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What is Churn Rate and What Should You Do to Lower It?

What is churn rate?
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Subscription businesses are dependent on recurring revenue. But before you can focus on your customer retention strategies, you need to know the answer to the following questions: what is churn rate, how do you measure it, and how can you manage it?

What is churn rate?

Churn rate, also called customer churn, is the rate at which customers stop doing business with a brand.

For SaaS and other subscription-type businesses, churn rate is a critical metric to track. Since customers pay on a recurring basis, revenue can take a hit when the churn rate increases.

A higher churn rate means you’re losing more customers.

The closer your churn rate is to 0%, the better you keep your customers.

How do you calculate churn rate?

To calculate the churn rate, just follow these simple steps:

  1. Get the number of customers you lost during a specific period of time. It can be a month, a quarter, or a year.
  2. Get the number of customers you had at the start of that specific time period
  3. Divide the first number by the second number
  4. Multiply by 100%

Here’s an example:

At the start of the month, you had 500 subscribers. 

By the end of the month, you had 450 subscribers, meaning you lost 50 customers during that month.

Divide 50 by 500, and you get 0.1. 

Multiply 0.1 by 100%.

Your churn rate is 10%. 

While calculating churn rate isn’t that difficult, it’s important to do it regularly. In fact, it should be one of the metrics that businesses should stay on top of.

Why should you calculate and regularly keep track of your churn rate?

Put simply, churn rate affects other important metrics. Being updated on your churn rate will give you an idea of how your business is doing even if you don’t examine all other metrics one by one.

Churn rate affects these three other metrics:

  • Monthly recurring revenue (MRR)
  • Lifetime value (LTV)
  • Customer acquisition cost (CAC)

MRR shows the long-term viability of your brand. So when your customers leave and churn rate increases, your MRR goes down.

Customer lifetime value (LTV) measures the total income that your business can get from one customer. When your customers churn, the LTV also decreases because the additional revenue that they could have brought into your business suddenly cancels out.

Finally, CAC goes up when your churn rate goes up. That’s because when you lose existing customers, you’ll have to get new customers, which usually involves additional costs. Plus, research shows that it can cost five times more to attract a new customer compared to retaining one. 

So by reducing your churn rate, you can lower your CAC, increase your customers’ LTV, and boost your MRR.

Additionally, tracking your churn rate also helps you:

  • Evaluate the current health of your business and forecast future performance
  • Get a deeper understanding of your customers’ behavior—what makes them leave and what makes them stay
  • Observe patterns like characteristics of customers who churn so you can adjust your retention strategies
  • Analyze and plan out costs needed for retention efforts
  • Plan out continuous and systematic improvements to lessen churn

Why do customers churn?

Voluntary churn is when a subscriber decides to leave your SaaS, service, or membership site. They go to their account settings and cancel their membership.

Meanwhile, involuntary churn is when a subscriber cancels without meaning to.

Reasons behind voluntary churn

When your customers decide to leave, the reasons usually revolve around how your product or solution serves your customers. Here’s a quick list of some reasons for leaving:

  • Changes in prices or plans that the customers don’t approve of
  • Personal reasons or changes in preferences
  • Poor UX and UI design
  • Users’ expectations were not met
  • Lackluster onboarding experience
  • Frustration from technical issues or customer support

How does involuntary churn happen?

Involuntary churn occurs when payments fail due to the following reasons:

  • Credit card filed in the system is expired
  • Credit card is declined due to insufficient funds
  • Card or online wallet is already at maximum spending limit
  • Possible fraudulent activity detected

Question for you: how much revenue are you losing due to voluntary and involuntary churn?

If majority of churn is voluntary, you might need to take a step back and reevaluate your product or service, its features, and how it relates to your target market.

But if the majority of churn is involuntary, then that means you can actually get your customers and lost revenue back.

4 ways to lower your churn rate

As you monitor your churn rate and other metrics, here are some strategies you can put in place to start combating customer churn.

1. Focus on customer retention

This doesn’t mean you should stop all acquisition efforts, but that you should also allot resources towards your retention strategies.

According to Gartner, 80% of your future revenue will come from 20% of your existing customers. Also, the probability of selling to an existing customer is higher compared to a potential one.

What does this mean? While new customers are always welcome, it’s important to know that they’re not the endgame. Ultimately, when you continue to show your subscribers the value that your product or service brings, they will stay. 

Here are some of the most popular retention strategies to help you get started:

  • Grandfather existing subscribers at the current price if ever you decide to increase prices
  • Implement customer loyalty programs to encourage continuous engagement
  • Create more opportunities to connect with them (ex. Newsletters, BFCMs, etc.)
  • Give new customers a great onboarding experience

2. Improve your UX and UI

UX (user experience) design refers to the overall journey of the customer and how easy it is for them to use your product, or figure out how to use it. Meanwhile, UI (user interface) design refers to the overall aesthetic of your SaaS product. This includes typeface, graphics, and positioning of certain elements.

For SaaS businesses, UX and UI design play important roles in retaining customers. In fact, poor UX causes 70% of online businesses to fail. If your customers can’t use your product, they’re going to bet frustrated. 

Invest in UX and UI right from the get go, and continue to make improvements based on actual feedback. 

3. Improve your customer support

Poor customer service can increase your churn rate—30% of Americans shared that they will think about switching brands after just one bad experience. Meanwhile, businesses that are able to provide great customer support can generate 5.7 times more revenue. 

What does this mean? It means that the quality of your customer support contributes to retention. So don’t take it for granted. Invest in manpower, tools, and strategy. And if it becomes too much for you to handle on your own, outsourcing customer support is always a viable option. 

4. Implement a system to recover failed payments

Ignoring failed payments means you have accepted defeat. Remember that failed payments result in involuntary churn—your customers didn’t leave your brand on purpose. You can actually attempt to recover your lost revenue.

Here are two quick strategies for failed payment recovery and winning your subscribers back:

  • Set up a dunning sequence. It’s an automated workflow usually via email, SMS, or phone. The sequence aims to recover the lost revenue by informing the customers about what happened and what they need to do next to reactivate their accounts. 
  • Work with failed payment recovery specialists. Recover Payments by LTVplus offers an all-in-one solution to recover lost revenue from failed payments. This includes personalized strategies and execution, as well as an app that can be integrated with your payment system for tracking. 

Wrap Up: Stay on top of your churn rate and get your customers to stay

Growing a business is so much more than focusing on marketing, sales, and the number of new leads you get every week. Customer churn is a real threat to subscription businesses, online courses, and SaaS products—knowing how to manage it and lessen it will do wonders for your revenue and business bottom line.

Despite having effective retention strategies in place, involuntary churn can still occur. When this happens, having a solid failed payment recovery process will help you recover your lost revenue. Schedule a free consultation with one of our specialists and find out how to begin.

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Regina Ongkiko

Regina Ongkiko

Regina is a freelance content writer for B2B, tech, and SaaS companies. She is passionate about creating content that provides value and impacts businesses. You can read more of her work at reginaongkiko.com. She loves getting her inspiration and ideas from the great outdoors.

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