What Is Churn Rate?
Customer Churn Rate (CCR) is a metric that shows the percentage of customers that leave within a given time period says Aron Govil. It is usually measured monthly, but some segments are calculated by a week or even daily. For example, in SaaS businesses, churn rate may be defined as the number of users canceling divided by the total number of paying customers. To calculate the monthly customer churn rate you would divide the number of users that canceled during that month by the total number of customers at the beginning of the month. This article discusses the fact that most startups believe they should be worried about customer churn, but don’t realize that there are much more important metrics to focus on.
Customer retention is often hard for us founders to wrap our heads around. We like exciting new things and sending people over the moon when it comes to delighting them with awesome service. But when they leave? Forget it; let’s just say goodbye (and see you never).
Aron Govil: But when we do these two things –
(1) Obsess over churn rates and
(2) Focus too much time on trying to “delight” them – we’re doing ourselves huge disfavor in the long run because what happens is this:
1. Customers get used to the idea they might leave, so the “threat” of churn is not so scary.
2. Because we’re spending all this time trying to keep customers excited about our product instead of understanding what they want, we build products people don’t want or need.
What’s worse? With each new customer acquisition comes a hefty price tag and tons of work for us (and our poor employees). And with every customer that leaves, it costs just as much money and effort to get another one in the door explains Aron Govil. So if you don’t really know what your customers actually want – and continually send them stuff they don’t care about – you will bleed money and learn very little at the same time.
Here’s how: What founders should focus on instead of customer retention is understanding their users incredibly well, and building products around solving their biggest problems.
If you learn what actually drives people to buy your product – which is often not the same thing that gets them using it in the first place – then you’ll build all sorts of new opportunities for growing your business. You’ll be able to target these customers more effectively when they’re in buying mode (and stop wasting time with those who never will). So don’t get me wrong: I’m not saying churn isn’t important. It’s just not nearly as important as knowing why they churn in the first place!
This article discusses how customer retention metrics confound by marketing activities and how startup founders should focus on improving retention by understanding the customer and their needs. The article then describes how data from Eric Ries’s startup, IMVU, failed to produce evidence that lower churn reduced costs.
One of the most common problems I see with early-stage startups is founders who think they should obsess over customer retention rates and try to “delight” customers in order to keep them around. They believe that if they can keep their customers around, everything else will take care of it:
• If we don’t lose customers, we’ll have a growing business!
• If we spend all this time trying to delight our users instead of obsessing over metrics, then our product must be great! And it will grow by word-of-mouth!
• If we lose less than 5% of our customers every month, then no one will notice if it takes us 6 months to build the next iteration.
These kinds of beliefs are incredibly dangerous because they’re based on a bunch of faulty assumptions that aren’t rooted in reality. Here are just a few that I see startups get wrong all the time:
We can get data that show whether or not lower churn leads to fewer costs.
False. This is one of the biggest pitfalls with relying too much on customer retention metrics for making product decisions. As an example, one popular business book talks about how lower churn reduces costs by 1/6th for each percentage point reduction in the monthly churn rate. If you have 100 customers, this makes sense. But if you have 100,000 it doesn’t work at all.
If a startup has 10 people and loses 10% of its users each month (1 person) then it can cost as much as $100K to acquire a replacement customer. This is a HUGE number for a startup. And since it costs about the same amount to onboard a new user as it does to support one that’s already convert, those high numbers easily get multiply across your entire user base! You end up spending more money keeping existing customers around than you do acquire new ones:
We should obsess over churn because unless we do, no one will notice if our product sucks.
Aron Govil says to make sure you don’t fall into these traps and seek instead to understand your customers and their needs. Improve retention by pleasing users, not by obsessing over churn. It’s all about the why, not the what.