For subscription-based businesses, customer churn has a direct influence on your customer lifetime value. Churn rate is the frequency at which customers cut ties with your product or service during an established period. This metric provides you with a clear idea of customer retention and insight into overall performance.
Preventing churn should be a top-level item for sales and account management teams. While many sales organizations place heavy emphasis on acquiring new customers, retaining the right ones can be far more advantageous. In fact, the research shows that, on average, a 5 percent increase in customer retention rates results in anywhere from a 25 to 95 percent increase in profits.
To help prevent customer churn, it’s important to know why customers churn in the first place, some warning signs to be aware of, and how to address these risks. Let’s review.
1. Know why customers churn.
Why do customers leave in the first place? To help understand, it’s important to know the two primary types of churn.
Desired Outcome Churn
This occurs when customers fail to meet their goals with your products or services. While the causes vary, ultimately, it’s something that sales and customer success teams can directly influence.
Poorly executed onboarding is the first culprit of desired outcome churn, as it’s the first interaction they have with a brand. If you’re too slow in helping them reach their first milestone, you run the risk of churn out of the gate. Inefficient support and poor customer success are also huge contributors. Although customers may see immediate success, if you don’t sustain it, or provide adequate support, you run the risk of churn. Finally, churning customers may feel as though competitors offer better alternatives.
Natural Cause Churn
This occurs when unavoidable problems impact a customer experience. While these problems are often tough to evade, there are steps that teams can take to safeguard against them.
Common natural causes of churn include cash flow problems, product inefficiencies, and a lack of customer chemistry. In the software world, adoption is generally spearheaded by key people in an organization. If product evangelists leave your customer’s team, you run the risk of losing the customer.
2. Know warning signs of customer churn.
Spotting warning signs of churn isn’t as impossible as you’d think. Sometimes, it’s a matter of asking the right questions about your product and how your customers are engaging with it. Here are some red flags to consider.
Are customers using your products?
To figure out whether customers are using your product, look at how often they log in and which parts of the product they use the most. Depending on your product model, you should be able to tell whether your customers are using what they’re paying for.
Is usage growing or decreasing?
Much like overall product usage, it’s important to track quality and quantity of users. If numbers are staying the same, it doesn’t necessarily indicate that a customer isn’t using your product. Rather, it’s essential to look for a decrease in users, which can indicate unhealthiness.
Are customers paying their bills?
Keeping an eye on invoices and payment patterns is an indication of customer satisfaction. While individual payments aren’t enough to signify churn, if a customer is consistently avoiding their bills, they may not be using your product.
3. Know how to address churn.
Knowing the warning signs is only the first step in preventing churn. You must also know when to reach out—and how to address the potential issues.
The first step in preventing churn is making your customers feel at home from day one. This is done in the onboarding process. Ensuring that new subscribers learn your software and understand their journey to success builds the foundation for retention—and helps reduce churn.
The Importance of SLAs
As we’ve reiterated throughout this article, strong customer service and communication is one of the best ways to prevent customer churn. Beyond onboarding, a good service level agreement (SLA) serves as a communication vehicle between your team and your customer to manage expectations. SLAs create a level of transparency necessary to create sustainable, enduring relationships.
SLAs should outline the services you provide, but they must also include the following:
- Performance measurement: How you quantify and report on service and product success
- Problem management: How customers will report problems and how quickly you respond to them
- Warranties and remedies: How you will deal with legal issues
- Customer duties: What your customer is responsible for in your partnership
- Termination: Circumstances under which you or your customer can end your partnership
SLAs help ensure timely delivery and implementation of services, but also ensure that customers receive the best support possible. Ultimately, SLAs help maintain a low average churn rate by keeping the customer experience top of mind.
Often customers churn because they can’t see the value in what they’re paying for. Consumers want to know they’re getting the most bang for their buck. That’s why enabling your customers to pick a product for themselves based on tiered pricing inspires a sense a maximized value.
Customers who know exactly what they’re paying for and how much they’re receiving tend to stick around much longer and pay higher rates. Pricing that is tiered around established value metrics—those that are aligned with the value that customers receive—increases customer loyalty. If pricing tiers are proportional to the value received, it not only creates loyalty, it increases your opportunities to upsell and cross-sell to existing customers.
Don’t Be Afraid to Ask Why
When a customer indicates that they are terminating some, or all of your services, take the opportunity to reach out and ask the question, “why?” Was it the product, service, the cost, or multiple factors? You may be able to address a concern and retain their service. On the flip side, if they decide to cancel, you have gathered valuable information to guide the evolution of your service offering. Let the churn make you smarter! Study and learn from the experience.
Understanding Customer Churn
It’s a fact of business that customers are going to cancel—especially in the subscription-based economy—and churn is an unfortunate reality that businesses of all sizes must deal with. Knowing why customers churn and some warning signs can help an organization prepare accordingly. Finally, understanding how to address churn and taking the steps to prevent it can help reduce customer loss in the first place.