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Win more revenue by understanding deeply why your buyers buy and customers churn.
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Clozd's tech and people help you drive strategic change from win-loss insights.
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Win more revenue by understanding deeply why your buyers buy and customers churn.
Clozd's tech and people help you drive strategic change from win-loss insights.
Churn analysis is the process of evaluating why your company loses customers. This evaluation helps companies find ways to reduce their customer losses and increase retention.
Churn analysis should be used to improve your customer attrition rate. Successful companies have a maniacal focus on keeping existing customers, and using churn analysis to understand the reasons your customers leave will provide insights into making sure it doesn't happen again. When you complete a churn analysis for your company, you can pinpoint several things, including:
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The churn analysis process is highly beneficial for your company as well as your customers, and the insights you gain from doing one are invaluable for the future success of your business.
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When you are monitoring your churn rates, you're going to notice very quickly when those numbers change. If they are dropping, that's a good thing. If the numbers are rising, and quickly, you've got a problem, and that's cause for concern.
Instead of panicking about the rising numbers and making rash decisions, you can perform a churn analysis to determine where things are going wrong. Churn analysis gives you new insights into what your customers are thinking in terms of cancelation, including:
Churn rate also plays a critical role in revenue growth and has an interesting relationship with your customer acquisition costs.
Customer acquisition cost (CAC) is the total cost related to acquiring a new customer. This includes the cost of all sales and marketing strategies that aim to attract new business.
CAC is usually significantly higher than a company’s costs to retain current customers. According to an HBR article, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. This means that the more customers you lose,, the more your company will have to spend to replace them with new customers.
Happy customers don’t churn. They also help with one of the best channels of sales and marketing—word of mouth. Increasing sales opportunities from word of mouth can be one of the best ways to reduce CAC, reduce sales cycles, increase win rate, and ultimately grow revenue.
The more you know and understand about your churn rate, the more you can improve it. Companies need to know every area that is causing them to lose customers and create targeted action plans to address and prioritize the causes of customer churn. If you aren't analyzing your churn rate, you can't improve it to make your business better.
Realistically, your company should have a steady pulse of your churn. This helps build a customer-centric culture and keeps sales revenue in the door. Although, actually calculating your churn rate and analyzing its causes deeper tends to be done annually, this can also depend on what your average contract length looks like. For example, if your average contract length is six months, it would be most beneficial to conduct churn analysis every six months.
Another great time to do a churn analysis is a specific time period after you've introduced a new product or service. You can get valuable insight into whether these new offerings are performing well, if they are stagnating, or if they are losing you customers.
Churn analysis also becomes a hot topic inside of a company when a very high profile customer is lost. They could have been a major percentage of revenue or a key strategic deal in a new market. Be careful not to fall into the trap of recency bias and use one deal to guide strategy for your entire customer base.
In general, if you aren't noticing concerning numbers and you haven't introduced new goods or services, it's still a good idea to perform a churn analysis at the end of every year. Doing this gives you continued insight into your company's performance and can help you game plan for the future. It is also a key business metric for measuring the health and future success of your business.
Before you do a churn analysis, you need to figure out the scope and direction the analysis should take. To figure this out, use your overall churn rate or industry standards as a baseline, and customer information to guide you on where to look deeper.
Two ways churn rate can be calculated are by customer churn or revenue churn. Select the time period that makes sense to your business. If you are working with annual contracts use a year as the time period to calculate churn rate.
Customer churn simply means the number of customers (i.e. logos, accounts, etc.) that you lost in a certain period. For example, let’s say you had 100 customers at the beginning of the year. Out of those 100 customers, you lost 10 of them during the year. You would calculate your customer churn rate like this:
(# of Lost Customers / Total Customers) x 100 = Customer Churn Rate Percent
or from the example above: (10 / 100) x 100 = 10% Customer Churn Rate
Revenue churn shows how much revenue a company loses from churned customers. Using the example above, let’s say that the 10 customers that were lost each had an annual contract value of $10,000. Let’s also assume that the remaining customers had annual contracts for $20,000 each. The total revenue lost (10 x $10,000) ends up being $100,000 and the retained revenue is $1,800,000 (90 x $20,000). Taking this information you can then calculate your revenue churn rate like this:
(Churned Revenue / Retained Revenue) x 100 = Revenue Churn Rate Percent
or from the example above ($100,000 / $1,800,000) x 100 = 5.56% Revenue Churn Rate
Now that you know your overall baseline churn rate, it is time to identify problem areas where the churn is higher. You can see from the sample above that by also calculating the revenue churn rate alongside the customer churn rate, a pattern of excess loss develops in deals with smaller than average contract values (the 10 lost customers’ annual contract value was $10,000 versus the 90 remaining customers’ ACV at $20,000). Taking this information you can look for similarities with these customers and look for signs of loss reasons. Maybe these companies were a new industry, region, or language for your company. Perhaps specific external pressures in a specific industry impacted these customers. You at least have an idea of where to prioritize your churn analysis and identify the deeper reasons behind these losses.
Next, it is time to dig deeper. The process of digging deeper can be broken down into a few steps.
As you perform a churn analysis, look at the following metrics to see where you are being hit financially within the company.
The lifetime value (LTV), also known as the customer lifetime value, is essentially how much predicted revenue a company can get from a single customer during the time period they are a customer, otherwise called the customer lifetime..
It is simple to calculate LTV for a single customer. Say you charged a customer $10,000 a month for your service and the customer stays with you for 12 months. Their LTV is calculated like this:
$10,000 x 12 = $120,000
To calculate what your average LTV is across the business you’ll need to know the average revenue per account * average customer lifetime value.
Average revenue per account (ARPA) is essentially how much revenue a company can get from a single customer account over a specific period of time. If you are looking on a monthly basis you’d calculate ARPA by dividing your monthly recurring revenue by the total number of accounts. (Monthly recurring revenue / total accounts = ARPA)
MRR stands for monthly recurring revenue and it is directly affected by churn rates related to cancelations and delinquent accounts. As you properly track your MRR and related churn rates, you can create a better product, market it more effectively, and continue to see compounding growth.
If your company offers a yearly subscription service, your churn rates will directly impact your annual recurring revenue (ARR). When customers cancel subscriptions, miss their payments, or don’t even engage with the service, you bring in less revenue and face more customer loss.
Once you have performed an effective churn analysis it is time to take the information you have and create a plan to improve. This is where the best companies separate themselves from the pack.
One of the biggest mistakes we see with a churn analysis program or project is when the data gets siloed to an individual or small team. You should give access to a large number of stakeholders. When this happens we see various stakeholders begin to take immediate action on improving churn rate by executing strategies within their purview.
Tactics for sharing churn analysis data effectively include:
With all of the churn analysis data you’ve gathered you should have a solid understanding of why your customers left or why they stayed. With company stakeholders create plans to improve in the areas that influence churn and double down in the areas that helped keep a customer. These plans should include key performance indicators (KPIs) and goals to track progress.
Some initiatives we see companies could implement or improve from our churn analysis experience include::
When you know what and where the problems are, you can work to address the problem and improve the situation--. Whether it beTry improving your customer service, creating new features, or fixing bugs in your system that cause problems for customers.
With the accurate, unbiased analysis results you get from Clozd, it’s easier for you and your team to come up with data-driven solutions that benefit your customers and your company.
One of the benefits of doing churn analysis is it helps you identify where you win and retain customers in the market. You’ll be better equipped to understand your ideal customer profile or ICP. With this data you can help focus more of your company’s efforts into bringing in new customers that will stay long term.
Learn more about market segmentation here.
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