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What is Churn Analysis?

What is churn analysis, and why is it so critical to a company's success?

With customers turning to subscription services for everything from shaving cream to document storage, it's no surprise that more companies are adopting a subscription business model.

Customers are drawn to these services because of their affordability and accessibility. Businesses value the consistent revenue and increased customer retention. This model is mutually beneficial and increasingly popular.

The International Data Corporation predicts that 53% of all software revenue will be generated from a subscription model by 2022.

A key to success in this business model is retaining users. Acquiring customers for a subscription-based service is the easy part. Keeping them can be more challenging. Fortunately, subscription-based services can use data to calculate and improve their churn rate.

What is a churn rate?

A churn rate is the percentage of customers a company loses in a given period. For subscription-based services, this is the amount of clients that unsubscribe.

A low churn rate can be a promising sign for a company. If a minimal number of customers are leaving, that indicates that the product offers something of value and is competitive in its market.

Having a high churn rate is both undesirable and expensive. Every subscriber lost is monthly recurring revenue (MRR) lost. Companies will generally have to put money into marketing to gain another customer, which on a large-scale can be financially damaging.

What causes a high churn rate?

Here are some factors that could potentially create a high churn rate:

  • The prices aren't competitive
  • The service isn't providing the desired outcome
  • The marketing attracted the wrong customer
  • Customer service is poor
  • There are too many bugs/logistical issues

The churn rate is the pulse of a business. If it increases drastically in a short period of time, this can signify a serious problem.

A low churn rate can be a signal of high-growth and stability. For example, Netflix has an impressive churn rate of only 3%. With the growth of Netflix's competitors, such as Disney+ and Hulu, one may have expected their churn rate to go up. This streaming giant, however, continues to retain more users than its competition, due to its competitive pricing and positive user experience.

You may be thinking, "Ok, How can I get my churn rate to zero?" Unfortunately, churn is a reality of any subscription-based service. Retaining every customer isn't plausible. However, with proper churn analysis, a company can limit the number of clients they lose and save money.

What does churn analysis do?

Churn analysis is a key to fixing a suboptimal churn rate. If done properly, it can answer several important questions:

  • Which demographic is most "at-risk?"
    For example, if churn is the highest among females ages 22-28, users within that category will be considered more "at-risk" of ending their subscription. Increased marketing targeting this specific demographic can help retain more clients.
  • Which immediate problems are responsible for churn, and how to solve them?
    Churn rate can indicate a more significant issue within a company. If a churn rate increases drastically in the same month as a new update installation, that may mean that the update has flaws or is not popular with users.
  • What are the strengths of the company?
    The demographic with the lowest churn rate is likely to consist of loyal users. Less focus and resources are needed to retain these customers.
  • What are the company's weaknesses?
    If a company's churn rate increases after a competitor enters that market, that could indicate the company’s product lacks what's needed to compete.

Imagine a SaaS company just discovered that their monthly churn rate is 16%. They realize that this rate isn't sustainable for their business and decide to consider three courses of action.

  1. Launch a marketing campaign targeted at current users
  2. Lower the price of the subscription
  3. Re-haul the customer service department

Picking any solution without churn analysis could be potentially detrimental.

Any changes to an existing platform can be jarring for a current customer. If a business implements a solution without fully understanding the issue, it could exacerbate the problem. Even if an action does neither harm nor good, it will still waste company resources and fails to provide a solution.

This company wants to make an educated decision, and decides to use Causal for management consulting. Causal's churn analysis models indicate that the churn rate increase corresponded with the release of a competitor's more affordable product. The company lowers the subscription to a competitive rate, which retains current customers who no longer have a reason to deflect.

Churn analysis is not only helpful in fixing issues, but can also prevent them before they occur. If a company understands each user's risk level, they can place their resources toward targeted retention campaigns.

Surprises are fun at birthday parties, not in businesses. With accurate churn analysis, a company is likely to be caught off guard.

What to look for in a tool that provides churn analysis?

Simplicity, innovation, and accuracy are incredibly important in a tool that provides churn analysis.

Causal provides all of this, plus clear interactive dashboards, real-time analysis, and outcome predictions for multiple different scenarios. Causal lets you take into account the unpredictability of your business, and allows companies to see which factors are likely to negatively or positively influence their churn rate.

Is your company a small or medium sized SaaS?

Causal also offers a specific SaaS financial model for companies in early-development. This targeted program takes into account the complexities and irregularities of seed-stage businesses. Causal understands the importance of churn prevention in company growth.

Causal makes working with data easy, so you can focus on what truly matters.