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How to Analyze Churn Rate: Step-by-Step Churn Analysis Guide

Read Time: 8 min

Churn, in a business environment is the term used when customers have canceled their subscriptions services. It’s important for your business to know your monthly churn rate in order to build strategies for retaining customers and maximizing customer lifetime value.

With this guide, you’ll learn how what churn analysis is, how to perform a churn analysis and the benefits of doing so. The first step is understanding what a churn rate is and why it’s important.

What is Churn Analysis?

churn analysis

Churn rate can be defined as the percentage of customers who cancel their subscriptions. If you have 100 customers and after a month 10 people cancel, your churn rate for that month is 10%.

Churn analysis typically centers around looking at multiple time periods in order to determine the trend in customer retention or loss over time. You should plan on doing a monthly churn analysis because monthly customers can make or break a business.

Customers who leave might have been thrilled to be a part of your service at one point, but over time their needs changed and they no longer have a need for your product. Understanding this allows you to explore whether the absence of these customers is affecting your bottom line.

The purpose of churn analysis is to understand which factors are responsible for the loss of your customer base and how you can improve your service so that more customers stay subscribed longer. Some common reasons why people cancel include:

  • Their needs changed and they no longer had a need for your product
  • They found a service comparable to yours and it better fit their needs
  • Their financial situation changed and they couldn’t afford your product anymore

After you’ve identified why your customers are leaving, you can start to think about how to communicate these findings to your team and come up with strategies that will retain more customers.

Why Customer Churn Analysis is Crucial for Your Business

A customer who leaves your service may never return if you don’t do anything to retain that customer. Then you’ve lost all of the profits and future earnings they would have contributed to your business.

That’s why it’s crucial for businesses to keep the churn rate under control. You need to understand that your customers have constantly changing needs. If your strategy is only focused on acquiring new customers, but not retaining old ones, then your business might not succeed, depending on your goals and business industry.

One of the best ways to measure the health of your subscription business is by measuring the percentage of monthly customer churn. You’ll want to track this metric over time so you can easily see which strategies are working and which ones aren’t.

Improve customer satisfaction and retention

A high churn rate is often an indicator that customer satisfaction and retention are low. This is because it’s easier to retain customers who are satisfied with your product.

It also tells you where the problems in your business are. For example, if you have a low churn rate but few new customers joining, then you know you need to work on how you acquire new customers through marketing practices or offering more value to existing ones.

Increase recurring revenue

If you can find out why customers are canceling and address those issues, then you should be able to reduce churn. Maintaining your existing customers takes up less time, resources, and money than finding and acquiring new ones. If your customer retention rates increase while maintaining profitability levels, then this will naturally lead to an increase in revenue.

Understanding where your churn is coming from will help you to increase your monthly recurring revenue.

Although not all churn analysis needs to be concerned with financials, knowing whether or not customers are canceling because of low price tags can drive better business decisions such as raising prices and finding loopholes in the way products are marketed.

Discover opportunities to strengthen your customer experience

You can find out why customers are canceling by actually reaching out to them. However, you’ll want to make sure that you don’t do this too early after they’ve canceled.

churn

When to Perform a Churn Analysis

You’ll want to measure your customer churn rate once a month based on the previous month’s data. Although it’s easier to track this metric at the end of the month, it’s important to note that you should try and avoid doing so because it will skew your data and make the analysis less accurate. For example, it’s best to look at this report at the beginning of the next month (analyzing the previous month’s data) as you had sufficient time to let all the data propagate.

Customer Churn Can Occur in Many Ways

Churn can be the result of many different factors. Understanding and identifying these factors will help you to come up with strategies that will benefit both your business and your customers.

Active cancellation

Active cancellation is when customers make a conscious decision not to subscribe for the duration of their contract due to a negative experience. These customers are not returning because they’ve decided that your product or service is no longer worth paying for. Pay special attention to this type of churn as it might be a factor you can improve upon and fix directly.

Not renewing subscription

This refers to the customers who haven’t used your product in a certain amount of time and end up canceling their subscription because they forget they have one.

Switching to a competitor

Your customers are satisfied with your product, but not satisfied enough that they want to keep paying for it. You’ll need to provide them with better value or a more appealing customer experience if you want them to come back and pay again.

Downgrading services

People will downgrade when they don’t think that your product or service is worth the price. To prevent this, look at reducing your prices to increase value and making sure that you’re providing customers with what they need. Or it could simply be that customers are choosing to downsize their bundle because it’s more affordable. Increasing the amount of benefits you offer at a lower tier may be enough to convince them to upgrade.

Good churn

Sometimes churn is key in the removal of customers who were a bad fit for your service or business model. Another example of good churn is when consumers leave after their short-term requirements have been met. It’s also known as ‘happy’ churn since it implies that they are bringing in more moneyas they had a good experience and will buy from you again.

How to Analyze Churn Rate with Churn Cohort Analysis

Churn cohort analysis is a more accurate way of measuring churn. It also enables you to calculate the monthly retention rate and customer lifetime value (CLV).

  • The exact date that they’ve canceled (or their last billing date)
  • Any reactivations within the last 12 months

Churn cohorts are usually classified by:

  • The month in which the customer canceled their subscription
  • Their recency (the newest and oldest cohorts)
  • A specific product/service/tier

You’ll then be able to see how many people move from one cohort into another one. This will tell you whether your retention rate is improving or declining. You’ll also be able to see which cohort is retaining the best (highest recency), whether it’s worth spending resources on this group, and how far back you need to go in order to find customers you can reactivate.

1. Identify your specific goals and KPIs

What are you hoping to achieve by analyzing your churn rate? If your aim is to retain more customers, then you’ll need to define what ‘retaining’ means.

For example, do you want customers who have stayed with you for 6 months or 12 months, or 2 years? You should also identify what success looks like for your business, as it varies from merchant to merchant.

2. Gather customer churn data with analytic software

There are many analytics tools that can help you to gather your customer churn rate data. You should also actively measure the number of people who have canceled their subscriptions within a specific time period.

Additionally, identify which providers send out automatic notifications when a customer cancels their account.

3. Segment customer data into cohorts

Once you’ve gathered your data, it’s time to segment it into cohorts. A cohort is a group of people who have carried out a specific action within a certain time frame.

For example, all churned customers over the last 30 days would make up one cohort.

You may also want to consider having more than one active metric at the same time. For instance, you might want to measure both monthly churn and customer lifetime value (LTV).

4. Analyze churn by cohort

Building on the previous step, you can then look into how your churn changes over time. You might notice that it’s always high during particular months and low during others.

You should spend some time checking what factors affect this behavior. External events such as holidays could be to blame if there’s a pattern each year. Or perhaps your product updates are causing more people to cancel.

Customer Churn Analysis Example

customer churn analysis

Let’s imagine that your expected churn rate is 10%, but you’re baffled by the fact that monthly churn for March and April was 14%.

Using a cohort analysis, you see that this high number of people canceling is only happening within 2 specific cohorts. The first group comprises customers who canceled between February 28 and March 31, while the second group is those who canceled between April 1 and April 30. This would suggest that your product’s updates have caused some damage.

In this situation, it would be worth gathering more data by checking whether people are canceling as a result of using the app less, or because they haven’t been able to complete certain tasks.

However, you might also consider reactivating customers in these cohorts to see how many of them would be willing to come back.

Final Thoughts

If you have a subscription-based business, and you’re looking for ways to reduce churn and improve customer lifetime value (LTV), then it’s time to learn how to analyze the behavior of your customers. The more data that we have about our customers, the better we can tailor products and services to meet their needs. This article helped you understand what a monthly churn rate is, and why analyzing this metric is so important. It also included some tips on analyzing cohort groups so that you don’t find yourself in a situation where people are canceling because they haven’t been able to complete certain tasks.

Sources: G2.com