Customer Retention and Churn: The Yin and Yang of Healthy Products

Friday, July 26, 2019
Nick Williams
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Introducing churn and retention

To put it very simply, churn is the percentage of paying customers that stop using your product over a given period of time and retention is the exact opposite—a number that determines the amount of customers that stick around with your product beyond the initial payment. 

Retention and churn rates are extremely important determiners for a company’s success. A company’s churn rates and conversely, their retention rates, can diagnose the health and growth of any product, with a particular emphasis on products implementing monthly or yearly fees, as most SaaS products do.  

As a general rule, it is more cost-effective to retain existing customers than it is to find new ones and it is much easier to convert payments from customers in the system than it is to onboard new ones.  According to OutboundEngine:

  1. Finding new customers is five times more expensive than retaining pre-existing ones.

  2. Increasing customer retention by 5% can increase profits from 25-95%

  3. Selling to pre-existing customers has a success rate of 60%, whereas selling to new customers is a paltry 5-20%.

  4. Loyal customers are 5 times more likely to repurchase,  5 times more likely to forgive, 4 times more likely to refer and 7 times more likely to try out new features. 

The numbers definitely don’t lie, and while it may take time, the idea is that your retention and churn strategies should begin paying pro-active dividends; that is to say, with properly developed customer relationships, you should ultimately aim to predict which client segments are at risk of churning, why, and what steps you can take to keep them around. 

Churn baby churn 

Churn rates, unlike good doctors, don’t usually have the best bedside manner. 

Why do customers stop using your product after the free trial period ends? Do they just hate your company’s guts?  Do they want to see you fail because they find that you smell bad and your hard work is worthless and you’re funny looking?  Chances are, probably not.  

Like most every front-facing aspect of a successful business, understanding churn takes putting yourself in the customer’s shoes for a quick minute. There are dozens of different formulas, used by different companies and organizations, to help you do this. 

A simple formula for determining churn rate? First, decide on a period of time. Then, divide the amount of churned customers during the period by the number of customers you began with at the start of the period. For example: 

Customer Churn Rate = (Customers beginning of month - Customers end of month) / Customers beginning of month

What constitutes a good or bad churn rate also depends on a couple of important factors like the age of your company and your target user. 

Almost anyone that has ever downloaded an app can relate: once using an app for its specific task, for example, maybe a user saw no point in converting from their trial membership to a premium account. 

Or maybe your lost customer was actually VERY interested in your product, at least conceptually, but they found your interface confusing, and so they were grounded before ever even lifting off.  

Or perhaps your pricing is simply too rich for the struggling student that would love to make memes during their Chemistry 202 lectures using your powerful photo editing software, but would rather go out to the bar with their friends on Friday night.   

There are an almost limitless amount of reasons why a customer might stop, or may never start, using your product. If you want your company to grow and ultimately, to expand, you need to pinpoint those reasons and figure out how best to minimize their impact on the bottom line of your client base. 

Churn-derived analytics seeks to understand the reasons why customers are leaving, by isolating particular metrics or tendencies, which can be broken up generally into three categories:

  1. Who is leaving?  What types of users are having the most trouble taking that next step? Users can be broken up into “cohorts” (age, nationality, gender, and whatever else).

  2. When are they leaving?  How long after downloading your app do customers give up?  If it’s hours, then your problem could be related to onboarding. If it’s months, perhaps introducing new features or premium content could help.

  3. Why are they leaving?  What exactly is turning potential long term users off? This can most easily be quantified by simply asking inactive or exiting users why they decided to take their business elsewhere.

Given the way that people procrastinate, churn can also be misleading. For example, many customers might think your app sucks but will never get around to unsubscribing. If you were to look at the numbers on paper, they might seem like happy, paying customers.  

That’s why accurately calculating churn requires a deep and comprehensive knowledge of your customer base and a thorough analysis of metrics related to their engagement with your product. 

By combining customer retention and engagement rates, as well as time-in-app numbers, you can form a more holistic picture of your users’ overall user satisfaction. Ultimately, to understand churn, one must also understand retention as the two go hand-in-hand. 

Let’s dive in. 

Exploring user retention

Retention is the percentage of customers that stick around as paying customers, but more theoretically, it is a means of collecting user activities so as to increase the number of repeat customers and to increase the profitability of each existing customer

So, retention is both a number, but also a strategy. It probably wouldn’t be hyperbole to declare customer retention as THE most important aspect of separating a struggling from a prospering business.  

The formula for coming up with a hard number to determine customer retention is similar to that used to calculate churn:

((# Customers at End of Period - # Customers Acquired During Period)) / # Customers at Start of Period)) X 100

Like churn, however, retention is not some magical number that will immediately solve all of your problems. It requires a solid database of customer relationship data and a few other prerequisites:

  1. Know what customer retention rate your company should have.

  2. Make sure you are measuring correctly.

  3. Be confident you are able to quantify and understand progress.

It is also important to think about retention contextually. That means lots of analytics—for example, comparing this month’s user engagement numbers with last month’s, and figuring out what your long term goals and projections might be.  

If your churn rates are higher in May 2019 than they were in May 2018, you know that something went awry in the past year—perhaps, for example, new features or a redesign have alienated loyal users.  

Importantly, customer retention also acts as an indicator of your company’s place in the competitive ecosystem. 

Think of it this way—there is a good chance, if a user left your product, that they did so to run into the arms of a cheaper, or more robust, or more accessible competing product. This is especially true in the booming SaaS market, where apps and services are as prevalent as mosquitoes in June.

6 strategies to increase retention and lower churn

Here are a few tangible suggestions to help foster great relationships and lower those churn rates:

1. Good Onboarding

If you go into an uber-competitive job interview wearing mustard-stained sweatpants and a mesh tank top showing off your totally rad South Park tattoo, chances are you won’t be landing that dream position. 

Acquiring and retaining customers is not all that different from a job interview: look smart, be prepared, and be clear about your expectations and skills.

Onboarding is a great opportunity to show off your company’s ethos or values.  Being transparent about your process and features is an excellent way to engage people.  

Here’s a quick statistic that illuminates just how powerful onboarding can be, and subsequently, how few companies are successful at it:

Within the first day of a mobile app’s download, 84% of those who download never return and only 2.7% stick around after day 30.

The only way to boost those dismal numbers is to impress users the FIRST time they visit.

2. Set Expectations 

People are different, with different goals and expectations.  

And, despite their potential differences, it becomes your job to understand as many of them as humanly possible.  The easiest way to create a smooth, pothole-less highway towards a mutually agreeable partnership, and to avoid any hurt feelings along the way, is to be absolutely crystal clear in your marketing and communications.

Setting expectations is essentially another way of saying: be transparent with your processes, your features, and most importantly, what customers are getting exactly when they fork over their hard-earned cash.  

There’s not really any conceivable situation where you’re providing a customer with TOO much detail about your product. Feel free to provide them with roadmaps, deadlines, patch notes, and clear guidelines about the features of your product. 

You can convey your successes, your results, and perhaps the areas which need some work. You can show users where you were 6 months ago, and where your project aims to be in another 6.  These types of metrics used to be locked tight in most company’s vaults but, creating and fostering a familial relationship with users can be powerful.

Consistency is key here.  

If you promise a new feature to customers in three months, make sure to deliver.

If you decide to start sending out a weekly newsletter, don’t let them fall by the wayside.

Your customers will be happy because they feel like a part of the process, and you’ll be happier because you’ll have fewer people knocking down your door looking for promised future features that ended up getting scrapped three months ago.

3. Use Tools and Metrics

There are a wealth of tools and strategies available to help retain customers and lower your churn rates. 

Product-led growth platform, Appcues, offers an extremely comprehensive list of tools that can be used to help develop and streamline the customer retention process. In addition to this list, other helpful platforms for retaining customers include: 

Having said that, tools aren’t some magical potion—they need to make sense in the context of your company, and they need to be used within the framework of a larger engagement and retention strategy for your users.  

A consistent focus on your desired end goal is the key to success—tools should work together harmoniously to help your team reach those projections. 

4. Create Customer Relationships and Listen to Feedback

Humans are sort of egocentric.  

We feel satisfied when our voices are heard—when they feel a part of some bigger picture. That may help to explain people griping and complaining on social media or review forums.  

Sure, part of the equation is just simple venting when something doesn’t go according to plan but, also, there is usually some glimmer of hope in people that their words will inspire some sort of change.

A 2-Star review can be more than just a black mark on a company’s Google Play storefront—it can also represent an opportunity to improve. Rather than trying to silence your critics, work with them. Chances are, those complaints or critiques are sentiments shared between many customers and, if you take the opportunity to tune up your product based on feedback, you may iterate in ways that will ultimately boost customer retention rates.

Using comprehensive CRM software can also help to better manage and analyze customer relationships. You can never be too prepared, and keeping a thorough inventory of past conversations, decisions and client preferences can help streamline future interactions.  

Creating a reciprocal relationship with customers can help foster an ongoing long-term business partnership. That doesn’t mean, necessarily, that you need to shower your user base with gifts. However, it makes people feel warm and fuzzy inside when they are provided with benefits or tokens to help underscore your appreciation for their continued use of your product.

Ultimately, you want your loyal users to become brand ambassadors and if your product is effective enough, and you have built a strong relationship with them, they will usually be more than happy to do so.

Simply put, keeping customers happy will discourage them from looking for alternatives. You don’t want to be that sad-ass (but also awesome-ass) last Blockbuster in Bend, Oregon still hanging on by a thread while all of your customers switched over to Netflix like 7 years ago.

5. Personalization is Key

Building on the idea of maintaining healthy customer relationships is the idea of providing each user with unique, personalized experiences. This may sound like a tall task, but luckily, customers will usually be happy to take the onus on personalizing their own experience—they just need the tools, and expertise to guide them.   

Creating a personalized experience should start with onboarding. Providing tailored, experientially derived onboarding will help to highlight your product’s key selling points while guiding users towards their desired endpoints. 

You want to make your product’s different features as ‘sticky’ as possible—meaning that users can see their value clearly, and will be inclined to return to your product to use them. 

By allowing for personalization, users will be more likely to remember your product because they will have invested a part of themselves into the customization process.

6. Re-Engagement is Possible

Slightly different than churned users are inactive customers. These are the users who are still paying for your service or who may have temporarily disabled their accounts. There are several ways to re-engage these accounts.

Don’t be afraid, for example, to re-onboard users. Giving inactive users a second shot at getting familiar with your product, or using the opportunity to show off new features, can be a great opportunity. Sometimes asking inactive users, “what’s up?” and trying to rekindle that dormant relationship is totally appropriate.  If you’ve got a balling customer support team, this is their time to shine.

Final notes on retention & churn 

Churn and retention are integral landmarks of a company’s success or failure. Each can help paint a bigger picture relating to aspects of your product or company that could use more work.  

In the end, churn and retention are both valuable tools to consider while turning the microscope on your company’s customer relationship practices. A great retention strategy, combined with a keen eye for the signs or issues leading to user churn, is a winning formula that can help turn a small, struggling SaaS company into the heavily-hyped, can’t-miss app du jour

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