What is Churn and Why is it Critical for Sales?
Churn rate can be a sneaky metric. While sales managers and reps focus on the “big” KPIs — revenue, win rate, and customer acquisition cost — excessive churn can easily erase gains in otherwise productive areas of your sales pipeline if you’re not careful.
Churn refers to the number of customers who discontinue using your product during a certain time period. Much like sleeping on an air mattress with a slow leak, unaddressed churn can wreak havoc on your business goals before you even realize there’s a problem.
That’s why it’s important for sales teams to understand what constitutes churn, how to calculate their churn rate, and what factors play into the process. In this article, we’ll go over all of that and more.
Here’s what we’ll cover:
- What is the Definition of Churn?
- Why Does Customer Churn Matter?
- How to Measure Churn Rate
- Other Metrics that Impact Churn Rate
What is the Definition of Churn?
Churn refers to the scenario in which a paying customer stops using a product or service and discontinues future payments.
Churn — sometimes also called “attrition” — occurs when the customer cancels their subscription or account and expresses the desire to no longer pay for your offering.
It’s usually expressed as the rate of customers who leave, but can also sometimes refer to the amount of revenue lost as a result of that subset of lost customers.
Churn rate is always measured over a given period of time. We’ll dive further into the specifics of the formula later on in this article.
Why Does Customer Churn Matter?
Churn rate is an especially important metric for SaaS and other subscription-based companies. Acquiring new subscribers is anywhere from 5 – 25x more expensive than maintaining existing ones, so it’s crucial that businesses avoid churn however possible.
Furthermore, sellers have a 60 – 70% chance of cross-selling and upselling to existing customers. Compare that to their only 5 – 10% chance of closing a sale with a new customer, and it’s clear why a low churn rate and an eye toward customer retention is critical to the success of any organization.
Marketing, sales, and customer success need to have an all-hands-on-deck approach to attracting and retaining highly qualified buyers that are likely to derive long-term value from your product.
It’s worth repeating that churn can be sneaky. Even a few percentage points dramatically affect how detrimental churn will be on a company’s bottom line. Take a look at the example below, highlighting the various costs associated with each a 5% and a 10% customer churn rate.
Beyond the obvious impacts to your customer lifetime value and overall bottom line, an excessive number of churned customers may indicate any number of glitches in the buyer’s journey or onboarding process.
Measurable End Result
Churn is a lagging indicator, meaning that it’s the measurable end result derived from measurable strategic activities that came before it.
In other words, measuring churn is helpful in determining whether or not a problem exists, but may not tell you exactly what the problem really is. Sales, marketing, and customer satisfaction will need to collaborate in order to determine where the pipeline hits snags that create churn — we’ll touch on some specific ones later on in this article.
Whenever you see your churn rate start to creep up, it should signal to your team that there’s an issue brewing that needs to be investigated immediately.
How to Measure Churn Rate
Calculating churn rate — also sometimes called “churn modeling” — is actually pretty straightforward.
The most basic formula divides the number of customers who left a company during a specific time frame by the total number of customers there was at the beginning of that period.
In reality, though, in order for this metric to offer any kind of actionable insight, you’ll need to consider a few additional factors.
To start, most businesses will have customers coming in at the same time that customers are churning out. Your churn model should account for the accounts you’ve added. Here’s what that variation would look like for a monthly churn model:
Your team may also want to view churn in terms of lost revenue. In this case, it’s similarly important to differentiate between gross revenue churn and net revenue churn.
Gross & Net MRR Churn Rate
Gross monthly recurring revenue (MMR) churn refers to revenue lost due to customer cancellation during a given time period.
Net revenue churn calculates this same lost revenue but then adds back in the additional revenue generated from new customers during that period.
Sales organizations that are interested in using churn modeling to their advantage should consider calculating the metric by cohort.
You can calculate churn rate for virtually limitless subsets of buyers — called cohorts — to determine granular-level behavioral indicators that can improve your pipeline.
Try experimenting with any number of data manipulations — January 2018 Buyers, All-Time January Buyers, Buyers Who Downloaded Whitepaper A, Buyers Who Needed More Than 3 Follow-Ups, and so on. These kinds of cohort analyses will help you pinpoint what part of your pipeline needs the most attention.
Other Metrics that Impact Churn Rate
A faltering churn rate is kind of like a check engine light: it means there’s something going on under the hood of your sales process that needs a closer look.
A bad churn rate can mean any number of things. It may indicate that your marketing campaigns are attracting poor fits from the get-go, making customers more likely to unsubscribe when they realize the product doesn’t meet their needs.
It could also mean that your pricing strategy relative to your value offering is misaligned.
Customer success represents yet another potential problem area. Poor onboarding is a huge factor in customer churn and should be one of the first places you look when you see the rate start to climb.
Here are some metrics to consider when your churn rate indicates a problem.
Negative Onboarding Experience
Studies show that 40% – 60% of churn happens after the customer uses the product only once. This should ring alarm bells for sales and customer success teams everywhere.
It’s imperative that the full scope of product value and functionality is delivered through the selling and onboarding process. If your customers are confused about how to use your product to ease their pain points, they’re not likely to stick with it for long. It’s up to you to hold their hand until they’re confident in leveraging your solution.
Poor Customer Service
According to ZenDesk, 82% of existing customers churn because of bad customer service.
If your sales reps remain in close contact throughout the sales process, only to disappear once a contract is signed, you’re at risk of losing otherwise good-fit customers. Remember, buyers want to feel like service providers care about their needs — continue to follow-up even after the deal is done as a gesture of good faith.
Poor Customer-Product Fit
A high churn rate can indicate issues at the top of the funnel. If, for example, your lead generation strategies attract only subpar customer matches for your product, you’re more likely to lose customers quickly after they purchase once they realize they won’t get what they really need.
If this sounds like a challenge your salesforce needs to address, consider developing an ideal customer profile (ICP) and buyer personas.
These profiles will help your sales and marketing teams fill the pipeline with high-quality leads and likely reduce your churn rate.
Sometimes customers churn not by their own choice. This is called involuntary churn, and can indicate issues with your billing process.
If you’re certain the rest of your pipeline has been optimized, and you see no other reason why you might be losing customers soon after signing them, you may want to reconsider your payment and billing practices.
Lack of Engagement
Sometimes salespeople use the wrong content at the wrong time. Customers may churn because they believe they made an impulsive purchase — which means the salesperson didn’t do a good enough job of engaging them throughout the sales process.
Take a closer look at the content available to your salespeople, and how well it resonates with particular buyers. You can reverse-engineer this exercise by analyzing which content was most popular with your most successful existing customer base. A sales engagement tool can also help with this process.
Do you know your company’s current churn rate? What steps can you take today to start to bring it down? You’d be surprised at how a few small tweaks can start to move churn rate in a more positive direction — try one of the strategies outlined in this article today to start seeing improvements.
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