Customer churn refers to the rate at which customers stop using a company’s products or services. Within the SaaS environment, it’s simply the rate at which customers cancel their subscriptions.

The two main measures of churn are:

  • Customer churn
  • Revenue churn

These two metrics are often correlated but they have subtle differences. Customer-based churn is when the paying entity, be it an account or user stops using your service.

Whereas, revenue churn encompasses less customer spending or plan downgrades. Downgrades are arguably a form of churn but offering a downgrade is a strategy to stop customer-based churn.

Churn is incredibly important for businesses of all sizes to measure, as high churn rates can slow and even outpace a business’s growth, which I cover in more detail here.

What affects churn rate?

Virtually everything. So much so, I’d even go as far as suggesting churn rate is the ultimate customer-health metric as it truly represents a customer’s dissatisfaction.

I acknowledge that saying everything isn’t helpful so let’s go through a couple of key trends.

Price affects churn

Price plays such a critical role in Economics 101, just as it does when talking about churn. If a customer doesn’t receive enough utility (satisfaction) at a given price, they simply won’t buy.

Although I mention price, value is the overarching premise here. If a customer simply isn’t receiving value for their price, they will be more inclined to churn.

As mentioned, offering a downgrade or cheaper solution can be one way to prevent customer-based churn despite seeing an increase in revenue-based churn.

For many businesses or staff tasked with tackling churn changing prices of a good or service isn’t feasible. So instead, reframe your project given the price, how do we maximise the perceived value a customer sees.

Competition affects churn

Naturally, the relative strengths of your competition play a major role in churn. If a customer is churning because your competitor has better features, prices, customer support, etc.

A secondary component of this is the cost of moving. If your product is hard to leave or there are extensive setup costs - a customer will be less likely to leave. This of course is a double-edged sword as complex products may hinder customer acquisition.

Simply put, the economic moat your business has plays a crucial role in churn.

How does churn affect revenue?

Churn is the opposite of growth, it acts as a strong handbrake to revenue growth.

A business may still be growing and successfully attracting new customers, but churn will mask the true success of sales teams. Since churn exhibits itself within revenue-generating areas such as sales, it’s also why churn is often overlooked. If sales growth is not improving, the initial answer is often to hire more salespeople - not look at churn.

Let’s imagine two businesses. Business is good, sales are growing steadily at 20% per year. However, Business A has a churn rate of 10%, whereas Business B has a lower churn rate of 5%.

Despite having the same sales efficiency, Business B will have 24% more customers than Business A. This difference comes solely down to churn.

Churn and sales growth are often pitted together. This is reflected often in organisational structures, where you have Sales and perhaps a Customer Success team. But as we’ve seen today, churn is a (heavy) anchor on sales growth.

So which one should you focus on? Sales and marketing costs are high, and are forever increasing. So from that perspective, focusing on retaining your customers and reducing churn is a smart move.

I really do suggest reading Tomasz Tungaz’s article on Churn vs Growth. Tungaz raises a great point that for smaller companies, high churn can suggest improper market fit, and that churn can erode the company’s brand.