If you’re going to make it your mission to track corporate metrics, churn rate is a great place to start. Unlike vanity metrics – like website visitors or brand mentions – churn rate gives you actionable data about the number of customers leaving your company, as well as potential ideas for improving overall retention rates.
But that said, there are plenty of misconceptions about this metric out there. Make sure to steer clear of the five following myths as you manage your company’s churn rate!
Myth #1 – There’s Only One Way to Calculate Churn
You would think that calculating churn would be as simple as dividing the number of customers lost at the start of a given period by the total number of customers in place at the beginning of this period. Unfortunately, if you’re a growing company acquiring a large number of new customers, any churn rates you calculate using this method won’t accurately reflect churn, as this equation fails to take customer base growth into consideration.
There’s no perfect way to calculate churn, but cohort analysis is one promising alternative. If you’re interested in getting started, the Toptal blog has a great introduction to this method. Steven Noble also proposes a few other calculation methods on the Shopify blog.
Take action now:
- Define your sales cycle. At what intervals are new customers joining your company and are there any major stopping points that would be relevant to your analysis? For example, if you offer a free 30-day trial period, you may expect to see spikes in churn towards the end of this timeframe.
- Determine your desired complexity. How much emphasis does your organization intend to put on managing churn? If you plan to take only surface-level action, you may not need to perform an in-depth analysis. If it’s a major focus for you, you’ll want to select a more complex calculation method to measure your churn rates.
- Select a calculation method. Review the options shared above and select the method that’s right for your company based on your desired level of complexity.
Myth #2 – Zero Churn is an Attainable Goal
Sorry – zero churn just isn’t going to happen! No single product will be perfect for every single consumer, which means that some churn is ultimately inevitable.
Instead of getting bummed out by your inability to completely erase customer retention issues, use the data you are able to generate – using simple churn calculations or more complicated analyses – to identify issues that can be resolved. Every test you carry out should give you insight to drive your churn rate as low as it can possibly go!
Take action now:
- Set a goal that represents a 5-10% improvement over your existing churn rate. Once you hit this goal, you can always go back and set further goals that get you as close to zero churn as possible.
- Plan and carry out tests. Use A/B or multivariate split testing protocols to identify and rectify the factors that lead to churn.
Myth #3 – Churn Rate is Affected by Internal Circumstances Alone
As you begin your hunt for variables to reduce churn, it’s tempting to only focus on internal initiatives, like your marketing messaging or your product’s specific features. Essentially, that is like looking at churn in a bubble.
Say, for example, that your SaaS company recently snagged a mention on TechCrunch. Certainly, this kind of publicity will drive sign-ups, but the odds that all these sign-ups will be perfect fits for your company are slim. If you fail to take external events like this into consideration, you’re bound to wind up frustrated at your efforts to both calculate churn rate accurately and minimize the rates you do come up with.
Take action now:
- Set up Google Alerts and other monitoring tools to track external events. Track all mentions of your brand names and product lines, then be sure anything you find is accounted for when you measure churn.
Myth #4 – Offering Incentives to Lower Churn is Always a Good Idea
According to Sunil Gupta, the Edward W. Carter Professor of Business Administration at Harvard Business School, “You have to look at the net profitability of the retention campaign. If I offer an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for me?”
The reality is that not all customers are equally important to a company. While offering incentives to reduce churn rate might help retain customers, you must be sure that the customers you’re keeping represent more value to the company than what you spend on incentives!
Take action now:
- Measure the overall values of different customers – not just their likelihood of churning. Though it’s common for companies to track how likely a customer is to leave, few compare this against the potential revenue each customer brings in. There’s no reason to spend a ton of money retaining customers that won’t improve your bottom line!
- Calculate the net profitability of all churn reduction campaigns. Different retention campaigns will incur different costs (for example, sending an email blast versus mailing out glossy brochures). Be sure the costs of any campaigns you carry out are weighted against the financial impact of customers saved.
Myth #5 – All Lost Customers Are Truly Lost
Finally, no matter how you decide to measure your company’s churn, keep in mind that one of the most important decisions you’ll make is how to determine when a “lost customer” is truly lost. According to some analysts, customers should be counted as churns after they’re inactive for a set amount of time (say, 60 days or one year). Others, however, argue that you shouldn’t count out customers until they formally request their accounts be closed.
The specific end trigger you choose should depend on your industry and what you know about your customers’ behavior. Just be sure to understand the ramifications of selecting this end point, as setting your requirements too stringently may cause you to count churns for customers who will reactivate themselves down the road.
Take action now:
- Study customer life cycles carefully. Do your customers tend to reactivate after periods of inactivity, or does this usually indicate they’re gone for good? Every company is unique, so you’ll only be able to answer this question after careful study.
- Select a cutoff period that works for your company. Once you’ve designated a formal churn indicator, go back and apply it to the churn rate calculation you selected in the action section of Myth #1 to improve the validity of your calculations.
Do you agree or disagree with these myths? Share your thoughts below!