What is Churn? | Definition and Overview | Product Metrics

Definition: Churn is a measurement of the percentage of accounts that cancel or choose not to renew their subscriptions. A high churn rate can negatively impact ... ProductPlan TrynowSignin Churn WhatisChurn? Definition:Churnisameasurementofthepercentageofaccountsthatcancelorchoosenottorenewtheirsubscriptions.AhighchurnratecannegativelyimpactMonthlyRecurringRevenue(MRR)andcanalsoindicatedissatisfactionwithaproductorservice. Churnisthemeasureofhowmanycustomersstopusingaproduct.Thiscanbemeasuredbasedonactualusageorfailuretorenew(whentheproductissoldusingasubscriptionmodel).Oftenevaluatedforaspecificperiodoftime,therecanbeamonthly,quarterly,orannualchurnrate. Whennewcustomersbeginbuyingand/orusingaproduct,eachnewusercontributestoaproduct’sgrowthrate.Inevitablysomeofthosecustomerswilleventuallydiscontinuetheirusageorcanceltheirsubscription;eitherbecausetheyswitchedtoacompetitororalternativesolution,nolongerneedtoproduct’sfunctions,they’reunhappywiththeiruserexperience,ortheycannolongeraffordorjustifythecost.Thecustomersthatstopusing/payingarethe“churn”foragivenperiodoftime. HowisChurnCalculated? Initsmostsimplisticform,thechurnrateisthepercentageoftotalcustomersthatstopusing/payingoveraperiodoftime.So,iftherewere10,000totalcustomersinMarchand1,000ofthemstoppedbeingcustomers,themonthlychurnratewouldbe10%. Butwhereandwhenyoustartcountingandcalculatingcanimpactthemathandeventualchurnrate.Forexample,iftheproductbeganMarchwith8,000customersandadded2,000newcustomersthatmonth,shouldthe1,000customerswhoquitbedividedby10,000(totalcustomersattheendofthemonth)or9,000(totalcustomersatthebeginningofthemonth,factoringintheadditionof2,000andthesubtractionof1,000.)or8,000(totalcustomersatthebeginningofthemonth,regardlessofhowmanywereadded)?Thatcouldchangethemonthlychurnratefrom10%to11.1%or12.5%. Beyondthat,there’salsosettlingonthe“momentofchurn”:doyoucalculatechurnbasedonwhenuserscancelorwhentheirsubscriptionactuallyends(whichmaybelaterinthemonthoreventheendoftheyear).Ifyouchoosethelatteroption,itbecomesimpossibleforacustomertochurninthesamemonththeysignup,whichmayhidethefactthatsomecustomersarequicklydissatisfiedenoughwiththeproducttocancelalmostimmediately. However,manycompanieshaveadoptedslightlymoresophisticatedandnuancedapproachestocalculatingchurn.Somewilltakeanaverageofthenumberofcustomersatthebeginningandendofthetimeperiodinquestionasthedenominatorinthechurnequation.Otherswilluseweightedaveragesorrollingmetricstotryanddivinemoreaccuratechurnrates. Othertacticsmayincludebreakingoutthetotalcustomerbaseintodifferentcohortsandcalculatingindividualchurnratesforeachone.Thismoregranularapproachcanidentifywhichcustomertypesarechurningmoreoften,aswellasbreakingoutnewcustomersfromlong-standingones. Regardlessofwhichcalculationmethodisultimatelyused,themostimportantthingisusingthesameformulaconsistentlyforaccurateperiod-to-periodcomparisonandcreatingareliableKPI.Theremaybedipsandspikeswhenthere’salargeinfluxofnewcustomers,butitatleastprovidesareliablemethodology. WhyDoCustomersChurn? Althoughthereisnomagicanswertothisquestion,thereareafewlikelycausesforchurn: Customernolongervaluestheproduct—Whateverfirstattractedthecustomertotheproductandinspiredinitialusageisnolongerpresent.Thiscouldbeachangeincustomerprioritiesorachangeintheproductitself. Motivatingfactorstousetheproductnolongerexists—Customerspurchaseanduseaproductbecauseitsolvesaproblemoraddressesaneed,butnotallproblemsandneedsarepermanent. Customerfrustratedwithproductuserexperience—Dissatisfactionwithusability,lackoffeatures,orpersistentbugsandperformanceissuescandriveacustomeraway. Theproductlacksamandatorycapabilityrequiredbytheuser—Acustomerneedstheproducttodosomething,buttheproductdoesnotofferthatfunctionality(orthecustomerlacksawarenessortrainingofhowtoaccessandutilizethatcapability). Valuetothecustomerdoesnotjustifytheexpense—TheROIforthecustomerisnolongerthere. Thecustomerhasfound/switchedtoanalternativesolution—Thismaybeadirectcompetitororanindirectalternativethatisfreeoralreadyavailable(i.e.insteadofareminderappthecustomerwilljustwritedowntheirnotesonpaper). Damagetoproductreputation—Thiscouldbeacybersecurityissue,noteworthyperformanceproblems,terriblecustomerserviceorbadactsbythecompanyorcompanyemployees. Ofcourse,eachdepartingcustomerhastheirownmotivationfordiscontinuingtheirusage.Exitsurveys/interviewsandanalyzingtheusagebehaviorofchurnedcustomersmayreveallargertrends. WhatDoesChurnMeanforProductManagers? ChurncouldquitepossiblybethemostimportantmetricforSaaSproductmanagerssinceitisaverytellingmeasureoftheperceivedvaluetheproductdelivers.Whilemarketingandsalesareprimarilyresponsibleforbringinginnewcustomers,theproductexperienceitselfwilldeterminehowmanystickaroundandforhowlong. “InSaaS,butespeciallyintimeslikethese,existingcustomersareyourlifeblood.Themorethatyoucanretainexistingcustomers,themorepredictableyourrevenuestreamwillbeinthefuture.” –KristinaShenandKimberlyTan,AndreesenHorowitz Thecostofacquiringnewcustomersismuchhigherthanthecostofretainingthosealreadyonboard,soreducingchurnisarealfinancialpriority.Everythingpossibleshouldbedonetokeepcurrentcustomerssatisfied,maintainingtheirusageandincreasingtheirlifetimevalue.Plusahighchurnratecanalsodamageaproduct’snetpromoterscore. Productmanagershavetwokeytacticstoemployinreducingchurn:userresearchtounderstandingcustomerbehaviorsandproactivelyaddressingproductshortcomings.Havingasenseforwhichusagepatternsarepredictorsofpotentialdefectionallowsforbothforecastingfuturechurnandactivatingaccountmanagementtoengagewaveringuserswhileprioritizingfeaturesandenhancementsspecificallytargetingtheconcernsofcurrentcustomersbothdisplayscustomer-centricityandreducestheirreasonsforleaving. HowCanYouReduceChurn? Churnisreducedbyincreasingtheperceivedvaluepropositionoftheproducttocurrentusers.Thiscanbeachievedinanumberofwayssincethevalueisdeterminedbasedonseveralfactors. Makesurecustomersgetthemostoutoftheproduct—Itdoesn’tmatterhowmuchaproductcandoifendusersaren’tawareofthosecapabilities,can’tfigureouthowtousethemandaren’tpositionedforsuccess.Investinonboarding,training,tutorials,contextualhelp,andproactivecustomersupporttoincreasethechancesthatcustomerswillunderstandhowtoactuallyusetheproducttoitsfullest. Recruittherightkindofcustomers—Notallproductsarerightforeveryone,soworkwithsalesandmarketingtotargetprospectsmatchingtheproduct’sidealbuyerpersonas.Ensuremessagingisaccurateandhighlightsactualproductcapabilitiesandbenefits. Pricebasedonvalue—Customersdon’tcareaboutvendorprofitmargins,growthrates,andrevenuetargets;theywanttopaywhattheythinkaproductisactuallyworthtothem.Usecustomer-focusedpricingstrategiesforyourproductthatpresentaclearROItousers. Continuallyaddvaluewithoutbreakingwhatalreadyworks—Currentcustomersdon’tmindandmayappreciatenewfeatures,butthisshouldnevercomeattheexpenseofdiminishingexistingcapabilitiesordisruptingtheuserexperience. Don’ttakecustomersforgranted—Norenewalshouldbeconsideredagivenandanycustomermaycancelatamoment’snotice,socontinuallyengagecustomerstounderstandtheirlikesanddislikesaswellaswhatcouldimprovetheirexperience. TryProductPlanFreefor14Days Getstartedinminutes—nocreditcardrequired. TryItFree  Tweet Share Tweet Share Tweet Share LinkedIn