The Ultimate Guide to Churn
Our comprehensive guide on understanding, measuring, and effectively combating churn to enhance customer retention and drive growth in your subscription-based business.
What is churn?
Churn is when customers who were paying for your service, cancel or stop paying. It can also be known as attrition and it is critical to the success of any subscription or recurring revenue business.
Churn can be split into good and bad churn. Good churn?! you ask, does such a thing even exist? Good churn can also be called unregretted attrition, meaning this is a customer you are ok with leaving. This may be because they are not a good fit, are loss making or pose other issues which makes them no longer being a paying customer acceptable.
The vast majority of churn is bad churn, so that is what we are going to focus on going forward.
Why churn matters
Churn is the gravity that can pull your business back to $0 in revenue. For every customer that churns you need to acquire two to see any meaningful growth.
Put another way, 1% monthly churn costs you 10% of your year end customers and 5% costs nearly half.
If not kept to a low enough level, which will be talked about below in benchmarks, churn will limit the rate of growth or growth entirely. Acquiring new customers when you have a high churn rate can be more difficult and expensive over time.
Churn matters beyond the financial impact, it is often a symptom of low perceived value, quality issues or an overall poor customer experience. Understanding why users are churning is important and something covered below.
How do you measure churn?
There are a lot of ways to measure churn and some key decisions on how you count if churn has occurred.
Let’s break down a few key decisions:
When has churn occurred?
The moment the subscription has ended and has not been renewed or the moment the subscription is cancelled.
When calculations are done in Upollo, we look at the moment of cancellation, as when that happens the customer has made the decision to leave and you are in the process of trying to bring them back.
If you wait until the subscription has ended you are separating when the user made the decision to leave from where you are counting it. Doing it from the point of cancellation also gives you a more accurate view into short term churn otherwise you would be unable to users churn during the first subscription period, eg. first month.
For the case of subscriptions that expired, in the case they don’t auto renew and the customer has not renewed, this in both cases is included and included from the date the existing subscription expired.
Customers or subscriptions?
When measuring churn you can measure whether a specific subscription or service has been cancelled or whether the user themselves has stopped paying.
Measuring specific service/subscription churn rate can be useful for comparing whether certain services/subscription types have higher churn than others. Otherwise using services/subscriptions themselves can include upgrades, downgrades and be complicated by users who have multiple services or subscriptions at a time.
Using customers makes analyzing churn much simpler and matches with the definition of churn. It is also simpler for cases where customers could be a user, a team or a company, in this case it is simply the account that is responsible for the subscription that you count as churned or not.
Key metrics and their formulas
Customer churn rate
Customer churn rate is the most common measure of churn, it focuses on customers who churn rather than the value of those customers. This metric is often used by customer success and product teams.
The formula for customer churn rate is:
Churn rate = (Number of customer who cancelled or had all their subscriptions expire in a given period / Total number of subscribers as the start of the period) x 100
An example is:
5% churn rate = 100 customers cancelled or had their subscriptions expire in March / 2000 customers were paying at the end of February
MRR churn rate
MRR churn rate focuses on the percentage of revenue lost to churn each month. This is especially helpful for finance teams to forecast revenue.
The formula for MRR churn rate is:
MRR churn rate = MRR of churned customers during a given month / Total MRR at the start of the month
An example is:
10% MRR churn rate = $10,000 MRR churn in May / $100,000 MRR at the end of April
User churn rate
For services that offer a free tier, tracking user churn which is measured not in cancelled subscriptions/services but in lack of usage is critically important to building a successful engaging product/service.
The formula for user churn rate is:
User churn rate = users who were active in the previous period, but not in this period / users who were active in the previous period
An example is:
20% user churn rate = 20,000 users churned in February / 100,000 active in January
Cohort retention curves
Cohort retention curves are a great way to visualise and understand churn whether that be on a customer or user basis.
A cohort retention curve looks at whether at what percentage of users or customers are still active or paying, depending on what you are measuring, at a number of days since signing up/starting their subscription.
This helps spot issues that occur early on and also points at which people run into issues. These are also helpful for spotting seasonality by comparing cohorts who started at different times or regional differences by doing cohorts by location.
Gross Dollar Retention (GDR)
Gross dollar retention is a common way of looking at churn and downgrades and their impact on revenue. Retention is the flip side of churn and we cover measuring this and other ways to measure revenue retention here.
Benchmarks for Churn
According to Stripe monthly customer churn is generally in these ranges:
Media and entertainment: 20%–30%
Online retail subscriptions: 15%–20%
Fitness and wellness: 10%–15%
SaaS (software-as-a-service): 5%–7%
The types of churn
Customers can churn for a variety of reasons, and some of those might not even be active choices.
Involuntary churn is something the user generally didn’t want to happen. They were not intending to cancel, but something happened, generally payment related, that resulted in the subscription/service being cancelled for them.
Payment failures can happen at any point in the lifetime of the subscription. Common causes are credit card expiry or cancellation or insufficient funds.
These common causes are often helped by Dunning campaigns/processes which is essentially retrying payments in the case of insufficient funds or reaching out to the user to get new payment information before expiry or after failures.
Payment failures may also occur because of chargebacks which can be caused by fraudulent use of the card, bad faith use by a user, a company blocking an employee's charge or parents being unaware or unhappy with a child's usage of their payment method.
Chargebacks may also occur when users have forgotten about their trial which automatically carried over to a paying subscription.
Churn can occur simply because the person using the tool left the company that was paying for the tool.
Lost access to account
Users can forget their password or lose access to the email they signed up with and thus lose access to their account. Users in this state might like to use the tool but cannot easily regain access to the account so they cancel the subscription.
Voluntary churn is where a customer has made a conscious decision to cancel or not renew their subscription.
Looking at churn holistically, two very different groups emerge, those who have found value and those who have not. These two groups have very different reasons for churning and there are different ways to help win them back.
Finding value is generally measured as having ‘activated’, which will be covered in a future article.
Common reasons for churning when the user has previously found value:
- One off or limited use case
- Circumstances changed, such as: They don’t need anymore, or they solved problem another way
- Moved to a competitor
- ROI makes problem not worth solving
- Seasonal usage: Common for school term, summer/winter breaks or sporting seasons
Haven’t found value
For users that haven’t found value they have a much smaller but broader set of common reasons:
- Unsure how to get value
- Got distracted / forgot to continue trying the product: Especially for trials or upfront payment services
- Wrong fit
Zombies are customers who are paying but getting no value from the product. They are going to churn, it is just a matter of when.
These customers can have found value in the past or not, but have just let the subscription run and haven’t cancelled yet.
Downgrade churn is when a customer moves from a more expensive option to a less expensive option or shrinks their usage (seats or some other measure of usage). This may or may not be counted as churn depending on which of the measures you are using above.
Downgrade churn is important to understand as if you are looking at only a subscription based metric this will count as will upgrades, however you haven’t lost the customer. Similarly, this won’t show up on customer based metrics but will on NDR metrics.
Finding out why your customers are churning
Ask churning customers
Customer calls and exit surveys are two of the most powerful tools for getting to why customers are churning. Note that making it easy to give you the right honest feedback is critical, just “I wasn’t finding it valuable enough” on its own isn’t going to help you solve the problem.
Sales or customer success conversations often given detailed context, but may not always give the most honest and blunt feedback. Exit survey at the point of cancellation give volume and often honesty but users are often not keen to give a deep explanation.
Analyze retention cohorts
Use retention cohorts to see if there is points in time where users are churning is it right after signing up, which could mean it was an onboarding or activation issue, or was it after a few weeks?
Cohort analysis can also answer questions like:
- Are particular roles or industries churning more frequently?
- Are users from certain locales churning more or less?
- Is seasonality a factor?
- Does how a user found us impact retention?
Looking at churn data over time
Looking at churn data over time, can give you a sense of whether a recent change impacted churn positively or negatively. This is a good way to identify bugs or changes which impacted users' workflows.
Look at user testing or session recordings
Seeing what users who churned or said they would churn during testing is a great way to discover how to improve the product and reduce churn.
Understanding what attributes and features impact churn
Discovering what features impact churn and retention and whether certain cohorts have big impact or not is key to being able to tackle churn.
You can discover this data manually by looking at each variable and whether it is more or less likely than the baseline. Alternatively you can use a tool like Upollo which will give you real time information, including on a per user basis, on what attributes make users more or less likely to churn.
Upollo can also help narrow down who is likely to be churning so you can analyze their session recordings and start conversions early.
Ensuring users see value right away
Most retention curves see a sharp dropoff after the first day of usage. Ensuring users are onboarded and see the value as soon as possible has some of the biggest impacts on retention, especially in the short term.
Increasing the value your product provides over time
Some of the biggest decreases in churn have been increases in value of the product. This is especially important for longer term churn where users may be thinking about trying competitors or simply thinking about whether they get enough value from the product to continue paying for it.
Providing the value is one part, but ensuring customers know about it is equally as important to ensure they realise it and remain a loyal customer.
Ensure you are getting the right customers signed up
Quality trumps quantity when it comes to building a sustainable customer base. Use targeted marketing and clear messaging to attract customers whose needs align closely with what your product offers. Employ qualification criteria to ensure that your sales team focuses on prospects who are most likely to become long-term users.
Move Users to Annual Plans
Transitioning customers from monthly to annual plans extends the customer lifecycle and provides a longer period to showcase the value of your product. Annual plans reduce the frequency of decision points for continuing service or the frequency of billing notifications, thus lowering churn opportunities.
Enable Dunning Campaigns and Smart Retries with Your Billing Provider
When payments fail, smart retries coupled with strategic communication can recover revenue without disturbing the customer experience. Partner with a billing provider that offers intelligent retry logic and custom dunning campaigns to gently nudge customers through payment issues.
Send Payment Reminders
Proactive payment reminders can preempt churn by addressing payment issues before they occur. Simple alerts for upcoming renewals or expiring credit cards can maintain continuity of service and show customers that you value their patronage.
Offer a Self Serve Portal for Updating Billing Information
Empower customers with a self-service portal. It provides them with the autonomy to manage their billing information, reducing friction, and the likelihood of churn.
Offer Subscription Pauses
Provide flexibility by allowing customers to pause their subscriptions. This understanding approach can prevent total churn, as customers appreciate the ability to return when they're ready. This is especially helpful for combating seasonal churn such as happens over summer, school holidays or sporting offseasons.
Identify Users Who Haven’t Got Value and Offer Support
Monitor user activity to identify those who haven't activated or seen the full value of your product. Reach out proactively with personalized support, resources, or training to help them gain maximum benefit from your product.
Sometimes, users need just a little more time to evaluate the value of a product. Offer trial extensions to users who are engaged but not yet activated, giving them a no-pressure environment to become paying customers. This can also be helpful for users who got distracted after signup or started trying the product on a Friday afternoon and have forgotten about it by Monday.
Remind Users of the Value They Have Gotten from the Product
Regularly communicate the wins and benefits that users have gained from your product. Use data-driven insights to highlight their success and encourage continued usage. Amazon Prime is a great example of this when you go to see your profile, the first step for cancelling, customers are shown how many free deliveries, shows and other benefits they have got from Prime.
For customers who have cancelled, win-back campaigns can be your second chance. Tailor offers to their reasons for leaving, show them what they're missing, and what's improved since they left. These can also be run for users who have just cancelled.
Re-engagement Campaigns for Zombie Users
Don't let inactive users slip away. Implement re-engagement campaigns that reignite their interest with new features or compelling content to draw them back into active use and reduce the likelihood of churn.
Expanding Usage within an Organization
Encourage adoption across different teams within a customer’s organization. Wider usage leads to increased stickiness and creates internal advocates, reducing the likelihood of churn.
Upollo increases conversion, retention and expansion and helps stop churn before it happens.
By providing churn likelihoods on a per user and per company basis, Upollo let’s you understand who is going to churn and why allowing for you to employ the strategies above either via manual outreach or automated campaigns.
Start tackling churn with Upollo for free!
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