About the Churn Guide
Customer churn is the most important metric to follow in customer success. Or is it?
In recent years, we’re seeing a departure from churn as the north star metric and an acceptance and integration of related metrics into CS workflows. In our recent poll on CS OKRs, Lowering Customer Churn placed just third with only 19.2% of votes, behind Increasing Adoption and GRR / NRR.
Yet despite this shift across SaaS, Churn is still a vital datapoint for both CS and the company at large. However, the rise of other KPIs has brought much needed clarity to CS dashboards. This new balance is healthier in the long term, as churn has never been and will never be a sufficient, standalone metric. It works best when paired with other relevant data to generate insights into how and why customers cease doing business with you, and what you can do to mitigate it.
To that end, today we’re going to look at Customer Churn from this new perspective and aim to understand it and its place in Customer Success and SaaS as a whole. Specifically, we’re going to review:
- What customer churn is, why it’s called that way, types of churn, and related definitions
- How to calculate customer churn for your business
- Some benchmarks for churn including recent statistics on average churn rate and more
- How to correctly conduct a churn analysis and forecast
- What the root causes of churn typically are and how you can avoid them
- Some opinions from around the CS space on why churn is decreasing in importance
- What the actual cost of customer churn is, along with some more FAQs
Throughout, you’ll have the opportunity to download our Churn Bible – an eBook we put together with all the basics around churn, neatly arranged for your convenience. Shall we begin?
What Is Customer Churn?
Customer churn is a business concept indicating the number or percentage of customers a business has lost over a given period. It’s typically measured as a percentage – or churn rate – of the total number of customers the business had at the start of that specific period. It’s usually measured on a monthly basis, but quarterly and annual churn play an important role as well.
As an example – a company with 300 customers and a 5% churn rate will lose 15 customers per month. However, that same company might lose 150, or 50%, of its customers per year, a far more concerning number – which is why customer churn measurements will always be a matter of perspective – how you look at the number and what insights you can gain from it.
Did you know? Customer churn goes by a few different names, all typically used interchangeably:
- Logo churn
- Customer attrition
- Subscriber churn
- User churn
What Is the Customer Churn Rate?
Customer churn rate represents the percentage of customers lost over a specific period, calculated as the number of customers lost divided by the total number of customers at the beginning of that time frame. It’s typically the go-to metric for measuring churn within an organization.
Why Is Customer Churn Important?
Think of it as a scaling problem: if you’re losing a customer this month, you might think it’s ok because you’re also winning another customer. But what about long term or when your company keeps adding new accounts?
By calculating your churn rate, you can understand the precise ratio between customers you’ve lost and those you’ve gained, and if that rate is high, it means you’re losing far more customers than you’re gaining.
↪ On the Hidden Cost of Customer Churn
That number adds up, leading to a significant portion of your customer base changing year-over-year due to poorly optimized retention tactics, or lack thereof. Furthermore, high churn also translates to a lot of potential revenue left on the table as customers who leave can’t upgrade and increase their spend on your products or services. Lastly, if you don’t take care to reduce your monthly churn rate, your annual churn rate will end up being a rude awakening to the realities of your business.
A recent review of the State of Customer Churn revealed that the average churn rate for the entire business sector is 6.58%, far higher than the recommended churn rate of 3% or lower (more on this in a bit). A company in that scenario loses 65% of their customers in a year. Imagine the stress that puts on the rest of the organization, forced to adapt to a constant influx of new customers whose use cases might be wildly different from those customers who left last month, for example.
That same study identifies the key reasons why customers churn, with an alarming 44% of respondents saying clients ‘weren’t achieving their desired outcomes.’ So what can we do in customer success to address the cause and mitigate this risk of churn?
Where Customer Success Fits Into the Equation
Customer success as a business function started with the chief goal of reducing churn. The most popular and biggest early advocate of customer success came in the form of Salesforce, who launched their CS department way back in 2005 with the purpose of reducing their “horrific” customer churn rate of 8% (equal to 80% customers lost in a year).
“Salesforce as a business was in a death spiral. Underneath the glowing results and amazing growth rates, there was a fundamental flaw in the business, and continuing on the current path would bring disaster. The culprit was summed up in one simple word–churn [..] A simple concept, totally part of our thinking today, but one that, in 2005, no other subscription-based B2B company had dealt with at this magnitude.”
So did it work? Yes – not only were they successful, but it helped establish a set of principles and tactics we still use today in customer success:
- Their main goal was to increase customer retention and reduce their churn rate – two sides of the same coin.
- To do this, they aimed to increase user adoption – which was a big issue back then, where customers would purchase a subscription for their user base, and then very few users were actually adopting the CRM.
- Furthermore, they wanted to “increase the overall value of their installed base” – meaning upsells, today a natural part of CS.
- To top it all off, they needed to accomplish all this while still maintaining their “stellar” customer acquisition rate, which they had worked hard to achieve.
Today, Customer Success as a business function has added many more tactics to help sustain those goals – from proactive engagement to value realization strategies, from onboarding flows to custom-tailored pricing models. All of these together make a well-oiled machine that reduces both customer churn AND revenue churn, while growing expansion MRR, just as Salesforce did (and still does to this day).
Types of Churn
Since we’ve reached the topic of revenue churn, it’s time we gave a cursory glance at the different types of churn and what they mean.
1. Revenue Churn vs Customer Churn
While customer churn represents the customers who leave at the end of a given period, revenue churn is the total value that’s lost as a result of customers who churn or downgrade their subscriptions.
The biggest advantage or use case of revenue churn, or monthly-recurring-revenue (MRR) churn, is to paint a more complete picture regarding customer churn. In effect, it helps all stakeholders assign a dollar number to the customers who left, allowing more financially inclined teams to understand precisely how churn hurts the bottom line.
There are two types of revenue churn:
- Gross MRR Churn
- Net MRR Churn
The only difference between the two is that for Net Revenue Churn you also have to add back in the expansion MRR you’ve achieved for that period. Looking at the formulas might be easier:
2. Voluntary vs Involuntary Churn
Voluntary and involuntary churn may sound self-explanatory, but there are some hidden intricacies:
- Voluntary churn represents customers who actively choose to stop doing business with you, for reasons such as poor experience, competitive disadvantages, or simply being unable to afford your product or services.
- Involuntary churn represents customers who leave due to passive issues such as payment problems, account issues, or simply forgetting to renew their subscription. On the whole, it’s typically easier to recover customers who’ve churned this way.
How to Calculate Customer Churn?
There is a simple formula to calculate customer churn. You will need to know the following things in order to complete a comprehensive churn analysis:
- Period for which you’re aiming to determine your churn rate
- The number of customers you had at the beginning of that period
- The number of customers you’ve lost during that period
- For revenue churn (formula above), you also need to know:
– Your MRR at the end of the previous month
– The MRR lost to churned accounts
– The MRR lost to downgraded accounts
– The MRR gained through expansion efforts such as upsells or customer marketing campaigns
Now you can simply use the formulas in this article to find the values you’re looking for! Here’s how to calculate your customer churn rate:
You might also find the formula for Customer Retention Rate useful, as it’s the polar opposite of your Churn Rate (and presents a different perspective, valuable in most reports):
Customer Churn Calculator
We’ve created this SaaS customer churn calculator to help you see the potential evolution of your current business trajectory:
Customer Churn Statistics and Industry Benchmarks
Now that you’ve calculated your churn rate, you likely want to see how you compare vs some industry benchmarks and recent statistics. We’ve got you covered:
What is a good customer churn rate?
A good monthly customer churn rate, particularly for SaaS, is between 3% and 5%.
However, it can always get better and should get as close to absolute 0 as possible. That said, it’s a far-flung ideal, unachievable by 99% of businesses.
What is the average customer churn rate?
As seen in the infographic above, the average churn rate falls between the following values:
- For B2B businesses: 6.7%
- For B2C businesses 6.6%
- For B2B2C businesses: 2.85%
- For SaaS businesses: 5.2%
- Overall Average Churn Rate: 6.58%
How to Do a Customer Churn Analysis?
A proper churn analysis will give you insights into:
- Why customers stop doing business with you
- What you can do to win them back
- How you can spot churn precursors in your existing customer base
- How to act to prevent churn for at-risk accounts
Start by calculating your current monthly customer and revenue churn rates. Next, invert those percentages to obtain your customer retention rate and NRR. These four metrics can help guide your churn analysis.
Then, because there are many factors that cause churn to happen, there are several kinds of analyses you can perform to determine why your customers leave you:
1. Cohort Analysis
In a cohort analysis, customers are grouped based on their shared characteristics. Each business is unique, so there are many ways you can group your customers to extract valuable insights. Here are a few examples:
- By customer segment
- By month of purchase
- By acquisition source (organic, paid, affiliate, etc.)
- By demographics (age, region, etc)
2. Customer Behavior Analysis
Alternatively, you can group and analyze your customers based on how they interact with your product. The most common customer health scores SaaS businesses look at are:
- Features used
- In-app actions
- Global account health score
- Messages sent / received
- Tasks created / resolved
- Tickets created / resolved
- Engagement score
- Feature requests
- Bug reports
3. Voice of the Customer Analysis
Looking at the big picture stuff can definitely help make sense of the noise, but it risks missing the human element of your customer interactions. Customer churn happens on the individual level, so only analyzing the macro level will always fall short of what’s necessary. Your best option past this issue is a Voice of the Customer analysis or process:
- Look at the direct feedback of your most valuable customers (by revenue, customer-fit, or other factors).
- Find ways to pass on that feedback to all relevant stakeholders and ensure they see it.
- Work with your CS and Product team to prioritize customer requests and feedback and handle everything with empathy and diplomacy – even if a customer’s request is too much, they still took time out of their day to try and help you, and you should respect that.
- If this is your first time through an analysis like this, consider turning it into a repeatable VoC process for longterm customer-alignment that actively prevents customer churn.
4. Gap Analysis for Service Quality
If none of your research yielded clear conclusions, a gap analysis for customer service can help shed light on more complex customer churn issues. It enables businesses to identify:
- Knowledge Gaps, or the difference between customer expectations and your perception of their needs.
- Policy Gaps, or any disconnects between your perception of customer needs and what the product / service can accomplish.
- Delivery Gaps, or the difference between product / service delivery specifications and the actual product or service.
- Communication Gaps, differences between the product / service you offer and the communication and overall marketing around it.
- Customer Gaps, or any differences between what customers expect and how customers see what they receive. You might be offering exactly what they expect, but if it’s not explained properly, you have a customer gap.
How to Forecast / Predict Customer Churn?
Predictive churn modeling means using machine learning models and algorithms to predict the evolution of your churn rate, based on existing data which you use to train the algorithms. But how does one do that, precisely?
Well, fortunately, in today’s AI landscape you can use a variety of AI models, such as ChatGPT 4.0, to analyze large quantities of data and create a model for your future churn evolution.
The most important thing to remember before proceeding with churn prediction is to ensure proper data governance and hygiene, as even the slightest incongruity or inaccuracy can sway the results of your predictive model.
Why Customers Churn?
What Causes Involuntary Customer Churn?
- Outdated Payment Information. In an increasingly subscription-centric world, few check and update their payment info, leading to involuntary churn when their card is declined.
- Payment Server Errors. Sometimes it’s nobody’s fault that a payment bounces – it may just be a server error. For this reason alone you should have a system that automatically retries after a grace period.
- Lost / Stolen Cards. Credit/debit cards can get stolen or lost. In that case, the customer usually declares it as such to the issuing bank and the card is canceled, leading to failed payments wherever the customer already uses that card.
- Insufficient Funds. Not enough funds can be a surprisingly common reason why customers churn. While in B2C lack of funds can be self-explanatory, in B2B it usually indicates the customer is going through hard times – so consider a gentler approach like Referrizer had during the 2020 pandemic.
- Other Bank-specific Reasons. Sometimes, the reason isn’t easy to pinpoint. People have their own personal relationships with their banks and the reasons for payment bounces might be hidden and complex.
What Causes Voluntary Customer Churn?
- Customers’ Can’t Achieve their Desired Outcomes. We’re seeing a shift in the CS space towards customer outcome achievement as a strategy for growth and retention. Indeed this is the right approach, as the CS collective report shows 44% of customers who churn do so because they can’t achieve their goals.
- Product Issues or Limitations. Next up are product limitations – if a customer expects something of a product and it’s unable to deliver, then you’ve got a delivery gap that needs fixing, or you’ve got a bad customer fit. Either way, product fixes or audience targeting changes should help get this under control.
- Pricing Issues. Sometimes, the price isn’t right. Meaning that either the customer can’t afford your product, or you might be due some pricing model changes. If more and more customers report issues with your pricing strategy, consider changing it.
- Poor Onboarding Experience. Onboarding is the pivotal stage where new customers decide if your product and services are worth the price they’re paying. Note that such evaluations will never stop, but providing value in the early stages goes a long way towards securing long term professional relationships.
- Poor Customer Fit. Sometimes a bad fit is just a bad fit. Other times it’s indicative of a communication gap – which needs to be fixed by CS together with Marketing and Sales.
How to Lower / Reduce Customer Churn?
How to Reduce Involuntary Churn?
1. Account Updaters
An account updater is a service that automatically checks your customers’ card details with their issuing banks before each renewal. On average, SaaS businesses that use account updaters see 2-5x improvement in their recovery rate.
A word of caution here: if you use an account updater as well as expired card notifications, you might end up spamming your customers and that won’t play in your favor. Even worse, you could charge users that actually wanted to cancel their subscription, though the chances of that are small.
Instead, try using the account updater by itself for a while and see how that impacts your involuntary churn. Then, if things don’t look better, try expired card notifications separately, and compare results.
Example account updater and how it works from Visa.
2. Dunning Emails
A dunning strategy can help most SaaS businesses prevent a significant percentage of involuntary churn.
If you freeze customers’ accounts immediately after a failed payment, this leads to bad customer experience. Instead, you can notify them before their card expires and ask them to update it (pre-dunning).
For a maxed-out credit/debit cards, allow your customers a few days to replace their card and try the payment again. This leads to an overall better experience compared to outright freezing their accounts
To ensure your customers get the best experience possible, Custify can help you automatically retry a failed payment or expired credit card and send a drip of renewal notifications to your customers whenever a charge to their credit card is declined.
Example of a dunning email from Spotify.
3. In-App Lockouts
Most of the time, issues can be solved if the card is tried again or updated. But if the situation isn’t fixed by the time the grace period ends, you can consider locking them out.
Although in-app lockouts are effective, you shouldn’t lock a user out of your app immediately after their payment fails. Instead, you should allow them a grace period to sort things out.
Also, make sure to also store their data for a set period of time, in case they decide to return.
How to Reduce Voluntary Churn?
1. Introduce More Personalization
We’re seeing the trend of personalized customer interactions becoming more and more prevalent. Just this year, 56% of consumers say they’ll become repeat buyers if their experiences are personalized, according to the State of Personalization report, while 27% of Gen Zers say they’ll stop buying after one impersonal experience.To that end, try to:
- Gather a complete picture of your accounts. If you gather the appropriate data from your customer success platform and other tools, you can then use it to personalize customer interactions. Note though that incomplete data means operating under false pretenses, which can lead to an adverse effect.
- Be smart about personalization. Customers don’t really care if you know that they got a new dog from LinkedIn. In fact, some may find it creepy if you bring it up. This kind of false personalization is not what customers want or need. Instead, find out goal-relevant information and use it to help them in support interactions, emails, and other product-centric ways.
- Use appropriate methods for low / high touch. Your engagement model will inevitably influence how much you can personalize customer interactions. For high touch, it’s easy as you can include customer data in your interactions. For low touch CSMs with hundreds or thousands of accounts, find ways to automatically use collected user data in playbooks and flows, or any type of automated messages such as in the product tour.
- Improve the product. Fundamentally, higher personalization doesn’t just mean using customer data to chat, it also involves, in the best of cases, updating the product to better serve customer needs. Use your VoC process (no. 4 below) to decide which improvements have the most merit.
2. Be Proactive in Your Customer Engagement
Being reactive in customer success is like using a fork to do the job of a spoon – it’s just going to bring diminishing returns until you eventually get fed up and quit. It’s the job of customer support to be reactive, and while CS can certainly help in that regard, customer service should never become the CSM’s job (despite our research showing 56.3% of CSMs are responsible for support). Instead, CS should be PROactive and come up with:
- A way of detecting churn precursors. Through product triggers paired with customer research and a solid CSP.
- A script for resolving the most common churn precursors. Every known product issue should have a solution. Every common customer request should have a prewritten response. And so on for all your most common scenarios.
- Automation flows, but smart. Proactive customer engagement works best when paired with automation playbooks. Use your prepared scripts and automate steps whenever your CSP detects churn precursors.
3. Come Up with a Value Realization Framework
Value realization is a trending CS topic right now and for good reasons. It seems the fog has lifted from many business leaders’ eyes that true value is the best way to stop customers from churning.
To put it bluntly, each customers goes through 5 value realization stages:
- Value Definition. Or when they know what they want – you must do your best to learn this.
- Value Delivery, or Expectation. Or when the business delivers the product or services, and the customer expects them to fit their definition.
- Value Realization. The a-ha moment when customers identify the value of what they have received. They may simply see it for now, as they still have a few steps to achieve it.
- Value Validation. Customers try to validate and replicate the value.
- Value Optimization. Once customers can replicate the value they received, you can move on to optimize that process as best as possible and keep it future-proof through recurring updates.
Your goal beyond identifying all of these correctly should be to optimize each one so you lower the Time to Value (TTV) for your customers and help them see the value they’re receiving at scale. More on how to actually execute a value realization process here.
4. Listen to the Voice of Your Best Customers
We’ve already outlined the Voice of the Customer process in the Churn analysis section above, but let’s recap the main points:
- Find your most valuable customers (by revenue, customer-fit, or other factors) and understand their feedback (ask for it, if necessary).
- Pass on that feedback to all stakeholders and make sure they see it.
- Work to implement VoC requests with your CS and Product team, prioritizing as you go.
To effectively reduce customer churn at scale, it’s vital that you turn this into a repeatable VoC process.
5. Streamline Your Onboarding for Increased Adoption
Adoption is growing as an OKR in CS and it’s no surprise. Using the product is the first step to achieving success with it. To that end, you should work to streamline customer onboarding through:
- better signup flows
- product tours
- implementation and setup calls
- customer integration requests
- more attention paid to post-onboarding
The best way around that? Download our SaaS Customer Onboarding checklist that walks you through everything you should do to perfect your onboarding process.
6. Build Extensive Customer Education Resources
Customers who know how to use your product will stay with you longer – it doesn’t take a genius to get why. So work with marketing, product, and support to create, maintain, and update customer education materials such as:
- Educational webinars
- A fully-functional knowledge base
- Actually useful guides and articles for the blog
- An eLearning platform (if you’ve got the budget)
- An online learning academy like Hubspot has
- A certificate program
↪ Pro tip: add your product as a skill on LinkedIn 😉
7. Offer Incentives for Customers Who Show Signs of Churn
At the end of the day, customer relationships are still business relationships, which means they’re transactional by nature. Therefore, the best way to win back customers who’re considering churning is by offering them some incentives to remain, such as:
- A discount
- A reactivated free trial
- A free grace period before removing access
- A bundle deal on extra features
- Any other ideas you might have
You can even turn this into a pre-approved list of incentives to give out to customers both pre-and-post churning, so you’re ready for (almost) anything.
8. Use AI Models to Anticipate Customer Needs
It’s fantastic the amount of in-depth research and training a single CSM can accomplish by simply talking to ChatGPT or other LLMs. Consider using AI to:
- Practice talking to customers in various common scenarios.
- Have it research specific customer interactions to figure out the best response.
- Feed it data to predict and anticipate customer needs for your business.
- Write customer emails that take into account all the data you have.
There are many more potential uses, as many as you can think of, but be wary of AI hallucinations, inaccuracies, and be mindful of privacy concerns. Find out what you should look out for in our guide to using ChatGPT in CS.
9. Come Up with an Offboarding and Win-back Strategy
In a concerning but not-at-all-surprising turn of events, nearly 73% of CSMs don’t have a win-back strategy in place for their customers, according to the State of Customer Churn cited above. Let’s fix that together:
- Create a list of incentives to win back customers.
- Reach out before customers churn and try to convince customers by offering those incentives.
- If customers still refuse, hold offboarding interviews post-churn to see what went wrong – research is essential at this stage, so it should take precedence over trying to win them back.
- Present churned customers with attractive win-back offers – but don’t push it or you’ll end up making everything worse (negative reviews can definitely sting).
An offboarding strategy, while not as cornerstone as an onboarding strategy, is still a sign of a healthy business that takes customers leaving seriously and works to better itself.
Expert Opinions Roundup: Why is lowering churn no longer the main objective of CS?
A recent poll unveiled that “lowering customer churn” has fallen to 3rd place when it comes to CS objectives.
Results based on 395 votes across 3 polls conducted in Nov-Dec 2023 in the Customer Success LinkedIn Group. Top 8 OKRs as quoted by CS Professionals across various Customer Success Slack Channels. While all OKRs on the list do contribute to reducing churn, that is not their ultimate goal, as CS tactics on the whole have multifaceted business benefits – from higher revenue to increased customer loyalty and more.
So we asked the CS community for their opinions on why lowering churn diminished in favor of adoption and GRR / NRR. Here’s what they had to say:
I believe Customer Success has evolved beyond solely reducing churn. The focus now includes proactive engagement, value realization, and fostering customer growth. It’s all about building long-term relationships and ensuring customers derive maximum value from your product or service. This shift reflects a broader approach to customer satisfaction and business success. And no-churn is just a consequence!
I see this as a positive change in language and focus. “Increase adoption” is a key leading behavior that directly impacts the lagging outcome of “lower customer churn”. Shows that CS is moving upstream to address the root cause of problems rather than reacting to them once they happen. I think it is a signal of maturing best practices and improvement in CS tech stacks.
It’s substantially cheaper to keep customers than obtain new ones.
Shawn Riedel, Customer Success Executive Leader at F/cs (and longtime industry truth speaker and influencer) thinks we’re still chasing metrics (like lowering churn) when we should be chasing customer advocates:
Interesting that creating Customer Advocates did not even make the list… which leads me to believe we’re still chasing metrics. Advocates buy more stuff and renew. That is the only way that math equation works. We should be working towards making our customers love us… then retention and growth become by-products. If we chase retention and growth… well, then we get the pie chart above which is all inside-out and really lacks the customer-centricity that everybody talks about.
Kyle Enman, SaaS Services Leader, thinks churn is still the main objective, since all other objectives on the list somehow contribute to churn reduction, but that the way we frame it has changed:
It almost seems like the top objective still is reducing churn, but the framing has shifted to be more about opportunity and execution than loss prevention.
To answer your question “what changed?”, I think this is representative of the desire for CS to shed the “cost center” label and instead be seen as a revenue generation engine.
Companies working on upselling and growth will automatically get great retention rates as a result of working on ways to increase value. Companies only focused on “reducing churn” are likely focused on reactive behaviors rather than proactive behaviors. Expansion has to be at the forefront of our work because it’s the best way to continue to drive increasing value with our customers through time. And adoption is important because it’s directly related to the behavior change we want to achieve– you can’t get value if you aren’t using the software/service. In reality, these three things are closely linked.
Other FAQs about Customer Churn
1. Why is it called customer churn?
The term customer churn comes from the dairy term “churn”, as in “churning butter” – the traditional method by which butter is made, but “churning” cream to separate liquids from solids. Precisely what the metaphor is here can be left to interpretation, but it’s reasonable to assume customer churn separates customers who stay from customers who leave.
2. Can customer churn be negative?
Yes! This is an ideal situation that only applies to revenue churn. A negative churn rate means that the expansion revenue you generate through cross-sells, upsells, and new signups exceeds the revenue you lose through cancellations.
For example, let’s say you had $100,000 MRR at the beginning of the month, but only $80,000 at the end, and you made an additional $30,000 in expansion revenue. This means that you actually managed to increase your revenue that month:
3. Why should I measure customer churn?
Churn is the killer of SaaS businesses. Therefore, it’s the most important metric you should track, frequently and accurately.
Left unchecked, churn leads to more pressure on Sales and a compounding CAC that eats away at your revenue. Not to mention that what isn’t tracked and measured can’t be improved. Imagine you don’t know your churn rate is 10%. In a year, all your customers would be gone and you’d have 100% new customers, an exhausted Sales department, and an over budget Marketing department.
Get started with churn reduction
If you want a quick guide to keep as a refresher on the importance of Churn, look no further than our Churn Bible:
It’s jam-packed with all the essentials about customer churn that you can bookmark, highlight, save, and present in your next meeting. You’ve also got numbers and quotes from industry professionals who know what they’re talking about – so you know they’ll back you up.
For more extensive reviews like this, keep your eye on the Custify blog.