The growth killer. What is churn? - Reduce Customer Churn

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Before reading this article, here is quick background into me, the author.

My name is Phil Carr, and I have successfully started, built, run, and exited high-performing SaaS businesses. My previous business was a B2B fitness company called My PT Hub. We became one of the biggest fitness software companies in the world for personal trainers and fitness professionals. Within 5 years, the team and I grew our customer base to over 1.5 million and signed up a new user every 30 seconds. In 2020, My PT Hub was acquired by one of the world’s biggest eCommerce platforms, Evercommerce (backed by Providence Equity and Silverlake Partners).

One of My PT Hub’s biggest successes was its ability to retain paying customers for a long period of time (high LTV). Our churn rate never exceeded more than 3% (avg of 1.45%), when the industry average for SaaS sits around 8-10%.

This blog aims to explain what churn is, why it’s essential, and what you can do to help reduce it. I hope you find it informative and helps to increase your customer retention levels.

What is churn?

Churn (sometimes known as the rate of attrition or customer churn) is the name given to the number of customers who cancel, leave or stop using a business’s product or service. Churn is predominately used where the business model has a recurring revenue stream. So, for example, subscriptions and licences.

Think of churn as a hole in the bottom of your water bucket. The water you’re pouring into that bucket represents the number of customers signing up for your product or service. The hole in the bottom symbolises the number of customers leaving (i.e. customer churn).

How do you calculate churn?

Churn is often presented as a percentage. Although there are many ways to calculate churn (different subscription businesses may have other equations), it is typically calculated like the example below.

Example:

Let’s say you’re running a business where your customers pay you a monthly subscription fee to use your services. Churn would be calculated by dividing the number of customers that leave that month, by the total number of customers you had at the start of the month.

1st March = 10,000 total paying customers

31st March = 500 paying customers cancelled that month

500 / 10,000 * 100 = 5% churn rate

Why is churn important?

Is churn in your company seen as a taboo subject? Perhaps it’s the Elephant in the room? Or even worse, you just accept that your churn rate is what it is? It is a given that you’re going to lose some customers and that if you’re benchmarking your business against industry averages, it’s not too bad.

In order to explore why churn is important, we need to bring your CPA (cost per acquisition) into the picture. Many businesses focus their time and attention on bringing new customers in to mask the number leaving. Did you know, on average, acquiring a new customer costs x5 more than retaining an existing customer? On top of this, an interesting article by Outbound Engine highlighted that “U.S. companies lose $136.8 billion per year due to avoidable consumer switching”.

Increasing your customer retention by just 5% can grow your profit margins by at least 25%. How does this work, you may ask? Returning customers will likely spend 60-70% more on your company’s products or services, while the success rate of selling to a new customer is 5-20%.

Your company can look to spend less time and money on operating costs associated with acquiring new customers and channel some of those expenses towards retaining more.

Here’s an example that may help:

If we make some baseline assumptions that you reduce your churn rate by 25%.

Your current churn rate = 8%

Average new customers per month = 1,000

Average lost customers per month = 80

Avarage customer order value = $50

By reducing your churn rate by 25% (8% to 6%), you could save around $380k over a 12 month period.

What can I do to reduce churn?

It’s important to highlight that there is always room for improvement and to not shy away from change. Many businesses will look internally to see what they can do to address churn and retain more customers. This would typically include downloading multiple CSVs from marketing, tech and finance teams and compiling in-depth analytics in Excel. Whilst this is good, the problem is that it doesn’t focus the company on any actions. It’s important to think broader and not to just focus on analytics. Just looking at the data is the equivalent of going to your boss with a problem and asking them to work out the solution. Tools and services are now available online to help automate this for you. The experience I gained from my previous business and the manual processes we were trialling was the foundation behind my new company, Upzelo.

Here are some examples of what you can do, with a tool like Upzelo, to help reduce your customer churn.