How to work with product churn?

What is Product Churn?

Product churning is a measure for the metric of how many customers are leaving a product of a company over a certain time period. Churn is used to understand the market performance of a product and the company as a whole in the market. It is a very common practice in the SaaS businesses, i.e., businesses that provide SaaS cloud services to their clients on a pay-as-you-go basis. These companies include both the customers who have stopped using a product and who downgraded the subscription or use while considering churn. Churn is a critical measure to be evaluated for businesses as customer retention is a much-needed aspect in terms of both brand image and operational costs. General estimates show that new customer acquisition costs 5-20 times more than customer retention and thus is a negative factor for profitability. Therefore, companies measure churn rate in order to keep track of the overall performance and customer loyalty level.

Specifically, churn evaluates whether customers are receiving the value from a product that they require. There can be many factors causing and affecting churn for a business. A product or service without upgraded features and values over time would lose its market and user value over time. Further, high competition and lower innovative approaches would make businesses and products lose their customers as well. Therefore, the key influencing factors for churn are a market-fit failure, intense rivalry, lack of innovation, high price rate, poor customer support, and unacceptable user experience. Businesses need to keep proper monitoring of churn to develop proper measures for better customer retention and loyalty.

What are the different types of churn?

In general, churn is a measure of customers leaving particular products or services. However, there are several different measures to estimate and evaluate churn. The main types of churn are customer churn and revenue churn.

Churn can be measured in terms of customers a business directly loose over time or can be measured in terms of revenue a business loose over time. If the churn is being evaluated in terms of the number of customers lost over time, then it is known to be Customer churn. On the other hand, churn being measured in terms of revenue losses over time is called Revenue churn. Though these parameters are evaluated in two different methods, both the estimates give a measure of adverse market impact on the business.

Both the measures have their respective importance. Though customers dropping off can be directly evaluated through customer churn, it is revenue churn that gives the actual measure of the adverse impact on revenue. For instance, customer churn for an expensive product would be costlier than that for a less expensive product. Thus, revenue churn is a much more specific measure of business impact.

How product churn impacts your business?

There are multiple ways by which churn affects a business. Firstly, there is a long-term cost that is to be carried by the business due to critical levels of churn. Acquisition of new customers and market for a business costs about 5-20 times more than the overall costs of retention of older customers. Therefore, churn causes a long-term indirect loss for the company. On the other hand, there is a critical market impact associated with churn for a business. Churn is a direct (or sometimes indirect) measure of customers leaving a product and thus is an indication of a reduction of the overall market that the product (or service) is serving. Further, churn often also comes with bad reviews from customers who are leaving through various media. This can be through word-of-mouth, social media, or product feedback. These reviews also affect new customer acquisition. Acquisition and marketing become tougher and costlier as a result. Finally, a high level of churn adverse affects the overall brand image of a business as well.

Advantages and Disadvantages of Churn Rate

Though churn is a negative metric for business growth, keeping track of churn is important for businesses. It is one of the key metrics for the growth of both the business and products. Moreover, with churn, the user journey and the most critical stages of the user journey where customers are leaving or dropping off are also possible to be evaluated through churn evaluation. On the other hand, measuring churn on a regular basis gives a boost to the marketing and product innovation efforts of a business. This is because it gives a critical measurement of the reasons for which customers are dropping off and gives an opportunity to improve. Therefore, evaluation of churn on a regular basis is crucial.

There are several adverse impacts of churn that are there to be mentioned. Firstly, churn future causes costs of customer acquisition which is much costlier than retaining customers. Churn impacts the brand image and reputation of both the product (or service) and the business critically. Furthermore, the measurement of churn can also have a critical impact on business performance. This is because a greater focus on churn reduction would cause the business to lose focus on its core business goals. The firm would start to take fewer risks that would affect its innovation in turn. Moreover, it would also lose the opportunities to upsell, affecting the recurring incline of revenue over time.

What is a Good Churn Rate, and How Do You Calculate Churn Rate?

As there are two measures of churn, there are also two measurement approaches for product churn. Customer churn is measured in terms of customers dropped off. It is calculated as the %reduction in customers for a product over a certain period of time with respect to the total number of customers at the start of that period. On the other hand, revenue charm is calculated as the %decline in revenue for a product over a certain period of time with respect to the initial revenue at the start of that period.

Now, a good fit varies from business to business, depending on the rate of growth. For low growth organizations, they cannot afford more than 5% churn, while for a medium-range business, 5-10% is a bearable churn rate. Large organizations can afford more than a 10% churn rate.