What is Churn and How Do You Reduce it

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SaaS owners are primarily concerned with one metric; churn. It’s the lifeblood of any software company and is a good measure of the longevity and profitability of the business. If you want to drive profit in the long term, then you need to reduce churn at all costs.

What is Churn?

Churn is the loss of a customer and the corresponding revenue. You’ll most often hear people talking about the churn rate, that’s the percentage of customers or revenue that you lose within a given period.

For example; if you measured churn rate on a yearly basis and you lost 2 of your 100 customers you would have a 2% yearly churn rate.

Churn rate can be measured in multiple different ways, and it’s important that you’re comparing the same metrics. One problem that many strategists face is comparing customers who started in X month with customers that started in Y month.

You’ll often find that the month the customers join has an impact on churn because of the changes to the landing page you’ve made and the closeness to the month of tax payments.

Customer Churn vs Revenue Churn

The two churn metrics that most businesses should track are customer churn and revenue churn.

Customer churn rate is what most companies focus on; the percentage of customers who are lost in a given period.

The revenue churn rate is the percentage of revenue that is lost in any given period.

They might be different, quite substantially, if you lose a customer who represents a large proportion of your revenue or one that only represents a small amount.

Some digital strategists would argue that customer churn isn’t important and that revenue churn is the only metric that matters. While this is true to some extent, revenue is critical, customer churn can give you information that revenue churn can’t.

It tells you about how most customers value the service, after how long they cancel and how much the average customer is worth.

All of this information can help you to make more informed decisions to improve your business.

How Can You Reduce Churn?

Perhaps most importantly, you want to know how you can reduce churn. Churn is a relatively complex metric, after all, a customer could leave because they went bankrupt, and this is unlikely to reflect on you.

However, churn rate is heavily influenced by the relative value that your service offers, the type of service that you offer and the quality of the service that the customer receives.

Firstly, relative value refers to the comparison between the value that the customer feels they gain from your business and the dollar amount that they pay.

Secondly, some services will simply have higher churn rates. If you help people to create resumes, then customers won’t stick around for as long as an accounting software because the problem is short-lived.

Finally, if the quality of your service is low in comparison to competitors, then your customers aren’t going to stick around.

Gain Feedback from Customers

Our biggest piece of advice is to talk to customers. If you feel like they aren’t subscribing to your business for as long as you’d expect, ask them why.

You might find out a problem or oversight that you’d never considered before and this can cause an improvement that will drastically reduce your churn rate.

Improve Your Product or Service

In general, the better your product or service, the longer your customers will continue to hand over their hard earned money. This is especially true if you have competitors who are also offering the same or similar service.

If your competitors are making constant improvements to their business, then it’s imperative that you’re doing the same. If you don’t, your customer base will gradually transition to the company that offers them the best service.

Offer Discounts for Longer Contract Periods

The reason that companies offer such large discounts for yearly contracts as opposed to monthly contracts is that they work. You can very easily work out the discount that you can offer and remain profitable by comparing the average contract length of customers on the monthly plan to the profitability of a yearly contract.

Split Test Your Landing Page

Finally, make sure that you’re always split testing your landing pages. Once you’ve established the correct price for your yearly contracts, you need to be actively encouraging people to sign up for the most profitable contracts.

If you know that a yearly contract is considerably more profitable than a monthly one, discourage people from choosing the monthly option.

You can do this by making the yearly option brightly colored and leaving the monthly option in grey for example. These small landing page improvements can drastically increase revenue by encouraging customers to choose a longer contract length that is more profitable.


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