How to measure churn and benefit?

Let’s discuss how to measure churn and benefit from it. Churn in simple words means loss of revenue, customers or users. All three are directly correlated in a straight line. Our current context is very much towards Saas revenue and customer churn. In a previous post I have also mentioned the 20 things to know about churn. Those 20 things cover Saas customer acquisition, retention, aspects of customer loyalty and finance. 

Now let's continue that conversation with how to measure churn and benefit from it. Measuring revenue, customer/ logo and user churn helps in customer retention, improving customer referrals which leads to more customers, revenue and a better product experience. We all are here to build great products which customers keep using. I am sure - with that revenue, company building and long term viability takes care of itself. 

Here are some churn measurement basics. A lot of churn principles can be inverted and applied to revenue or ARR measurements. 

• The customer was there last year but not this year. This is customer churn. 

• The customer had 100 licenses, however this year the licenses became 90. This is user churn and also a customer downsell or downgrade. 

• If you have franchises or similar as customers, then you have many logos under one parent customer. In this case, logo churn will also be there. In this case there can be logo churn as well as logo downsell … 💰 

More churn measurement basics - 

All of the above should be measured. But the most important metric to measure is revenue churn. It applies to all three mentioned above. 

• If the customer churns the annual amount ($ ARR), the customer was paying is lost as churned revenue. 

• If total annual ARR was 100 and churned customers were 5; then revenue churn is 5%. Similar is applied to MRR. 

• The total ARR can be looked at as current ARR + New bookings + upsells - churn - downsells. If the upsells and upgrades are higher than the churn then it is also termed as negative churn which is beneficial … 💥 

• Cross-sells can also be added in this equation which reduces dollar churn. Revenue churn is mostly measured in %. 

I hope this makes sense. All of the above churn measurements are required at any stage of the company, product maturity and/ or Saas platforms. 

Any measurement after this gets advanced and needs discipline of recurring data. If you are at this stage, it is expected that you have more than 100+ customers and significant dollar revenue so the cost of data management and tools is justified. Here are some of the most advanced churn measurement approaches.

Each of them has its own benefits … 👍 

My advanced churn measurement approach consists of cohorts. So I assume you are aware of cohorts as a concept. Cohorts are a group of customers with similar characteristics or behavior. Disclaimer here - I mentioned data discipline before. In addition to that, appropriate sampling will also be needed. If there is one customer in a cohort, those results may not be good. As one of my projects with the statistics team, I have advanced behavior modeling based on this. This is of tremendous value, if you are up for a very advanced approach. 

Here is a refresher before we move on -

“I have always believed that the way you treat your employees is the way they will treat your customers, and that people flourish when they are praised.”

― Sir Richard Branson

For now, let’s get back to our advanced cohorts approach to measure churn. If you have all these it will benefit in saving customers and growing revenue. 

• Segment your existing customers by contract signed date. This can be done annually or bi-annually. It is obvious that Saas products evolve every 6 months and the churn as an outcome will be different based on when the customer was signed/ on-boarded … 👏 

• It is beneficial to divide customers by industry such as IT, transportation, healthcare, finance and so on. The product will be used by different industries in different use cases and many contexts by a variety of users who do slightly different roles. I believe you got this point. This measurement will help us understand what use cases are working in which industry and where we should focus more in that industry. Example - we should not sell our product to healthcare companies because our use cases and flywheel is not working in that industry. 

• Churn can also be measured by geography. Segment the customers by geography and look at churn. Example - there can be churn of customers in specific geography because of updates to GDPR. 

• Components purchased is another approach to segment customers. Most Saas platforms are sold based on components. However, if the customer did not purchase some of the components then the value they receive may differ which can result in eventual churn. Example - if you purchase all streaming services together chances or churn are less than just purchasing Netflix or Prime Video … 🏅 

• Customers can also be segmented using Product engagement/ adoption/ transactions. I have seen that the customers who use the product more, buy more products and are less prone to churn. 

• I feel it is also valuable to segment customers using operations data (ex. support) and training. The customers who spend time and encourage their users to get trained and certified have less chance to churn. 

There are AI agents who can do all of the above, really.

Please note that I have not considered factors such as budget reductions, executive movement, industry challenges, competitive pressures and so on. 

Don’t mention it. Happy to help … 🙋

.....

Swagat Irsale is a Growth Advocate. He works with start ups and scale ups and helps them grow revenue and build enterprise products which users use.

Connect with him for work, partner opportunities.