It can be heartbreaking at first, but every business that uses a subscription model will experience churn. Every successful SaaS company has dealt with users unsubscribing to their services. That’s why churn analysis is so vital. This tells them how customers are unsubscribing so that they can retain both their customers and their profits in the process.
When you’re growing your business, retaining your clients costs about 5x less than pursuing new ones. That’s because those customers were already sold on the product, and they just needed an extra nudge to stay on board. You’ll save a lot of money with churn analysis.
At June, we offer a range of templates to help you analyze product usage data and identify churn risks. We’ll explain the ins and outs of churn analysis in this article. Then, we’ll identify some of the benefits of churn analysis and major churn risks.
What is Churn Analysis?
Churn is when your customers decide not to renew their subscription. Therefore, churn analysis delves into the reasons why this is happening. On the other hand, retention analysis analyzes the reasons why customers stay with you. Both types of analysis are essential to SaaS growth, and SaaS businesses should not mistake one for the other.
Using churn analysis techniques, you’ll be able to identify the rates at which your customers leave your product. Afterward, you can figure out the reasons for why this is happening and how to win them back.
The only issue with this methodology is that churn data is based entirely on past behavior. While it’s a good indicator, that means that it might not predict future reasons for why your customers churn. However, a company’s churn risks are usually stable over time.
How is Churn Analysis Calculated?
Here is a simple formula:
Churn rate = canceled customers / # of customers at the beginning of the month
So, if 80 customers canceled in May, and you had 500 customers at the beginning of the month, then your churn rate is 16%.
Some businesses will use the number of customers at month end to calculate their churn rate, but this makes little sense to us. After all, those customers were still there at the beginning of the month, weren’t they?
Churn Analysis: Important Terms
Churn analysis involves a lot of jargon. It can be hard for you to keep track of, so we’re listing out the important terms here.
Customer Acquisition Cost (CAC)
The formula for customer acquisition cost is:
CAC = Cost of sales and marketing / new sales acquired
Acquiring customers is expensive. By reducing your churn rate, you won’t have to onboard so many new customers to get to your revenue goal. Therefore, you can focus less time on marketing and more time on improving your product.
Lifetime Value (LTV)
Each customer has a lifetime value:
LTV = Average value of a sale * the number of transactions * retention time period
If you decrease your churn, then the LTV of your customers will go up proportionately. After all, reducing churn gives you a more stable customer base because you’re increasing the number of transactions and the retention time period of each customer.
How Does Churn Analysis Work for SaaS?
In the opening months of your SaaS business, you’ll be elated to bring in more and more customers. That said, the ones who slip away will eat into your time and profits if you don’t retain them.
To stay on top of things, you’ll need to constantly monitor your company’s churn data. Start by understanding where the churn is coming from.
Afterward, you can experiment with different ways to resolve it. Sometimes, you can easily find pain points in your user flow where customers tend to drop off. Those are usually the first places that you try to fix. However, you need to maintain vigilance in case there are new issues.
Leverage Customer Data
Naturally, you’ll need a means of analyzing your customer churn data. June is perfect for that because it allows you to predict churn from product usage data.
June helps you find out exactly where you retain your customers. For example, if you run a CRM, you might find that your users are quite receptive to your scheduling tools. That will allow you to double down on this feature and remind users of it when they are at churn risk. To identify these insights, just look into the most triggered events of your most retained and active users.
If you're not sure who your most active users are, head to June's Active Users insight
Then, by you can look into the most triggered events of the top 10 to have a good understanding of what actions make your users sticky.
You should also compare your churn data to the average in your industry. According to Recurly, the average churn rate for SaaS is about 5%. Meanwhile, B2C companies see about 7% average churn. Other industries can be much higher. So make sure you find a suitable benchmark first.
5 Ways To Use Churn Analysis to Your Benefit
Having a host of analytics tools at your disposal means nothing if you can’t use them effectively. Try to avoid getting bogged down in the minutiae, growing a startup means staying lean.
Avoid Losing Revenue
Each time you lose a customer, you also lose the revenue they’re bringing in. This might seem obvious, but the point here is that you need to be proactive. Get ahead of the customers that seem likely to churn by using churn analysis.
Your best bet is to create a churn analysis dashboard that helps you track where your customers, and money, are moving. Once you see a problem arise, like a user that’s slipping away, you can quickly nip those problems in the bud. Develop strategies to deal with this that are backed by rich churn data.
Lower Your CAC
It costs about 5 times more to acquire a new customer than to retain the ones you already have. Minimizing your customer acquisition cost is huge. As we mentioned earlier, the more your users churn, the more you need to spend on ad outlay. It’s cheaper to keep the customers that you already convinced of your product’s benefits. Especially if you can identify specific customer cohorts.
A lot of startups with a high churn rate get stuck in a vicious cycle of product churning and lofty advertising budgets. The problem is, that advertising often diverts your attention from more important issues, like improving your product.
So, before start spending a lot on marketing make sure your churn rate is in a good state.
Increase Your LTV
Your customer LTV isn’t just another empty user retention metric. Having high customer retention and LTV could pay you massive dividends in the future.
When investors take a look at your company, they will always look at customer LTV. As we mentioned earlier, efficiency and sustainability are of utmost importance. If you’ve already put in the effort to build good customer relationships, then that tells a potential investor that your company has what it takes to succeed.
Typically, you would look to bring in investors to help you scale. It is far easier for them to help you increase your advertising budget than it is for them to fix the fundamental issues that cause churn. Especially if you’ve let these issues fester over the years.
Get Feedback to Improve
When you use our June analytics tools, you’ll be able to keep track of power companies and users. This allows you to find out the customers that use your product the most, which you can track through user engagement using June. As such, you’ll be able to understand exactly what it is they appreciate about your software by messaging them directly.
You should also try to understand why some users are canceling. Some churn is inevitable, but you might still like to ask users that unsubscribe exactly where your product went wrong.
If you do this, you should ask your customers how they will replace your product. This will help you understand your competitors better and help you make your company appear more attractive than them in contrast. Plus, you’ll get a chance to practice your customer service skills and improve those processes too.
Up-sell Your Customers
When churn rate is low you can start to think about upselling your customers. By knowing your power companies and your strongest features, you’ll better understand how to do it. You already know exactly what appeals to them, so you could create custom offers that respond directly to their needs. You might even be able to attain the elusive “negative churn” where you get more from your customers each month on the whole.
5 Major Churn Risks
Not sure whether your business has excessive churn? We’ll tell you some major churn risks that you need to look out for. Sometimes, you need a churn analytics tool to discover when they occur.
Slipping Away Users
The biggest tell that a customer is about to unsubscribe is when they begin to use the features of your tool less and less. If your users are slipping away, then your task is to re-engage them.
Of course, that means you’ll need to look at your user behavior over a defined period. If you expect customers to use your software 2 or 3 times a week, then a week without usage could be a huge tell. However, we recommend not sending a customer a message until about 2 periods (2 weeks if frequency of use is weekly) after their last use.
In your message, you need to engage the customer with an actionable item. For instance, you might mention a couple of new features that you’ve launched on your platform since they haven’t used them yet.
Many times when a users has already stopped using your product, it's already too late to win them back. That is why, your should constantly monitor the heath of your customers (especially the paying ones).
To do so properly you should come up with some thresholds of engagement that you consider healthy. To do so you can look into your Top Feature Users or Most Engaged Companies depending on whether you look at data from a user or a company perspective. Then look into your top 20 users or companies most triggered actions. Narrow your focus on max 2/3 main events (1 would be easier) that are capturing you product's main flows. You should now come up with a threshold for those events that you will use as a reference to decide whether an account is doing well or not so well.
If your product is supposed to be used by multiple members of a single org then you should follow the same logic to come up with a % threshold of active members. This will help you understand how strongly that account is engaged. Don't forget to monitor expansion as well!
Adding these dimensions will help you decrease churn and boost engagement. Don't stop at a retention or at a slipping away report, go further and retain more.
Users Not Understanding Your Product’s Benefits
Even if they’ve subscribed to your service, not everyone understands why it’s valuable in the first place. In fact, some users can get frustrated by this and drop you altogether. That’s why you need to understand your users' needs and emphasize your product’s best features. Pick out the ones that users like the best using a feature audit report. Typically, your best features are the ones that users use the most.
Throughout the year, there are two major churn risks that you need to be aware of. The first comes during tax season, many people will stop using a product around this time to cut costs after finding out exactly how much they’re spending. The second time comes in the summer. Many products don’t get used as much and are forgotten as employees take vacations and are generally less productive.
The best way to avoid seasonal churn is to keep your product top of mind. Re-engage users that are slipping away and give your users concrete statistical data on how your product is helping them. You could also thank them for choosing your product as well.
Customers Who Feel Unheard
Hopefully, you have some means of receiving customer feedback. If you don’t, you’re falling behind. Creating good relationships with your customers is a priority when competition is so high. From the very beginning, you should actively listen to your customers’ feedback and implement it whenever possible.
If you run a SaaS business, this can give you a huge leg up over the other companies that present a cold and informal robot face to their customers. Treat your customers like human beings, and they’ll be far more inclined to stay with you than switch to some other cold-hearted SaaS company. Take some time from your busy schedule to interface with clients directly.
You Aren’t Matching Your Customers’ Expectations
Don’t let your customers down. And don’t over-promise anything either. Make sure that you advertise your best features and give your customers a clear understanding of what your product does before they sign up. Sometimes this is an issue of proper positioning.
If the customer insists on leaving, then you should try to understand where you went wrong. Maybe some of your customers have unrealistic expectations. And you’ll know not to target that cohort in future marketing campaigns.
Minimize Churn with June
Why spend all your time and money on advertising to new users when you can start churn analysis for much cheaper. In fact, June’s free analytics reports will help you get started right away. Plus, you can check out our catalog of templates to find a wide range of perspectives on your customer churn data.