If you’re a business with a subscription model, the key metric you need to focus on is: customer churn rate . Your churn rate tells you how well your business is doing. It is a factual indicator of whether your customers like your product/service.

1. What is customer churn?

Customer churn rate is the percentage of customers who stop using your product/service within a given period of time.

Customer Churn Rate = Number of customers lost during a time period (month, quarter, or year) / Number of customers you had at the beginning of that time period (month, quarter, or year)

Here’s an interesting graph that we can explore further:

If you’re losing 5% of your paying subscribers each month, you’re looking at an annual churn rate of close to 50%!

Let’s visualize this with a chart: Here we compare a company with a 5% monthly churn rate (blue) and a 10% monthly churn rate (red), both companies adding 100 new customers per month.

After just one year, you’ll see a difference of about 30% in customers and revenue for both companies!

Today, more than ever, companies are aware of the importance of customer retention. This is your foundation, and if the foundation is strong, your growth will be exponential.

However, if your customer churn rate is high, no amount of advertising spend or marketing dollars will help you.

2. Set up processes to reduce customer churn

1. Track and address customer churn in stages

Early stage (0-3 months):

Early customer churn is related to product adoption. Customers who churn here are usually hard to win back, and they don’t use the tools/services offered very much or use only a small portion of them.

To combat early churn, you need to take a close look at the user experience. Make sure you have relevant training guides, one-on-one support, and no UI that confuses users. Set up cancellation surveys to see where customers are getting stuck. Also consider hiring some external testers to complete the customer onboarding process with a fresh eye.

Mid-term stage (3-12 months):

Next, you need to address mid-stage churn. Typically, this is due to a lack of business impact of the software or service. To combat churn during this phase, you need to ensure that you are doing regular check-ins and interactions with your customers and that they see progress towards the goals they need to achieve.

Many companies stop paying attention to customers unless they raise issues directly in the first few months. This is a mistake. Instead, invest time in focusing on how your clients are doing in their first year and over the medium term.

Later stage (after 12 months):

Finally, you have late-stage churn. Usually this happens because people have found better options, they haven’t seen expansion of the software/service, they’ve become burned out on the service/platform, or they’ve experienced a series of bugs or issues that have made them unhappy.

To avoid this churn, make sure you stay focused on upgrading and growing these accounts. Upgrading accounts keeps them from churning, while considering what additional value you can add to all your customers to encourage their loyalty.

When clients reach out one, two, or three years down the road, some personal messages can work wonders by continually letting them know how much you appreciate them.

2. Reduce churn by building and optimizing engagement

Customers who are active in your social community and active on your software are less likely to churn. So when new customers sign up, engage them right away. Sending them a personal video email or scheduling a 1:1 Zoom call is all it takes to establish an immediate human connection.

Then, invite them to join your social community and ask them questions about their business and goals. The more you share it with your customers, the better your bottom line will be. With each customer, you have the opportunity to not only sell them a product, but also to build a relationship. If you do that and spend time with them, they will be less likely to walk away from you right away when they hit a roadblock.

3. Focus on leading indicators

There are certain metrics, like Monthly Active Users and Net Promoter Score, that can give a sense of what’s to come. MAU and NPS are good examples of leading indicators because they can signal problems months before they occur.

For example, if your customers are not using the software (low MAU %), then those customers will definitely churn; and when they do churn, revenue will take a hit.

4. Focus on annual customers (a double-edged sword)

It’s simple, if your customers subscribe to your service for 12 months at a time, this will somehow help improve retention. I think annual contracts make a lot of sense and provide stability to the business. From Hubspot to Infusionsoft, many companies have talked about how they have reduced customer churn through this focus. That being said, it can also mask or delay problems.

If your NPS is too low (i.e. your customers are unhappy), then moving to an annual subscription model could force unhappy people to pay for a service they don’t want, which could become a PR nightmare. Therefore, it makes more sense to focus on solving underlying core problems for these customers and making sure they are happy using your product.

5. Focus on specific accessories

If you sell software/services that apply to many different industries, you must develop customer onboarding guides, manuals, and assets for each industry. Think about the customer experience, you can better solve their problems by leveraging what other similar businesses have done and learning from their successes.

Specifically, try setting up onboarding emails that are tailored to your new client’s industry. Try creating a “Getting Started with [[insert industry]]” guide for companies based on your industry. Have support reps welcome new customers with a personal video message, such as: "Hi, I'm one of the experts on the B2B marketing team and I'd love to speak with you."

This way you can get them more engaged with the team, which will improve retention and make them feel more confident about meeting with the team because they believe the product support team will be able to meet their specific needs.

6. Aligning reward programs with churn goals may be key

Salespeople follow their incentive plan. If they are only paid for closing business, they will seek to make deals with anyone and everyone, but this may increase churn. At Hubspot, sales reps initially get paid commissions after an account is older than 30 days. If you look at the retention rates for the first 90 days, they’re incredible, but after the fifth month, they just skyrocket.

This was obviously not what Hubspot wanted, so they had to restructure their rewards structure. The moral of the story is that you need to give both your sales and customer success teams a clear incentive to retain customers and have it built into their compensation.

3. Review of Churn

Churn is an ever-changing and challenging issue. You might have a technical bug that causes high user churn for one month. A month later, your customers might be struggling to adapt to the new UI that was just released. In another month, your competitors may be stepping up their promotions. Problems are always dynamic.

However, using some of the above methods, you can begin to isolate where you are experiencing problems (e.g., early and late stages) and what needs to be done to keep those businesses functioning properly.

Be humane, be sincere, go beyond yourself, and always remember:

Automate processes but not relationships

Author: Ryan Yuan

Source: Ryan Yuan