Your revenues depend on the recurring revenue paid weekly, monthly or yearly by customers for your product or service. A profitable subscription-based model entails having more renewing activities than cancellations. At the same time, without the right tool, many businesses struggle to track or analyze churn rates effectively. Here are four common mistakes when it comes to churn analysis and how to combat them:
1. Not being able to identify the source of the churn
Companies tend to focus on lowering their overall churn rates before even understanding the causes of those churns. Just "be more user-friendly" or "fine-tune the services" may bring short-term benefits but probably won't contribute to churn reductions in the long-run.
That’s why you need to implement tools that help you understand where or when a customer drops off exactly. You will get answers for questions like what are customers doing right before they become inactive. Once you are able to identify the drop off points, you can begin to pinpoint the reasons of users unsubscribe or pause payments. What's more, you can come up with hypotheses that can be verified with A/B tests or other similar methods. Using AI tools like Churned can help you speed up the process if you don’t know how to start.
2. Using only one type of churn calculation
Like most subscription-based businesses, you might be offering subscription plans bundled with add-ons to generate more revenue. This means you should not only be tracking customer churn rate, but revenue churn too.
Customer churn rate, also known as rate of attrition - measures a company’s loss of subscribers in a given time period. To calculate your monthly customer churn, use the formula: Number of churned customers / Total customers
On the other hand, revenue churn measures how much revenue is lost, which can be defined as Monthly Recurring Revenue churn (MRR). MRR Churn = Churned MRR / Total MRR. Revenue Churn is just as important because it helps to track churn between high and low spenders. If a company offers different pricing plans, the revenue churn rate can help pinpoint which customer segment contributes to the most churn.
3. Using new customers to reduce churn
You’re losing a few customers but welcoming lots of new ones, that must sound great right? Wrong, if you’re overlooking only the total customer and/or revenue growth, you’re not getting the whole picture.
Sure, the overall growth rates are relevant, but when you look at churn you should only be looking at the customers you’ve lost, excluding the newly acquired customers. This will make it clearer on whether your company is doing well and which are (if there are any) the problems that are causing high churn rates.
4. Not analyzing your churn rates properly
In a perfect world your churn rate could be 0%, but it’s not realistic. The first step is to identify a churn rate benchmark for your business so you can still see growth. Generally a 5-10% churn is tolerable, however if you offer a low-cost service, a high churn rate is ok. Whereas in larger corporations, even a low churn rate of 5% could still be too high.
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