Is Churn Just a B2B Term?
Churn is not a phenomenon only associated with B2B companies. In fact, in B2B and B2C businesses, the post sales process looks very similar. Oftentimes, customer experience with the product & service impacts customer retention and churn rates in B2C and B2B businesses in the same fashion. In reality, churn is more related to the subscription economy than B2B or B2C situations. Churn has gone mainstream because of the emergence of SaaS, rather than the prevalence of B2B and B2C.
Even though churn may be more ubiquitous in B2B cases, churn is equally important in B2C situations, in which there is a focus on listening to customers through satisfaction inquiries, surveys, and analytics to better understand their purchasing behaviors, such as checkout abandonments, demographics, and other consumer-related patterns. Since B2C companies will at times provide a freemium model, understanding how conversions occur after free trials is also an important element in interpreting churn.
The Impact of Churn: SaaS vs. Non-SaaS
In order to answer the question of whether churn has an impact on SaaS vs. non-SaaS companies, one must first understand the SaaS subscription model. SaaS, or ‘software as a service’ is a method of product delivery that has a predictable revenue model, such as a monthly, quarterly, or annual subscription fee.
Typically, churn does not have as great of an impact on non-SaaS products, since all licensing is usually paid for upfront, including any potential Professional Service fees for implementation and training. The one impact for non-SaaS companies is the churn related to ongoing support fees to maintain and support existing customers. These ongoing maintenance costs often are competitive differentiators in the enterprise arena, and can cause a customer to switch vendors.
In contrast, churn has an immediate and drastic impact on SaaS revenue, depending on the subscription model, and ease of switching offerings. For example, the opportunity cost to switch from a monthly Hulu to Netflix plan is extremely low, but changing Customer Success platforms requires much more effort, since it can require building an entirely new data model. Since SaaS monthly subscription models have a much more direct impact on the bottom line, there is higher fluctuation than in non-SaaS companies since there are much more billing periods for churn to occur. However, constantly being on the lookout for churn can make you more aware of the warning signs and better prepare you to counteract it. Having a quarterly or annual subscription model for a company can be devastating if the company does not have tools and processes in place to predict potential churn.
Are Churn and Retention Opposites?
Customer retention is essentially a measure of how many customers remain loyal to your brand and product. Retention only takes into account existing customers of a company. In a SaaS model, retention is extremely important, and is calculated by looking at the number of clients retained over a particular time period (ie: monthly, quarterly). For example, if you have 100 customers for the month of April, and 80 customers in May, the retention rate would be 80/100 = 80%.
Churn is the exact opposite of retention. It is the number of customers that have not remained loyal to your brand and product, once again compared under specific time periods. Calculating churn can be complicated and done in a few different ways.
The Different Ways of Calculating Churn
Calculating churn can be a simple or a more complicated endeavor, depending on how accurate you want your churn rate to be. There is also the question of whether you want to track revenue or user churn, which are different. Revenue churn measures the revenue lost from a cohort during a specific time range, whereas customer churn assesses the number of paying customers lost from a cohort during that period of time.
In its most basic form, churn rate can be calculated by taking the total number of existing customers for a specific period such as a month, adding any new customers, subtracting customers lost, and dividing by the lost customers for that month. For example, if there are 100 existing customers, 30 new customers, and 10 lost customers (100 + 30 – 10) = 120. The churn rate would be 10/120 * 100% or 8.3% for the month.
Despite this simplistic calculation, there are many other external factors to take into consideration that can impact the accuracy of your churn rate. Oftentimes, these factors are ones that contribute to increased churn but are rarely your fault. New technology disrupting existing practices can have a debilitating effect, as can new governmental policies, economical downturns, and new consumer trends.
Benchmarking Churn Rates
Benchmarking your churn rate against industry standards is can be a very useful exercise to put yours in perspective. This will allow you to evaluate your churn rate over a period of time, and see how it compares to industry standard rates. It is important to note that industry standards will vary depending on the sector, maturity of the company, and customer personas that you are targeting. For example, if you are a recent start-up, it isn’t helpful to compare rates with those of a company working exclusively with enterprise customers that typically stay longer. Like Joel York said in his article, SaaS Benchmarks – Acquisition Costs and Churn Challenges, it will likely not be an accurate comparison.
The point of churn benchmarks is to compare against realistic expectations for your particular stage as a company. The following table shows how a monthly churn rate of 4% can translate to an annual rate of 38.73%! That’s a lot of money going out the door.
Acceptable Churn Rates and Industry Averages
In a perfect world, your churn rate is as low as possible. However, as we all know, we don’t live in a perfect world, and there will always be some customers unhappy with your brand and product. With that being said, what is an acceptable churn rate from an industry standard? It depends on your industry. Some sectors have a higher rate than others. For example, according to Bessemer Venture Partners as cited in Lincoln Murphy’s article, an acceptable churn rate is in the range of 5 – 7% annually for SaaS companies. Make sure to differentiate between monthly and annual churn rates; 5-7% is a decent annual churn rate, but very bad as a monthly churn rate.
Tune in next week for Spurn the Churn – Part 2, to read about strategies for reducing churn.
This post is inspired by Joseph Jaffe, who used the term “Time to Spurn the Concept of Churn” in his book, Flip the Funnel.