Customer churn – also known as customer attrition – is when a customer decides to not renew their subscription. This can be for any number of reasons, and it’s widely understood that churn is a normal part of every SaaS business. Even though customer churn will always happen to some degree, companies still need to prioritize reducing their churn rate as much as possible. This is done through developing a churn management program.
But how do you know if your churn program is working? And what are the KPIs used to measure the success of your program? There are lots of different metrics that can be measured, so let’s break it down.
Determining your churn rate is a simple formula where you take lost customers over a certain time period and divide it by the total number of customers at the start of that same time period, and then multiply that number by 100.
For example, if your business had 1,000 customers at the beginning of the month and lost 25 customers by the end, you would divide 25 by 1,000 to get 0.025. You then multiply 0.025 by 100, resulting in a 2.5% monthly churn rate. We recommend calculating both monthly and annual churn rates as these can differ dramatically.
Your monthly recurring revenue (MRR) is just what it sounds like – the amount of revenue your business earns each month. Calculating MRR requires only two inputs:
The number of monthly subscribers
The amount of money these subscribers pay each month
The formula is as follows:
It’s smart to look at MRR over the course of a longer time period so you consider any anomalies or seasonality typical for your business. For example, results would be skewed if you determined your MRR based on a few months over the busier holiday season.
Customer lifetime value (CLTV) is the total amount of revenue received on average from a single customer throughout the entirety of your relationship. It’s an invaluable number to understand because it helps you make strategic decisions about how much it’s worth spending to keep a customer from churning. It also helps you determine what customer segments are typically most profitable for your business.
The simplest way to calculate CLTV is:
So a subscriber of a video streaming service might be worth: ($25 subscription cost) x (12 renewals annually) x (5 years) = $1,500
Armed with your churn rate, MRR, and CLTV you have the key metrics needed to measure your churn management program. But how do you know if you’re moving the needle?
We advise our clients to look at the following:
As you serve up tailored win-back offers, you need to understand if they resonate with your audience. Detailed reports -- like the below screenshot from an example ProsperStack dashboard -- on what the offer acceptance rate is for each churn strategy deployed will give you good insight into what drives your audience to renew.
Ultimately, the goal of your churn management program is to save revenue. Regularly reviewing the amount of MRR saved and total saved revenue will help you track the overall success of your program. The ProsperStack dashboard allows you to sort this data monthly or look at the program overall, as is shown in the image below.
To determine the overall ROI of your program, all you need to do is take the amount of saved MRR and subtract it from the costs associated with the program. This will tell you if the juice is worth the squeeze and how competitive you can get with win-back offers.
Let us show you how our churn prevention tool pays for itself in saved MRR. All we need are three simple data inputs and we can generate a custom report on how ProsperStack will grow your revenue. Get in touch today.