By Harsh Vardhan
- What is customer churn
- Identifying churn indicators
- Reducing customer churn: the methods
- Tools for reducing customer churn
Reducing customer churn is easily one of the smartest growth hacks in the present day.
Given that that acquiring new customers is way more expensive than retaining existing customers, reducing customer churn is one goal which should, and does, give sleepless nights to business owners.
Acquiring new customers requires a huge effort – all the way from the initial contact to the closing of the deal. If acquisition costs make the lion’s share of your marketing budget, companies are left with fewer resources for improving relations with existing customers and measuring customer satisfaction – making them more likely to churn.
The first step towards greater customer retention is – reducing customer churn. Let’s begin by understanding customer churn a little better.
Customer churn is the rate at which your existing customers stop doing business with you. In the case of SaaS businesses, it is the rate at which they cancel their subscription to your service.
The formula for calculating revenue churn is very simple:
% Customer churn rate = Customers lost during period t / Total customers at the start of period t
Customers lost during period t = Total customers at the start of period t + new customers gained during the period t – total customers at the end of period t.
For example, you had 120 customers at the end of October. You gained 10 new customers by the end of November. The total number of customers at the end of November stood at 125.
The customers lost during November => 120 + 10 – 125 = 5The customer churn rate for the month of November will be => 5/120 = 4.16%
The customer churn rate for the month of November will be => 5/120 = 4.16%
Reducing customer churn will dramatically accelerate your revenue growth. Assuming that your company has a monthly revenue of $15,000. To that, you add another $2,000 every month. Now, you have a customer churn rate of 3%. If all of that remains more or less the same for the next 5 years, you’ll end up generating around $2.6 million. Now that’s not bad.
The second scenario, let’s say you manage to bring down your customer churn rate by 10%, to 2.7%. Now that gives you an extra $100 thousand dollars in revenue. If you’re able to reduce your customer churn by 30%, that’s even better. Your revenue goes up to $3 million dollars!
A few churn rate benchmarks for SaaS companies
- For established and successful SaaS companies, the churn rate should be around 5-7% annually.
- In the case of early-stage SaaS companies, ideal churn rate is around 5% monthly.
- For SaaS companies in the financial services domain, a rate of less than 20% is ideal.
- SaaS startups serving SMBs tend to operate with higher monthly churn, somewhere between 2.5% and 5%+.
- Saas companies operating within the mobile industry should aim for less than 30%.
Customer churn is not a random event that occurs out of nowhere. A user canceling their account is the culmination of all unpleasant incidents over a period of time.
In most cases, they would have been unhappy with the product for a long time before they decided to call it quits.
However, before they churn, most customers would exhibit a peculiar behavior that is uncharacteristic of someone who likes your product.
There will always be a few signs that would stand out. If businesses learn to read those signs, they might have the opportunity to take preventive measures for reducing customer churn.
A few signs that indicate a possible churn in the future:
“Before cancellation ever happens, there are clear signals that a customer is in danger of churning.” ~ Casey Armstrong
This is why you need to be proactive when the aim is reducing customer churn. The best way to do it is by analyzing your user behavior, identifying churn indicators, and monitoring these indicators regularly.
Here are a few indicators you should watch out for:
1. Usage level – Customer churn is often preceded by a period of decreasing usage levels. Keeping an eye on the login activity will help you identify at-risk customers before they churn. There is no ideal level of login activity as it depends on your product and how frequently your customers use it under normal circumstances.
It is also worrying when someone moves to a lower plan of your product. There is a good chance they might cancel soon.
2. Feature Adoption – Every product has some key features that help them stand out from their competitors. If certain customers are not yet using these features, the chances of them churning is higher.
3. Customer’s KPIs – If your product is not helping customers achieve their KPIs, then chances of them churning is higher. It is crucial that you regularly ask for their feedback through surveys, phone calls, or transactional emails.
4. Support tickets – It basically takes into the consideration the number of support issues raised, the severity of the problems, and the time it took to resolve them. These three factors can significantly affect your customer’s health. If they haven’t reported any issues, that again is another problem. Silence doesn’t always mean they are happy with your product.
5. Financial health – It is measured on a monthly rate: whether payments are made on time or delayed, and the validity of the account’s credit card.
Here are a few questions you should seek answers to:
- When is the contract coming due?
- What are the contract’s renewal terms like?
- What kinds of customer support interactions are you seeing from the customer?
- Is the customer using the service and getting what they’re paying for?
- How does the account manager “feel” about the customer’s state of mind about the services they’re buying from you?
Once you have an idea of who might leave, it’s essential that you take steps to define the problem, fix it, and retain their business.
Implementing a systematic approach to uncovering at-risk customers and reaching out to them impacts satisfaction, engagement, and is vital to reducing customer churn.
All customer churn is not bad. Companies need to realize this first. You should categorize customers as worth saving and not worth saving. If you don’t, you will end up spending a lot of resources on customers who are not going stay with you anyway. Such customers would have already made their mind up and your efforts will simply be in vain.
How do we categorize customer churn?
1. Unavoidable Churn
Unavoidable customer churn happens when customers stop doing business with you due to things that are beyond their control. It is very hard to save these customers. Rather than trying to save them, you should try to analyze the reason behind their decision first.
The reasons behind involuntary churn could be:
- They are closing down their business.
- They can’t afford it any longer – some companies may encounter cash flow shortage forcing them to end the subscription.
- Outdated equipment – there are times when customers stop using your product because they don’t have the necessary equipment or a third party service to run it.
- Change in management or key users of your product/service has moved on from the company.
2. Avoidable churn
This occurs when customers decide to stop using your products by free will. Most of the times this is due to the fact that they are not happy or satisfied with your product. Companies ought to spend most of their retention efforts on these customers. As they have a greater probability of staying.
Here are few reasons behind voluntary churn:
- Lack of regular communication with customers.
- Bad customer service – In fact, one Oracle study found that almost 9 in 10 customers. have abandoned a business because of a poor experience.
- Customers are unhappy with the pricing.
- Too many support issues – bugs, errors, etc.
- Not taking customer’s feedback seriously.
- Customers find your product too difficult to use.
- Bad onboarding.
- No option available to scale-up.
- Security and privacy threats.
- Lack of customized plans and packages.
- Difficulty in making the payment.
- Competitor’s product/service seems more attractive to them.
It is always crucial for you to know what percentage of churns happen due to avoidable reasons, and strategize accordingly.
A quote from well-known customer service and customer experience advocate Bill Quiseng encourages organizations to “work as hard to keep a customer as you do to find a new one.”
Without much ado, let’s jump in and see what are the best ways for reducing customer churn:
Businesses need to ensure that the relationship with existing customers grows over time. They should be able to minimize customer churn and win back lapsed customers, or those who show first signs of lapsing. Let’s jump in.
1. Set realistic expectations from the get-go
The most common reason why customers leave companies – they fail to deliver to the tunes of the promises they made. It is a common practice across industries to over promise and under deliver.
The over-promising begins right from the first sales call, and it ends up doing more damage than good in the long term.
Why would a salesperson want to over promise? There could be numerous reasons:
- They fear turning the customer off
- They are under pressure from their boss
- They are desperate to close the deal
- They are unwilling to tell the customer what they do not want to hear
- They desire to come across as the ‘deal maker’
Well, for starters, Science forbids it. Big promises create big expectations, and when those expectations are not met, the human brain responds by signaling a decrease in the dopamine production, and the person feels really bad about it. This applies strongly to a business environment: customers feel cheated when a company fails to deliver on its promise.
Instead, for reducing customer churn, companies should stick to making commitments that they feasibly meet. Salespersons need to be trained to ask questions and not make promises in the dark.
Customers who are allowed to talk about their problems and aspirations will take you where you need to go. When you push a product to a customer while running a company script, their guard goes up and stays up.
However, if you do the opposite and ask non-threatening questions that prove you are listening, the customer will come closer to you. Your relaxed manner and respectful curiosity would make your customers starting to trust you. Once a customer makes an emotional commitment to a salesperson, they are yours to nurture from there onwards.
2. Nail the first five minutes
The most reliable way to reducing customer churn and earn the loyalty of a customer is to deliver remarkable customer service. It essentially starts with the first impression your business creates in the minds of the customer.
More often than not, a customer would have formed an opinion of your business in the first seven seconds itself. In that short slice of time, they will judge your employees on their knowledge, professionalism, friendliness, helpfulness, credibility, courtesy, confidence, responsiveness, and understanding.
Based on the above parameters, the customers would form one of the three opinions of your business (and your employee):
- They like your business (and the employee)
- They do not like your business (and the employee)
- They are indifferent
Dislike is obviously bad. But, indifference is equally harmful, especially in the long run. Indifferent customers are the ones who will sign up for your product half-heartedly and will move to your competitor at the first chance they get.
How do we combat this? Create a ‘wow’ moment for the customer as early as possible. You need to ensure that you focus on your strongest value props from the very beginning. Tell them how your product adds value. Get your customers to commit to you. Get them to believe in your product. You want them to love the product and not look for reasons to stop using it.
When a first impression is built based on the value your product can add, it is the beginning of a sticky relationship and the customers will be less likely to churn.
Here’s a great excerpt from an article by Josh Ledgard about why the first five minutes matter:
When someone starts using a new product, they want to see immediate results. This gives them the impression that they could be even more successful as time goes on. If the first 5 minutes are painful, the rest of the experience will be colored by a bad first impression. – Josh Ledgard, Co-founder at Kickofflabs
3. Send interesting emails
While most businesses do keep in touch with their customers on a regular basis, it is just not enough. Automated emails for trial sign ups do not really qualify for actual communication.
People are bombarded with automated emails so often that they have stopped paying attention to ‘Do you need help with’ emails. When you’re looking at reducing customer churn, all you have to do is make it a little more interesting, a little more human.
Dropbox sends out this lovely email to customers who have not started using the app despite having signed up for it:
Now this one’s cute, simple, and right on-brand – any day better than a plain text email. These little things go a long way in fostering good relations with customers.
Mention did something interesting to bring its churn rate down – they started sending out Pro-tip emails for reducing customer churn:
These emails became pretty popular with their customers – Mention was able to bring their churn rate down by 22% within just one month.
4. Constantly remind customers of your value
Your customers signed up with you because you had something nobody else did. They signed up because they saw value in what you make; because you had something worth their attention.
Over time, customers tend to forget all of those things. They stop realizing the value you add to their lives, eventually. On top of this, with your competition trying to barge in your customers’ heads every now and then, they hardly have any recollection of why did they choose you over and above everybody else.
When you’re looking at reducing customer churn, you have to make a genuine effort to remind your customers of your value proposition every now and then. You have to take actual steps to remain at the top of their minds.
- Every time you send automated emails, ensure that you highlight the best features of the product.
- Every time you release a new feature, ensure that you tell all your users about it. Offer them free usage for a few months.
- It is a great idea to send a few case studies to your customers every now and then.
- Additionally, you should create informative content, such as tutorials and infographics, to tell customers how useful your product is.
The key to reducing customer churn is to constantly remind them that you bring something important to their lives every day. It is your responsibility to keep reinstating their faith in you.
5. Keep a keen eye on the competition
One of the worst things that can happen to a company is when their customers perceive the competition to be better.
When you’re looking at reducing customer churn, you need to constantly strive to keep the perception of their product better than that of their competitors.
How? By benchmarking your overall performance and customer satisfaction against your competitors. A continuous process of measuring your performance against a standard will certainly move your employees to do everything a little better.
The pertinent question here is – what aspects do you benchmark?
Gallup studied 1 million small businesses and found four key drivers for determining whether a customer is satisfied or not:
- Response times (speed & efficiency)
- Attention to details (accuracy and thoroughness)
- Collaboration (level of partnership between you and your clients)
- Helpfulness (willingness to go out your way to get the job done)
For all of you who are really serious about competitive benchmarking, Client Heartbeat is a wonderful tool. It is a business intelligence tool that lets you benchmark your performance against local competitors, industry leaders, and industry averages.
You can then use this intelligence to make better-informed business decisions. Keeping an eye on the competition is a key to reducing customer churn.
6. Collect feedback from customers
This is the easiest, yet the most powerful way to keep your customers from churning.
A new research published in the Harvard Business Review found that the act of just asking for customer feedback in itself is enough to help keep customers satisfied and coming back for more – even when they do not respond to your request.
Several theories of consumer psychology point to the fact that even a simple satisfaction survey appeals to your customers’ desire to be coddled, reinforcing the positive feelings they might already have about your product, and making them more likely to buy from you.
The very process of asking questions or seeking opinions induces people to form judgments that otherwise wouldn’t occur to them. They might not consciously realize that they love a feature unless you seek feedback about it.
When you’re looking at reducing customer churn, collecting feedback would definitely strengthen the association customers have with your product. They would start to actively think about its usefulness and benefits. The product no longer exists only in the subconscious; it is at the top of mind of the customer. This sort of an association is enough to keep them from wandering off to competition.
This is not the end of the story. When you do collect feedback and make actual improvements to the product or a process based on it, it is a great opportunity to tell your customers that you really acted based on what they expressed.
Even better if you can have a small reward to go with it – a discount on their subscription or a free trial for an otherwise premium feature will work like a charm.
Another great way to recognize their efforts is to publish their feedback on your blog or your social channels.
The moment they realize you value their opinion, you are on the track to reducing customer churn. Even when you end up making mistakes in the future, these are the customers who will always stand by you.
7. Market to current customers and prospects alike
A large number of companies make the mistake of marketing only to prospects, and spending little or no efforts on the existing pool of customers. Forgetting about our existing customers would always be to our detriment.
According to Totango, most businesses “spent only 21% of their marketing budget on existing customers, whereas these customers make up 61% of their revenue.”
Imagine gaining a new customer with your marketing spend but losing an existing one. The end result: you’re left with the same number of customers and lesser revenue.
Now that’s a crime. You cannot take your existing customers’ loyalty for granted. The more you care for them, the more ‘sticky’ they become – you don’t want to miss this opportunity.
When you’re looking at reducing customer churn, marketing to the existing ones will foster a much closer association between you and them. It is never a bad idea to remind them of your product, your propositions, and your values.
There are several clever ways to do this:
- Create newsletters that focus on ways to use your product better, ways to help your customers get more done through your product.
- Send them updates about new developments within your product and ask for their suggestions.
- Offer a discount once every year – a surefire way to foster long term association.
- Host online events for your existing customers
- Give them a privileged first preview of a new feature
Above all else, ensure that you offer your existing customers even better rewards, deals, and treatment than you do to new customers. By making them feel special, you’ll build a loyal customer base with a reduced churn rate.
8. Uncover your weaknesses
No business is flawless. No matter how efficient and streamlined your processes have become, there is always one element which is weaker than the other – that’s your weak spot.
Going by the old proverb ‘you are only as strong as your weakest link’, it is imperative that you uncover it, and work towards improving it.
The two aspects that you need to uncover are:
- Why are people not signing up for your service?
- What is it that your company is not good at?
It is very important that you collect feedback from customers who have just stopped using your product. More often than not, you will be able to find a few common reasons most of your churned customers would quote.
Why would someone who visited your website not sign up for your service – this is an important question you need to answer. There is a good chance that your competitor has what your product is missing. A reliable way to identify the features that are off-putting for your prospects is to employ tools that monitor their behavior on your website.
Without knowing your weaknesses, you will have no clue what to improve. There have been numerous instances in the past when companies went down because they failed to work on their weaknesses.
Kodak failed to see that the future lies in digital, and kept on spending on R&D for traditional cameras. By the time they realized their mistake, the bus had left the station.
Microsoft committed a big mistake by not paying attention to inbuilt security features and kept relying on third party services such as McAfee. Apple took advantage of this situation by building computers with sturdy security features. Microsoft ended up churning a lot of customers.
When you’re looking at reducing customer churn, remember that focussing on weaknesses is just as important.
9. Build useful resources for customers
A customer who understands your product and its benefits well is an educated customer, and educated customers do not abandon you.
If you create a library of resources (articles, videos, and whitepapers) that can educate your customers about the potential benefits of your product, they will start realizing the value in your product.
All customers have problems they are looking solutions for. If your resource library is able to genuinely help them with solutions, you go a long way in earning their loyalty.
Hubspot has done a fantastic job at it. Their primary business is an inbound marketing tool that helps businesses generate and convert leads. At the same time, they run an Inbound Marketing Academy filled with a variety of articles, videos, and blogs about inbound marketing.
They are helping their customers get better at using their products. A majority of the educational material is based around Hubspot. If a Hubspot customer leaves and defects to a competitor, they would be sacrificing the personalized educational materials. A few of these resources are more valuable than the product itself!
Here are a few tools available in the market that can help you monitor churn.
Churn Buster helps make sure that your customer’s payment information stays up-to-date. Payment failures is a major reason for churn. Some companies managed to improve their revenue by 50% after they started using this tool. It will monitor customer payments and sends out an email in case of failures. Churn Buster also has the feature where you can reach out to your customers whose payments failed over the phone. It also has a reporting tool that offers insights daily metrics.
Hookfeed allows you to filter your customers based on their behavior and intent. It will help you answer questions like who has raised funding, who has a large team of employees, and how likely they are to convert to a paid customer. It allows you to personalize your communication with each individual customers.
YesInsights helps companies collect actionable feedback from their customers. It will help your create simple one-click and Net Promoter Score surveys. This will help encourage more people to take your survey. This way you will be able to clearly identify and understand the major reasons behind the churn.
You can do complex behavioral analysis and generates automated insights using this app. You will be able to find out how customers engage with your pages. Mixpanel tracks views, shares, likes, and purchases on different web and social media platforms. The app will help users to gauge the potential of each marketing channel in terms of customer engagement.
Intercom is not specifically a tool aimed towards reducing churn, but it’s an awesome tool that does just about anything including support. Intercom has one of the best support systems and email drip campaigns that you can use to reduce churn. Intercom will warn you as soon as users are “slipping away”. That way you can look into right away and communicate with that user to see if they are experiencing any problems.
Intercom shows the people using your product and what they do in it, making it easy to quickly find the right people to ask for feedback. Automatically ask users for feedback right after they’ve used a feature, in your app — when and where they’re most likely to respond.
Ambassador provides the most flexible, customized experience for your referral and affiliate programs. Referral, partner & affiliate channels can all be managed in a single dashboard via Ambassador. You can reward Ambassadors for referrals with cash, points, virtual currencies or swag and receive actionable metrics to measure ROI.
With Ambassador you can leverage the power of the social web to influence purchasing decisions. Use Social recommendations to increase sales and conversions. Ambassador integrates easily with your favorite 3rd party applications. From newsletter software to billing applications and even Salesforce and Hubspot, our integrations keep your referral program running smoothly while syncing data between your favorite applications.
Although the bitter truth is that some customers will always churn no matter what you do, you should never consider it a ‘part of the business’ and take it lightly. It is an even bigger problem when you are not worried about customer churn.
If left unchecked, customer churn can even take your company down for good. Always keep a close eye for early warning signs, and take steps the moment you spot an at-risk customer.
If the customer decides to leave despite your efforts, be gracious, and collect as much feedback as you can. Understand from them what might have prevented it – that is the key to reducing customer churn.