What is customer churn?
Customer churn is a vital metric for any subscription business, especially SaaS companies. It’s a measure of how many customers, sometimes referred to in sales shorthand as “logos,” do not renew at the end of their subscription. Occasionally, churn occurs prior to the expiration of the subscription term, but this type of turnover is less frequent because it typically requires breaking terms of a contract. Customer churn can also be thought of as the inverse of customer retention.
Are there different types of churn?
Churn is generally measured in two broad categories — revenue churn, which measures the dollar value of contracts not renewed, and customer churn, which is commonly expressed as the percentage of companies up for renewal that do not extend their contract. Within each of these categories are several more specific views, from the predictable (net vs. gross; churn within company size or industry cohorts) to the nuanced [preventable churn (unhappy customers, inactive users) vs. structural churn (customer went out of business or was acquired)].
Why does churn matter?
Churn in all its forms is such a critical health metric for SaaS businesses because customer acquisition costs are typically high for subscription software companies. So high, in fact, that it’s not uncommon for a vendor to not recoup its acquisition costs until several years into the contract. As a result, early churn means the company lost money on that customer. Similarly, understanding churn is a prerequisite to understanding customer lifetime value, which is another foundational metric for SaaS businesses.
How do I calculate customer churn?
Calculating customer churn rate is more complicated than meets the eye: Should it include free trial users? Month-to-month contracts? Should it isolate only customers up for renewal? As a result, SaaS companies vary greatly in the way they answer a question as seemingly direct as, “How many of your customers didn’t renew in a given period of time?”
Because there are dozens of competing formulas for calculating churn, what matters more than the formula(s) a company chooses is that it benchmarks itself consistently. Churn is a moving-target KPI. It can be affected by seasonality, product changes, competitive factors, pricing expectations, customer support, and even PR events. Changing one’s churn calculation regularly will impede the ability to understand what’s causing a company to lose customers and make changes to its business, which, in the end, is why one tracks the metric in the first place.
What drives customer churn?
Not all customer churn is preventable. If a company goes out of business or gets acquired, there’s little chance of saving that customer. This is often referred to as “structural churn.” The opposite of structural churn is preventable churn, and in these cases, companies and decision-makers tend to look at a few consistent criteria when deciding whether or not to renew a product or service. Questions they’re likely to ask themselves include:
Value: What benefits do I get when I use this product? Do I get what I expected when I initially bought?
Usage: How often do I use this product? Is this a mission-critical, daily use application, or is this an infrequent, nice to have?
Relationships: How attached am I to the people behind the product? Is there a strong bond between a customer success team and an internal champion? Do I feel invested in this specific company’s product?
Alternatives: Are there other ways to solve my problem? Would I use them more frequently, or do I have a stronger relationship with an alternative provider?