive customer retention strategies.

Identifying the stage of the customer journey is important for planning customer retention strategies. So let’s start by understanding the stages of retention:

Early-stage customer retention: How to get customers to use your product more than once?
Mid-term customer retention: How to get users to build habits around your product?
Long-term customer retention: How to make your product indispensable?

Early-stage customer retention

The first few days are the most crucial for retaining customers cause that’s when most attrition happens. Customers face what we call the post-purchase dissonance: a phase during which they constantly assess their purchase to determine if they made the right decision. At that point, we need to make sure that customers get the value they are expecting and hence increase their retention rates.

1. Provide better onboarding

Identify customers in their first week of purchase and ensure that they are onboarded and have started interacting with the product. While the sales team pitch the product with a specific use-case, the onboarding specialists can set up the workflows and processes based on the customer use-case.

Include these tips while planning for a smooth onboarding process:

  • Have an onboarding specialist to acquaint customers with the new app and also be their point of contact for any help.
  • A part of marketing efforts could be to create an email sequence or drip campaign that spans about two weeks. Provide getting started guides and educational resources via email drips.
  • Include a product tour or video for the customers to get started. 

2. Engage and educate your customers

Did you know?

“Providing customers with short tutorials on product features before hanging up can reduce churn by 6%.” HBR (Harvard Business Review)

Amidst immense competition, it is tough to retain customers merely by your one-time sales pitch. You need to constantly update your product, proactively monitor feature roadmap and feature requests, and more importantly, talk about the progress. 

Sending newsletters or product updates, educating customers through self-help portals, implementing social listening, monitoring software review portals, etc., are some of the ways to engage with your customers. 

Creating exclusive content in videos, blogs, case studies, help text, product tours, gifs, etc., can help educate users. Customers today not only want knowledge about using the product but are also keen to learn about the problem you are trying to solve. 

3. Provide top-notch customer service

Did you know?

“33% of Americans say they’ll consider switching companies after just a single instance of poor service.” – American Express.

Once customers are onboarded, they are going to reach out to support for any help thereafter. Thus, customer service is easily the most obvious method of keeping customers by your side. According to a Customer Experience Impact Report by Oracle, the two main reasons customers churn are incompetent staff and unbearably slow service.

Equipping support staff to handle customer queries politely and resolving their questions in the shortest time possible should be the customer service department’s goal.

Pro Tip:

To power your support team never to miss a ticket, companies can use customer support software like help desk, live chat, or chatbots.

Mid-term customer retention

These are the current customers who have completed at least a month and continue to use your product. You need to make sure that they stick to your product and get accustomed to using it to improve their business.

4. Keep the app simple and usable

tips to use the app

Customers purchase a product to make their life easy. Less learning curve will result in higher app usage, and better engagement will result in better stickiness.

There is a phenomenon called feature blindness, wherein a customer cannot locate certain core functionality within your app. Such experiences can be frustrating for customers every time they use the app. So there is an utmost need to design the app for smooth usability and a great user experience.

The GIF here shows how HappyFox Help Desk provides suggestions within the app, shortcuts and tooltips to customers for locating required functionality with ease.

5. Pay attention to complaints

No problem is small. Every issue has a workaround and a root solution. You have to check if your team is providing workarounds until the problem gets bigger or if every complaint is drilled deep enough to identify the root cause and improve the app.

6. Ask for feedback often

Customers won’t tell you directly what’s wrong and what’s right about your product. They will leave you and go before you realize what went wrong. Carefully timing your surveys can help you get an idea and reason why your customers love you. Short surveys can be sent in various ways: 

  • A pop-up within the app
  • Rating and feedback collected after solving a customer query
  • A quarterly email for completing a survey

Long Term customer retention

Long-term customers are those that have crossed the new customer stage and have been using your product for quite a while. Let’s see what we can do for this segment.

7. Define your most valuable customers

This is how one of HappyFox’s customers celebrated their love for our product and service with a HappyFox cake! 

From the customer: “Thank you for your valuable support and dedication to realize this vision with us! We have a great solution now and see the potential to make it even better with you and your team.”

All this is possible when you do not just help the customer progress, but you build a lasting customer relationship. 

Always identify high-value customers and take extra efforts to customize your products and services for their needs. Why? 

These are the customers you want to keep the most. Valuable customers have to be treated with extra care because they bring in the biggest revenue. They can get you great connections and also become ambassadors of your brand. The churn of a high-paying customer can hit your revenue and can jeopardize your profit metrics.

8. Know who is at risk 

Do you check how healthy is the app usage of your customers? Do you analyze feedback to predict customers who are just going to trip off?

Customer behavior can easily help you with churn prediction. Inactive customers are high-risk customers. They might not be complaining, but they at the risk of churning. 

Having a specialized team for following up with such accounts can help you keep the churn rate under control. Providing discounts or special offers to such accounts can also help.

9. Encourage customers to upgrade to annual contracts when possible

In a highly competitive market, customers usually prefer to give a monthly commitment to a product or a service. But from a company standpoint, it makes sense to get as many annual subscribers as possible because the longer the time frame for using your application, the more likelihood for the product to be a part of the customer’s routine.

To encourage annual contracts, companies can offer sales representatives better commissions for yearly closure. Pricing can be more annual contract-friendly to attract annual subscriptions.

10. Do a churn analysis and improvise

When customers are leaving, a feedback survey can help you get information about the reason for churn. You can then split them into categories and work on those pain points to not repeat the same mistake. Some of the most common reasons could be:

  • Price
  • Mismatch with customer expectations
  • Poor customer service
  • Unavailability of a specific feature
  • Inactivity or fewer performance upgrades
  • Increasing competition

Causes for Involuntary Churn

causes of involunatry churn

Most businesses pay attention to voluntary churn but have you ever thought about how many customers passively fail to renew their contract, and we just let them go.

Let’s look at how involuntary churn occurs and how to control it before it’s too late.

Credit Card expiration 

This is a common issue, and you’ve probably had this happen to you in the past. Your card will expire, and your card issuer sends you a new one a month before your current one expires. You activate it but forget to update it on all the subscriptions you pay for.

This is exactly what happens with your customers from time to time. And unfortunately, the charge won’t go through until your customer updates their card on file.

Wrong Billing information

There are cases where customers relocate and fail to update the new credit card details in the various apps they use. This discrepancy in the billing information can automatically lead to the refusal of payments via cards.

Theft/Loss of cards

Again a very common problem is the theft or loss of cards which leads to non-payments or non-renewals. An important thing to note here is it might take quite some time for the customer to issue a new card and update his/her details.

Maxed out cards

This situation occurs when the credit card limit of the customer is exceeded. Auto-renewal of the services they paid for then stops and therefore becomes a major problem.

How to prevent involuntary churn?

Involuntary churn can be prevented by making the entire payment, billing updation, and reminder process as automated as possible. 

Following are some steps that can address the above causes of involuntary churn.

  • The easiest way to prevent involuntary churn caused by expired credit cards is to give your customer a heads up before the card expiry. There are apps like “Recover” that can help you notify customers via email about the card expiry well in advance, insisting they update their billing information. 
  • Use SMS/Mail APIs like Twilio, Nexmo, etc., that can be integrated with the billing system and notifies the customer via SMS. 
  • Sending in-app reminders/follow-up calls well in advance to make sure that the customers do not default. 
  • Give customers a grace period if their payment fails.
  • Keep track of successful and failed transactions.
  • Choose a payment platform with Smart Retries in real-time and scheduled retries. If the payment doesn’t go through due to some technical glitch, a smart retry logic can help. Stripe, for example, enables you to set the retry frequency if the payment fails.
  • A periodic revival of billing and personal information of customers as part of updating the database can also ensure low soft declines. 

Key Takeaways

It’s the loyal customers that make a business successful. Customer attrition is the last thing any business wants, and hence understanding, measuring, and building a framework to reduce churn is paramount to any company’s success.

Our goal was to uncover the why behind churn and how to prevent customers from losing interest in your product and eventually leaving you. More importantly, we discussed involuntary churn and how we can prevent unintentional churn.

Realign your company’s churn strategy today by applying the tips and tricks outlined above.

Avoid Customer Churn with exceptional Customer Service

We cannot stress enough how important customer service is to customer success. Based on the complexity of your product, each customer can contact support multiple times and would expect quick response time and speedy resolutions to stay loyal to your product and brand.

You need to make sure that your team lends an ear to your customers across various support channels and is well equipped to troubleshoot issues within the SLA. HappyFox provides a suite of products that can help you connect with customers, self-serve, automate support workflows, analyze support performance and unify support across channels to never miss a customer request.

Want to give a spin to HappyFox for improving support and reducing customer churn? Get a free demo from our product specialists today!