Customers keep unsubscribing? Whether your business is in tech, SaaS, or another subscription-based sector, you need to learn the reasons behind those cancellations.
That’s what a churn analysis is designed to do.
A churn analysis is a collection of data — your KPIs, revenue data, customer behavior data, demographic information, and more — that you’ll develop with your analytics team. Once created, it lets you examine the data to understand why your churn rate is rising. You’ll gain insights into why customers are unsubscribing or downgrading, and from there, you’ll be able to form a strategy to bring that churn rate back down.
Ready to learn more? Read on to get an in-depth look at what churn analysis is, how to create one, and how to use it like an expert.
What Is a Customer Churn Analysis?
Understanding churn analysis means understanding churn rates first. In brief, churn rates measure how many customers leave over a certain period of time. If you’re selling a product as a service, it’s a great metric to help track your inflow of new subscribers and the outflow of people who have ceased using your service.
That’s what a churn analysis is all about — it’s a deep dive into customer behavior. With a churn analysis, you’ll be able to analyze your customer base on a granular level to provide insights as to why some customers stay while others unsubscribe. It’s information you can use to improve customer retention, thus improving your churn rate.
Why Do Companies Analyze Churn?
To put it simply, companies analyze churn because it’s one of the best metrics to judge how well your business is doing. When churn starts to creep higher, it’s time to act. This is a bellwether indicator that tells you something needs to be tweaked to improve your churn rate.
What happens if your churn rate rises unchecked? Revenue will drop, and you’ll see your customer acquisition cost rise as you spend more per customer on marketing to bring those new customers in.
How much can your revenue decrease? It depends. Here’s a study of the telecom industry from 2016 as an example. Researchers found that churn was costing telcos in the U.S. and Europe at least $4 billion a year — and likely $10 billion per year globally. And that’s just one industry. Elsewhere, churn rates might be higher or lower depending on any number of variables.
As you can see, rising churn rates are bad news all around.
The good news is that a thorough churn analysis lets you look at a variety of different metrics, which gives you insights as to why your churn rate is rising. At a basic level, you’ll be answering questions like:
- Which customers are leaving?
- Why are they leaving?
- Which customers are most likely to churn soon?
- What can I do to reduce churn?
Now that we’ve discussed how a churn analysis can help your company, let’s take a look at some of the most common types of customer churn.
Types of Customer Churn
There are a few different types of churn. Here, we’ll discuss some of the most prominent so that you can better understand how churn works, plus get some insights into some of the most common reasons why customers churn.
Voluntary Active Churn
This is the easiest type of churn to understand — at least at a high level. Voluntary active churn is when subscribers choose to unsubscribe. The key distinction between this and other types of churn is all in the name. Unlike some other types of churn, “voluntary active” means that subscribers are deliberately unsubscribing.
Naturally, your company will want to understand why; you’ll have to examine the churn analysis to find out.
Involuntary Passive Churn
Involuntary passive churn is the opposite of voluntary active churn. Involuntary passive churn happens when customers accidentally unsubscribe.
This can happen fairly easily. It’s often a result of automatic payments gone wrong. For example, a customer may have recently received a new debit or credit card, but forgot to update their subscription with the new numbers, so the payment fails. Or maybe a lack of funds or a recent change of address that they’ve neglected to update results in a payment failure.
Whatever the case may be, it’s accidental on the customer’s part. Most of the time, they’re not even aware that they’ve been unsubscribed until they receive a payment failure or subscription cancellation notice. They’re not necessarily high-risk customers — just customers who perhaps need a reminder to update payment information.
“Good” Churn
Losing customers is never a good thing, right? That depends. There is such thing as a “good” type of churn.
Normally, when your churn rate increases, your revenue goes down. It’s a simple equation: More customers leaving, fewer staying and paying, so your profits are smaller.
Good churn flips that on its head. This happens when expanding revenue from existing customers outweighs the money lost from those who are unsubscribing.
To express it with an example, let’s say that you’re a streaming service offering a variety of packages and add-ons. Good churn would happen when your existing customers take advantage of those add-ons to the extent that the increase in revenue from that actually outpaces the lost revenue from subscribers who got the basic package then later unsubscribed without paying for any add-ons.
Downgrade Churn
Downgrades are a type of churn that can be easily overlooked. It happens when your customers downgrade their subscriptions. So for a cellular provider, this could look like customers who are opting for smaller data plans to reduce their bills. If you offer a streaming service, downgrade churn happens when people remove add-ons like premium channels or expanded live services but keep the cheaper basic plan.
At least you haven’t lost the customer entirely, right? Well, that remains to be seen. It really depends on how much you spend per customer, not only on providing services at different levels but also on marketing strategies designed to retain customers and sell them additional services. If you have high per-customer costs, downgrade churn can be devastating.
On the bright side, downgrade churn can tell you a lot about what you may need to do differently to retain customers. Why do customers downgrade? Put simply, it’s because they no longer see value in the upgrade. Analyzing this type of churn can help you understand why they no longer deem it valuable — and from there, you can make decisions that may change their minds.
The Benefits of Analyzing Churn
You’ve already seen some of the benefits that come with churn analysis. Now let’s dive deeper to identify some of the biggest reasons to invest in this type of analysis.
You Keep a Close Watch on Customer Acquisition Cost (CAC)
Attracting new customers is expensive. Statistics reveal that adding new customers can cost up to five times more than keeping existing customers — and increasing customer retention by just 5% can lead to profit increases ranging between 25% and 95%.
Consider the costs involved. Your marketing department, working on new or optimized ways to promote your services through digital marketing, print media, TV commercials, and more. Your sales team, working hard to qualify, nurture, and convert qualified leads. And that’s not to mention the costs of publishing, outside creative help, and more. These are just some of the variables that make up your customer acquisition cost.
Doing churn analysis regularly helps you keep a close watch on your CAC. That’s because the CAC is a fundamental part of churn. When you have customers unsubscribing or downgrading, naturally, you have to increase your sales and marketing efforts to bring in new customers so that you can make up the shortfall.
It’s a little like tug of war. Customer retention falls, customer acquisition rises. CAC is a metric that must be tracked when you’re tracking churn.
You Can Better Control Revenue Potential
What is revenue potential? It’s the ability of a revenue source to generate revenue over a specified period of time.
For example, let’s say your SaaS business offers a basic package and a premium package at two different monthly subscription rates. Your basic package costs $100 per month, and at the start of the month, you have 1,000 subscribers, so your monthly revenue potential is $100,000. For the premium package, the cost is $200, and at the start of the month, you have 100 subscribers, so the revenue potential is $20,000. Your total revenue potential for the month ahead is $120,000 for 1,100 total customers.
Now, let’s look at how analyzing churn rate helps you control your revenue potential. To do this, let’s fast forward to the end of the imaginary month described above. Your revenue potential was $120,000 — but the actual revenue that you received was only $100,000.
What was the cause? Your churn rate analysis may tell you. Look at customer cohorts to see where that lost revenue comes from. Did all of your premium package subscribers unsubscribe? Probably not — but if they did, it’s time to look at your future pricing strategy and revenue potential to see where the problem is.
What’s more, regularly completing churn rate analyses will give you an overall average to work with, and that will help you better forecast your revenue potential. Rather than factoring revenue potential using maximum subscribers, use the numbers of customers retained each month from your churn analysis. Add the fees they pay to create an average revenue potential amount that accounts for your average level of churn.
You Can Develop Strategies to Reduce Churn
Why do churn analysis? The biggest reason — maybe the only real reason that matters — is so that you can develop strategies to reduce churn. There are always improvements to be made, plus when churn rates start to rise, whether gradual or sudden, it’s usually indicative of a problem that can be corrected.
A detailed analysis will point out a variety of metrics. You can use them to develop targeted customer retention strategies.
For example, you may discover that subscriptions soar around the holidays but then drop off during the spring. This tells you that you need to identify the reasons why this happens — and it gives you a chance to develop a strategy to retain more customers the next time you anticipate rising churn rates.
Another example would be a hypothetical streaming service that offers sports package upgrades. When churn rate rises, is it because people are downgrading away from the sports package once football season is over? If so, what can they do to make this package attractive year-round?
Those are only a couple examples. There can be so many reasons behind rising churn rates. It takes a variety of metrics to gain insights on consumer behavior. From there, you can adjust your product, sales, and marketing campaigns to reduce your churn rate.
Just one churn analysis is valuable, but repeating this process to generate monthly or quarterly analyses is even more valuable. Not only do annual reports give you fresh data to derive insights from, but they also allow you to track patterns that emerge over time, just like in the examples illustrated above.
How to Analyze Your Customer Churn Data
By now you know why you should do it — but do you know how to analyze customer churn data? For most companies, analyzing churn manually is growing ever more difficult because there is so much to track. To get started, look for enterprise resource planning (ERP) software that offers your team plenty of data and various perspectives so that you can analyze from different angles.
Track Specific KPIs
Every churn analysis begins and ends with key performance indicators (KPIs). Naturally, the most important KPIs will revolve around subscriptions, upgrades, downgrades, and cancellations. These form the basis of your churn rate.
However, there are a lot of other KPIs that can give you key insights into why people are subscribing, upgrading, downgrading, or unsubscribing. Here are a few to look at:
- Customer engagement and usage: When engagement falls, customers drift away. What can you do to keep them engaged (and paying)?
- Support tickets: Is your support team extra busy? That combined with a high churn rate could be indicative of frustrated customers looking elsewhere for services.
- Competitor pricing points: If someone does what you do but cheaper, customers can drift away.
- Customer acquisition cost (CAC): You’ll need to learn how much it costs to replace customers when churn rates are on the rise.
- Monthly recurring revenue (MRR): MRR calculates revenue you get on a monthly basis, and it’s typically divided into several sections — MRR for new customers, MRR for upgrades, and others. There is also churn MRR, which calculates money lost to cancellations. You’ll use these in conjunction with the CAC to determine the true costs of rising churn since customer retention is nearly always more profitable than higher rates of customer acquisition.
- Renewal rate: How likely are customers to renew their subscriptions on a monthly or yearly basis? This statistic will help you generate more accurate forecasts and monthly recurring revenue reports.
- Likelihood of upgrading: This is another metric that will help you with forecasting and generating more accurate MRRs.
These are a few of the basics to include in a churn analysis. There are many more metrics worth tracking — and each offers different insights.
Segment Your Customers
First, let’s clear up a common misunderstanding. Customer cohorts are often confused with customer segments, but there’s a very clear difference between the two.
Customer segments are groups of people united by something in common. People with masters’ degrees in biosciences could be one segment, and people making more than $100,000 per year are another.
Cohorts (which we’ll discuss more below) are people united by something in common and who are also within the same timeframe. So one cohort of people would be people who earned $100,000 in the year 2016, for example, or women born in 1973.
Segments divide people based on common factors, cohorts divide people based on common factors within a specified timeframe.
You can use segments to start gathering consumer behavior data.
- Are men or women more likely to subscribe?
- What income brackets are more likely to subscribe?
- Is your service more popular in certain regions?
- Is your service more popular among certain age groups or education levels?
This demographic data can show you where to target marketing strategies, and it sheds light on groups most likely to stay or to unsubscribe.
Evaluate Your Cohorts
A cohort analysis is incredibly valuable as part of your churn analysis. That’s because it provides you with several layers of perspective. Not just demographic data, but also time data.
Essentially, you’ll be taking the segmentation data from above and breaking it into time-specific groups. That lets you analyze several things, including:
- Which customers are more likely to disengage or unsubscribe after a given period of time.
- Which features of your product are most highly utilized or underutilized — plus who is using or not using these features and when they are most likely to start or stop using them.
- Which customers are at a higher risk of delinquent churn. Perhaps people of a certain age from a certain region are more likely to unsubscribe. Once identified, you can learn the reasons why this cohort behaves as it does.
- Which portion of customers are using your support services. Perhaps, for example, men over the age of 50 have an unusually high support ticket rate. Can you do something to make your product easier for them to use?
A cohort analysis is a great tool to get a granular look at your customer base. It lets you identify difficulties that specific groups may face. Once you’ve revealed a pattern among your cohorts, you’ll be able to address it to keep your churn rate low.
Assess Customer Sentiment
Much of the data we’ve already discussed will come from your ERP software — but not all of it. Analytics tools will help you gather KPIs and may even shed a little light on demographics and cohort data.
For qualitative factors you can’t track strictly by the numbers, like customer sentiment, you’ll need to rely on other tools.
Try these strategies:
- Monitor your social sites. Are you getting likes, shares, and mentions? On which sites and among which groups of people?
- Ask for in-app ratings. Adding a gentle rating request popup or push notification can help you gain valuable insights into the minds of your active users.
- Ask for direct feedback. Make sure customer support emails include links to brief surveys. Add a survey at the end of customer service and tech support calls and also include one in your cancellation flow to gather reasons why people are canceling. Be sure to provide questions that allow both disagree/agree feedback and open-ended answers.
- Measure willingness to recommend. You can do this as part of direct feedback surveys or through in-app ratings simply by asking the question: How willing are you to recommend this service to family or friends?
All of this is yet more data that can go into your churn analysis to help you identify weak points.
Reducing Customer Attrition With Your Churn Analysis
Now that you’ve collected all of the data for your churn analysis, it’s a matter of putting it all together. Your mission is to find out why customers are canceling or downgrading their services — and then to figure out how to slow down cancelation and downgrade rates.
Dig deep into the data to learn more.
Start with survey results from people who have canceled or downgraded. Are they canceling because it’s too expensive? They prefer someone else’s service? Tech support issues?
You can take that data and look elsewhere within your churn analysis to learn more.
Let’s say the largest group of cancellations comes from people who responded that they canceled because of technical issues. You can look at support ticket numbers to confirm this trend. If there are more support tickets than usual, you need to figure out why. If a particular demographic group has had more support tickets than others, then perhaps there is something about your service that makes it less accessible to this group.
Be sure to check cohorts too. You may discover that the people who have recently signed up are more likely to cancel than those who have been around awhile, and that could suggest a lot of things. Perhaps new adoptees find the learning curve difficult, so they unsubscribe at higher rates, which could signify that your onboarding process or customer success strategy needs improvement.
There are many, many reasons why people unsubscribe or downgrade — too many to list here — but you get the point. Using your churn analysis, seeing all of the data points in relation to each other, and being able to look at them from different perspectives allows you to connect the dots and learn why your churn rate is rising.
That puts you in the perfect position to reduce customer attrition — and increase your revenue.
Empower Your Sales Team To Reduce Churn With Sales Assembly
You may have started small, but as your business scales upward, your strategies and expertise will need to scale right along with it. To stay competitive, you’re going to need top-tier talent — and lots of it. Doing business means doing analytics, and churn analyses are a big part of that because it’s vital to track consumer behavior so that you can continually improve your offerings.
Sales Assembly can help you through every step of the process. Take advantage of masterclasses, micro-trainings, certifications, and more. You’ll gain access to a talent pool to help you scale faster — and with our strategic resources, you’ll scale smarter too.
Ready to learn more? Let’s chat! Contact us today for additional information.
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