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What is a churn rate and how to improve it?

What is a churn rate?

Churn rate is a business metric that measures the number of customers who stop using a product or service over a particular time period. For example, if you have 100 paying users and 10 leave during January, your annual churn rate for that year is 5%.

Churn rate explained

Churn rate can also apply to the movement between two stages: organic traffic to paid customers, etc.

How to measure churn rate

To calculate the monthly churn rate, multiply the number of customers lost in one month by 100, then divide it by the number of customers acquired that month (the denominator). Then you can take this percentage and apply it to your annual churn rate to get an idea of what is going on each month.

Why is it important to measure the churn rate?

If you do not measure your churn rate, you cannot know whether or not your product is meeting its goals. Your company probably measured customer acquisition costs at one point during its lifetime, but these costs are pointless unless they are used to calculate the expected return on your investment.

How businesses can decrease their churn rate?

Now you know how to calculate your churn rate, let’s look at how to reduce it. Most of the time, you will not know why a customer decided to leave, so you need to iterate your product or business model until you see a reduction in the number of customers leaving.

Here are 10 tips to help you reduce the rate at which users churn out of your product or service:

1. Do not try to grow too quickly

Grow too fast

When you first launch a product, your goal should be to attract and retain customers, rather than achieve huge growth numbers. Manage your growth carefully and keep an eye on the number of customers you lose each month. Growing too fast can cause problems that ultimately decrease this metric by forcing you to spread yourself too thin.

2. Keep the product simple

Simplify

One of the biggest reasons customers churn is because they do not understand how your product can benefit them or solve their problems. If you keep your product simple, you will avoid overwhelming new users and help them to set themselves up for success with your product. It is also important to regularly survey your customers to ensure that you are building the right product.

One of the biggest reasons customers churn is because they do not understand how your product can benefit them or solve their problems. #churnrate Click To Tweet

3. Communicate with your users

Discounts

If users feel ignored by the business, they will leave. It is important to not only communicate how your product can benefit them but also to interact regularly with them. Include new and existing users in conversations about what is working and what needs improvement.

4. Build your community

Building an engaged online community surrounding your product can help to decrease the number of customers who churn. If you focus on creating content that is helpful for your users, they will naturally want to engage with you about their problems and share information about how they use your product. Additionally, if you create a community, your customers will have the opportunity to communicate about your product.

5. Offer free trials

When customers can try a product before they have to pay for it, their risk decreases, and they are more likely to convert from trial users to paid customers. Consider charging at least a portion of your user base after the free trial to see how many will pay for your product.

6. Offer discounts and promotions

Just like offering a free trial, offering discounts communicates that the customer’s risk is decreased because they do not need to purchase the entire product before using it. Discounts may also come with an expiration date, which can motivate customers who are on the fence.

7. Optimize your product

Most products change over time, and your customers will likely expect you will continue to improve it. Make sure your product is easy to use and provides value to the customer, so they are more likely to stay with you for the long term.

8. Retain old users

Thank you

Customers who have been around for a long time tend to be more loyal and profitable than those who are new. Make sure you communicate with existing users and thank them for their business. If they have been with the business for a while, find out why they continue to use it, then share that information with potential customers who might also benefit from your product.

9. Announce when you introduce new features

Customers are more likely to continue using your product if you regularly give them opportunities to improve it. Communicate with them about how the updates will benefit them, and ask for their input along the way. Keeping users in the loop can decrease churn because they feel heard and understand why you are making changes.

10. Analyze why customers leave

New information can change a customer’s mind about your product, so it is important to regularly gather insights from those who are not using the product any longer. Ask them why they left and what would have made the product more valuable to them. This way, you can use that information to attract others who will be happy with the product.

The advantages and disadvantages of knowing your churn rate

Knowing your churn rate can give you valuable information about how to improve your product. If it is too high, you will need to identify the reasons behind the losses, so that you are aware of your target audience. Then, focus on improving those elements so that customers are more likely to convert from trial users to paid ones.

On the other hand, you might not need to know your churn rate. It can be easy to make assumptions about losing users when they do not convert from trial users to paying customers, but in some scenarios, this may prove untrue. For instance, if the number of new users who sign up for your product is low, you will likely lose most of them before they pay for your product. This does not mean they are unhappy with the product, but it might be that you do not have enough users to create a community or generate organic referrals.

If you know your churn rate, but cannot find the reasons why customers leave, try looking at who is leaving instead. Who are they? How long have they been using your product? What features did they like and dislike?

What is a good churn rate?

A good churn rate depends on the industry, but generally, it should be below 25 percent. At the same time, a business with many new users might have a high churn rate because most people who try it will not become customers.

To find average churn rates by industry, you can search for reports from companies that provide software and services to help manage your user base.  

Frequently asked questions about churn rate

– What does churn rate mean?

A churn rate measures the number of customers who stop using a product within a certain time frame. You can find your churn rate by dividing the number of users you lost in a month by how many new users signed up during that same timeframe.

– Why do customers churn?

There are many reasons why customers churn. In some cases, it might be that they did not find value in the product. In other cases, it could have been a case of bad timing or miscommunication from the business side.

– How can I decrease my customer churn rate?

First, identify the reasons why people are leaving. Then, look for ways to prevent those situations from happening to other customers.

– How can I calculate my company’s churn rate?

You can use a formula to find your churn rate. First, divide the number of users who did not renew their subscriptions by the total number of active subscribers at the beginning of that month. Then multiply that figure by 100 to get your percentage.

– Is there a good churn rate for SaaS companies?

The average monthly churn rate for SaaS companies is 13.9 percent, according to RJ Metrics’ 2016 Benchmarks Report. The rate will vary depending on the industry you are in, but in most cases, it should be around 10 percent or less.

– Is it a good idea to know my company’s churn rate?

If you do not know your company’s churn rate, it might be a good idea to track it. The number will allow you to find out whether customers are satisfied with the product and whether the company is doing what it can to keep them around.

Conclusion:

Most businesses are willing to spend money frequently on improving their product, but they don’t have a plan for how they will improve their churn rate. By implementing some or all of these ten tips, you can increase the value your product provides and decrease the number of customers who leave.