ArticleBest PracticesDecember 9, 2015
Diagnosing Churn Image

Diagnosing Churn

By Dan Steinman

It's typical to think of churn as a leaky bucket. How many customers are you retaining? How many are you losing? How much money are you keeping and how much are you leaking?

Instead of a leaky bucket, let's think of customer churn as something that results in a doctor's visit, like recurring migraines or high cholesterol. It's painful, annoying, and won't go away. In your annual checkup, the physician asks a few questions; checks your eyes, ears, and heartbeat; and then performs some preventative health procedures. While the cause of your company's churn ailment might be indiscernible to the untrained eye, a professional Customer Success Manager can monitor, diagnose, and prevent churn much like a doctor treats your high cholesterol with a prescription.

We surveyed a panel of more than 100 subscription businesses to discover the impact of customer churn and reveal Customer Success best practices. Our own Gainsight survey module was used to design, administer, and analyze the results.

Key Findings

  1. Customer Success is the best defense On average, companies with a dedicated Customer Success team have a 24% lower churn rate than companies without Customer Success. My earlier post explains why Customer Success is not optional for recurring revenue businesses - CSM teams generate growth by reducing churn rates and increasing contract values from existing customers.
  2. Get the complete picture. Only 45% of respondents say that they measure churn by both customer and revenue. It's crucial that your Customer Success team evaluate churn from many angles. In this Churn Analytics webinar, we discussed the risk of looking at churn one-sided. For example, if a company loses 10 of 100 customers (and those 10 have the biggest contracts), the loss could actually reflect 60% of incoming revenue.
  3. Don't forget the positives. 2 out of 3 respondents say they include down-sells in their churn calculation. However, fewer choose to include up-sells and cross-sells. In the VC panel session at Pulse, our annual conference, investors discussed the concept of net churn - or $ retention rate. As a best practice, this metric should be at least 100%, ideally 110-125%.
  4. Risky Business needs to be addressed.  The majority of respondents (77%) agree that the most effective way to reduce churn is to identify at-risk customers earlier. Through data science or triggered alerts, there are many ways to keep a pulse on your customers and take proactive steps to retain them.
  5. Great Expectations might be too great. Respondents say the number one reason for churn is that customer expectations are not met. A simple customer satisfaction survey administered from a Customer Success Management solution would give those companies a better picture of customer health before it's too late.
 

Churn cannot be ignored; knowing what causes churn creates a foundation for keeping your customers and maximizing profitability. Jeffrey Kaplan, Managing Director of THINKstrategies, agrees:

"Measuring customer churn is critical to success in the cloud and subscription services industry. Yet, today's churn management 'best practices' are limited and not well-documented. Companies with recurring revenue streams cannot survive unless they keep customer churn to a minimum, which means achieving 90%+ renewal rates. The results from this survey reveal that there isn't a consistent way to monitor churn. Less than half of respondents are able to report on churn weekly and a quarter of companies track churn by only company."

Yes, businesses have each developed their own terminology, approaches, and measurements to address churn. The real question is: what's missing? If you have the process in place to collect data on churned customers, you have an opportunity to analyze and identify factors that increase the likelihood of churn. Subscription services companies must have exceptional insight into their customer data in order to quickly remedy situations that cause churn to occur.

This infographic summarizes our survey findings and answers the questions:

  • What is the best way to monitor churn?
  • How frequently should you calculate the metrics?
  • What are the most common symptoms of churn among subscription businesses?
  • How should you treat churn and are there any cures?
 

customer success infographic customer health

 

More on survey: We utilized a stratified sampling method and took responses from April to July 2013. 54% of respondents are in the Software industry, followed by 11% in the Business & Professional Services industry. 52% of companies are dependent on a CRM system to calculate customer churn.

Picture of Dan Steinman
Dan Steinman GM, Gainsight EMEA

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