Imagine this: Your SaaS company’s churn rate has been raised from 4% to 10% that too in just the last six months. Only imagining this steep rise in your churn can give you sleepless nights.
You must be confused and worried seeing this sudden rise in your churn rate. It may make you scratch your head and wonder what wrong has happened with your SaaS business.
Seeing this steep rise in churn, you can do two things. These are:
The first one is to panic, make random changes, and develop some new strategies. However, it doesn’t help in most cases and ruin your business.
The second option is to calm yourself, sit peacefully, and think about what’s gone wrong with your company in the last 6 months. In simple words, you need to do some churn analysis.
In this article, we will help you estimate your customer churn rate and then guide you on how to use the data you get as a result. Once you have gone through this post, you will be able to answer:
- Who are the customers that are canceling their subscriptions?
- What are the underlying reasons behind it?
- How can we address the identified problems to reduce churn?
Churn Analysis
Churn analysis is generally using and analyzing data to figure out the underlying reasons behind your customers canceling subscriptions.
Analyzing churn is not all about calculating it. It leads you to explore the reasons behind churn as well. It further guides you on how to address the steep rise in the churn rate.
Churn prediction and churn analysis are often considered the same. But in fact, both these are two different things. In the case of churn analysis, you have to analyze the reason behind the already high churn rate and then fix this issue by finding suitable solutions. On the other hand, churn predictions are about the future behavior of your customers. You forecast the probability of churning based on previous data and history. After predicting churn, you can plan to avoid it.
Reason You Need to Analyze Churn
Estimating your churn is another thing. Knowing your company’s churn rate is 12% is not going to help you as it’s just a number unless you tend to figure out the reasons behind it and then improve it. Without knowing what customers are canceling, when they are doing so, and what are the reasons behind it, it’s almost impossible to control churn.
That’s the main reason why churn analysis is so important for your SaaS and subscription business.
We have witnessed situations when owners realized that there is something worn that is resulting in higher churn. However, they don’t know the reasons behind it and make random assumptions. They also search for solutions online and use random tactics to fix the problem.
The main point is that without knowing the “why” behind the steep rise in churn, anything you do to control it can make conditions worse for you.
Losing revenues by making random changes to your strategies is the worst thing you can ever want especially when you are already dealing with high churn. When you know why customers are leaving, you will know the points where you need to make changes. This is going to help you in reducing your churn.
Calculating churn and then analyzing it regularly is not that easy. You need a SaaS analytical tool to do so with perfection. Baremetrics is
Method to Calculate and Analyze Churn
Before you start, you must know what you are trying to solve.
In this case, our main concern is to reduce churn. And for that purpose, we need to figure out the answer to two basic questions:
- What category of customers is churning more?
- What are the possible reasons behind it?
These two questions are our starting point. Now we know in which direction we have to move. It prevents you from entering an endless black hole of data and gives no insights.
Knowing what we are trying to do, it’s time to dive into a stepwise guide to churn analysis.
First Step: Setting Up Tools
It’s the zero point to start from as you must have data to analyze for any type of analysis.
Numerous tools are out there ready to help you with churn analysis, but we are going to keep things simple for now. Instead of exploring different tools, let’s pick one and explore how it can help you.
You need a subscription SaaS analytical tool like Baremetrics. This tool is the right choice as it has numerous features to help you. Apart from churn analysis, it can help you with other SaaS metrics as well.
Only using Baremetrics alone can provide you with loads of data. This data will be enough for analysis and making informed decisions. You can have access to all types of data by entering the dashboard of this SaaS analytical tool.
We are going to use Baremetrics for the rest of this guide so that it will be easier for you to follow along.
You can try some other tools as well for a more deep and advanced churn analysis. Trying product analytics tools like Mixpanel or Amplitude can be helpful. They guide you about the usage of your products by customers.
For example, by using these tools you can check the most sticky features of your products. This feature will make customers keep buying and using your products. Similarly, you can also check the features that are used only once or twice by your customers.
Product engagement is one of the major reasons behind churn. So, the data you get from product analytics tools can be very handy when it comes to churn analysis. However, we are not going to get deep into that as our main concern is to focus on churn analysis rather than customer behavior.
Never waste time exploring or checking different tools. Start with basics and if failed then branch out. It will save you time and effort.
Second Step: Investigate the Reasons Behind Customer Attrition
As mentioned earlier, one of the two main questions in churn analysis is “why customers are churning”.
The best way to get this answer is to start asking. There are a couple of methods to do so.
Method A
It is used by many new SaaS companies. It is pretty simple as the only thing you have to do is to send emails to your recently churned customers and ask them why they have canceled subscriptions.
You can ask this question directly or can try a more professional way. In this case, you have to send them a form containing different questions. Then you have to request your churned customers to answer these questions. The questions will be related to their attrition. So, you can get the reasons behind churn.
It’s a short, straightforward, and clear technique. But it only works well for the starting companies.
Method B
As your business grows, you must look for a more professional and scalable way to explore the reasons behind the revocation. This is the point when method B comes into play.
You need to create a questionnaire that customers have to answer before closing their accounts. Baremetrics’ cancellation insight feature can help you create one for your churned customers.
The form will have some reasons mentioned on it from which the clients have to choose for leaving. Apart from that, the “other reasons” option will also be present. Customers can choose this option to describe their specific reason for cancellation. You can track responses using Baremetrics’ dashboard.
Based only on this information, you can do some very basic churn analysis.
For example, you can track how many people are leaving for a common reason and how much MRR you are losing due to that common reason.
If most of the customers have chosen “too expensive” as the reason behind leaving your products, you have to go deeper. Don’t worry! We will guide you about it a little bit later.
Looking at this feedback data helps you a lot in setting directions. For example, if switching to another product is the reason why customers are abandoning buying your products, then you need to concentrate more on your competitors.
After noticing which competitor they are switching to, you need to compare your company with that one. During the comparison, you will look at the departments in which your opponent is beating you and attracting your customers.
If high prices are the common reason behind churning, then you need to search deeper and conduct some results.
You must remember that if customers are leaving due to high prices, the ultimate solution is not to immediately cut prices. The main thing to focus on is that your products are not cost-effective. Instead of decreasing their prices, you must improve products and introduce advanced features to justify their price.
You also need to analyze the type of churn. You can use Baremetrics to check churned and unpaid customers and compare them as well.
Third Step: Analysis of Churn Rates by Scanning Cohorts
First, you must know what cohorts are. A cohort is a group of customers or subscribers that share some similarities. For example, all the customers who signed contracts in May 2023. Subscription date is not the only criterion for cohorts. You can do so based on payment plans and other things as well.
Imagine, you are a SaaS company that has lost 300 customers in the previous half-year. Those 300 customers were on different payment plans, belonging to different regions, signed up on distinct dates, and getting different services or products from you.
What do you think, doing churn analysis for all these customers at once is a good option, or grouping them and then analyzing each group is the right option?
If you opt for the first method, you will get some random and high-level trends. It’s not going to help you a lot.
On the other hand, if you group your churned customers, you will get more actionable insights. So, it will be beneficial to break down your churned customers into different segments. The two best cohorts to start with are:
- Plan Level Cohorts
- Subscription Date Cohorts
Churn Analysis By Plane Level Cohorts
Let’s analyze the churn rate by plane-level cohorts through an example.
To get a quick overview of churn in a specific month by using Baremetrics. The only thing you need to do is open metrics and then user churn. After that, a list will appear containing user churn for different payment plans.
Once you manage to find which price plan users are churning more, you will wish to zero in on why those specific customers are canceling subscriptions. You have to use a spreadsheet to analyze this churn.
You need to enter cancellation insights in Baremetrics and then download the selected data. Then you have to sort this data in the spreadsheet by payment plans.
Then you have to check the reason behind the cancellation of the customers on a specific payment plan. You can also read their complete comments as well. It will help you look for trends in churning by plan level.
Churn Analysis by Subscription Date Cohorts
It is another method to analyze churn by cohorts. In this case, you have to look at retention by churn date. You start with analyzing all the customers signed in a single month and then check for how many months all the customers stayed.
Don’t worry! It’s pretty straightforward to analyze churn by sign-up or subscription date cohorts.
In Baremetrics, you have to head into the user churn dashboard. Then you have to find the customer retention table there. Once you get the table, you will be able to look at how many customers have been retained month over month based on the subscription date.
The simplest and most common way to use this data is to compare customer retention based on signup date. Let’s elaborate not with the help of an example.
Let’s say, the customers who subscribed in May 2022 show a steeper rise in churn rate just after a couple of months as compared to other cohorts. On the other hand, the March 2022 cohort has very solid numbers in terms of customer retention.
Seeing this, you will definitely be curious to go deeper into this. Therefore, you may compare the May cohort with March one.
For this comparison, you have to go to the Customers section in Baremetrics. Here you can apply a couple of filters to have only those customers who signed up in May 2022 and March 2022. You need to apply customer lifetime value or simply LTV filter as well to compare the data of only paid customers.
Now you need to get some more insights into these two cohorts. Therefore, you will have to start by comparing the ARPU of each cohort. It gives you an idea about the customer value present in each cohort.
The customers with a lower ARPU will show more entries. Most of them may be subscribing just to test your services or products. So, they will often leave after two or three months. So that can be the reason why the May cohort shows more churn as compared to March one.
ARPU for the March cohort will be higher than double of the May cohort. Based on this data, you can assume that in March 2022, you managed to get some big fish who stayed with you for a considerable long period. This assumption seems pretty accurate when you compare the customer plan of the March cohort with that of May.
In May, most of the customers were signed up on lower payment plans and churned after two to three months. While in March, customers subscribed for higher plans and they stayed longer than average.
From this quick analysis, you can conclude that customers with a higher ARPU retained longer than average.
These are just a few examples of analysis churn by cohorts. You can cut your churned customers into segments based on their location, attraction toward a specific feature, and tons of other criteria. If you stick with our outlined framework you will be able to analyze churn and head toward the next step.
How to Reduce Your Customer Churn Rate
The main thing is done as now you are able to figure out the reasons behind churning. The next thing you have to do is to control churn. You can try numerous methods to reduce it. You can try:
- Introducing new features
- Making your products advanced
- Defeating your opponents in marketing and quality
- Lowering prices
- Offering loyalty programs
- Communicating
Apart from that, you can try numerous other methods to keep your churn under control.
Are you ready to estimate, analyze, and control your churn? Signup for a free trial of Baremetrics and get help in estimating and analyzing churn. It will help you in estimating other SaaS metrics as well.
