Churn is the silent killer of businesses. If you could wish for one of product metric to be perfect, I recommend to wish for a 0% churn rate (or 100% retention rate). So, what is churn? Churned users are people who stopped using your product. Or framed more positively: the fraction of your users who keep using your product over time is your retention rate. Why is it important?
Let’s say you are did a splendid job signing up 20% more customers than were using your product last month. If 20% of your users also stop using your products, you are expending a lot of energy, but your revenue growth is flat-lining. Yet, if only 10% of your users stopped paying, you’d be growing revenue 10% month over month, and you’d be more than doubling every year! Churn is one of the metrics that most affect your bottom line.
Before you can do anything about churn, you have to measure it using cohort retention analysis. To truly understand cohort retention, we need to break it down into three key components: cohorts, critical action, and time period. Let’s go through an example
Let’s say you are starting software company that provides Linkedin automation (automatically sending messages to prospects). You start building your first features: uploading prospect lists, connecting your linkedin account, sending messages, sending sequences of message, providing statistics, refining statistics, improving stability, creating new ways to upload prospect lists. As you build out your feature set, you can imagine your first customers might not enjoy your product as much, as it’s limited and buggy, but over time your product is maturing and you create more happy customers. To measure the progress over time, you can divide your users in groups that start using the product between a certain time period. E.g. 11-17 Dec, 18-24 Dec, 25-31 Dec, etc. These are your cohorts of users
Second, do you want these users to achieve? What is the value you want to provide for your customer? Do they need to have logged at least 2x per week? What is the specific user behavior that indicates active usage of your product? For the case of linkedin automation, you can set it up and forget about it for a few weeks. You could set the action as “logged in to the software” as the action, but it wouldn’t capture the fact that I’m still getting value out of the product passively. Therefore, as a general rule, I like to pick ‘customer paid subscription dues’ as the critical action that indicates a customer is using the product.
What will happen next, is that some of your new users wil discontinue using the product. But when do they make that decision, and when can you say conclusively that they have stopped using the product? You might not log in to your tax accounting software for a year, until next year’s taxes are due, yet you are using the software as intended. The same for AirBnB. You might not go on holiday every month, but you are a recurring customer. The point is, the frequency at which you measure retention, which should align with your product’s expected usage patterns. Weekly of monthly will often do, but not always.
When you have defined these you can start measuring. There are some handy softwares like Posthog can perform these measurements automatically, and after a few weeks your cohort retention table may look like this:
From this, we did some work to create the corresponding retention curves.
Here we see a cohort retention rate, decrease over time — this is natural but can be improved. The good news is that it
A good churn rate depends on the industry you’re in and how inherently ‘volatile’ your customers are. Individual consumers are quite whimsical, and they have a lot of agency to start and stop subscriptions. A 40% retention rate is already pretty decent in this category
When you sell to businesses (startups and SMBs) someone might have to convince someone else that it is worth it to buy your software, and switching is not usually appealing. If you achieve 60% retention for SMBs, you’re up to standard.
For large businesses and enterprises, you can rely on the stability of their business and their bureaucracy. Undoing purchases and creating replacement processes is work. Once you are in, just don’t give them a reason to rip you out. 70% customer retention is good in this segment.
Your churn metrics will improve when A) your product does what you say it does and B) you develop ‘sticky’ features. Let’s break it down. First, the easy one.
Whenever a customer first hears about your product, whether it’s through your landing page, advertising, social media. They come in with an expectation that your product is going to deliver something that they’re interested in.
For example, let’s say you’re running a Thai restaurant serving delicious authentic Thai food, but your advertisement in the front of the shop says ‘fantastic Asian food.’ What will happen? People who do not believe that restaurants selling a variety of cuisines will have good food will never enter, even though you specialize in authentic Thai cuisine. People who are keen on a simple meal of sushi, which they could probably get at most general Asian restaurants, will be disappointed because you don’t serve sushi. What if you said you sold Thai food? Would you have fewer customers leaving your restaurant before ordering, and wouldn’t you waste less time on the ‘wrong customer’?
This example sounds bogus to be true in real life, but it happens all the time for software startups! How often do you land on a new startup’s landing page and are left wondering what it really does? Convincing copy that sets accurate expectations makes all the difference.
Second,
Features that increase product stickiness are those that encourage regular, repeated use and make it harder for users to switch to competitors. Let’s go through some categories and examples of ‘sticky’ product features.
Whoop accumulates data that you will lose access to if you stop paying.
Duolingo makes learning a social activity by letting you create a profile, pairing you up with your friends, and entering you into competitive league. And if you’re an active user, you know how persistent their notifications are.
In general you can think about stickiness as aiding one of the following objectives:
Make your product indispensable by integrating it seamlessly into your users' daily routines. For instance, if your software syncs effortlessly with popular tools like Google Calendar, Slack, or CRM systems, it becomes a central hub for their activities. This makes switching to a competitor disruptive and less appealing.
Allow users to tailor the product to their specific needs. Netflix, for example, provides personalized movie recommendations based on viewing history, making the experience unique for each user. When users invest time customizing their experience, they become more attached to the product.
Features that store valuable user data can increase stickiness. Accounting software that holds years of financial records makes it cumbersome for businesses to switch due to the hassle of data migration.
Products that become more valuable as more people use them create a natural stickiness. Social platforms like LinkedIn or collaboration tools like Slack rely on network effects—the more colleagues and connections join, the harder it is to leave without losing valuable relationships.
Encourage regular use by integrating habit-forming features like streaks, rewards, or challenges. Apps like Duolingo keep users engaged with daily goals and progress tracking, making the app a part of their daily routine.
Offer something users can't get elsewhere. Software with proprietary features or exclusive content ensures that users have a compelling reason to stay. For example, Adobe's creative suite offers industry-standard tools that professionals rely on, making alternatives less attractive.
By thoughtfully incorporating these sticky features, you not only enhance user engagement but also make your product an integral part of your users' lives or businesses. This makes it significantly less likely for them to churn, boosting your retention rates and, ultimately, your bottom line.
You've just read about the true silent killer of businesses - churn. It's the one metric that can make or break your SaaS company, no matter how impressive your top-line growth may seem. The good news is, there are proven strategies to tackle churn and keep your customers loyal and engaged.
The key lies in deeply understanding your users, setting the right expectations, and developing truly "sticky" features that make your product indispensable. Yet, there’s a lot more to be said on churn, and that's exactly where we can help.
We have helped countless companies just like yours optimize their onboarding, enhance their product experiences, and implement retention-boosting strategies. We know the playbook inside out, and we're ready to dig into the details of your business.
Don't let churn continue to erode your hard-earned gains silently. Take the first step and book a call with us today. In just one session, we'll uncover the quick wins and long-term initiatives that can transform your retention metrics and set your company on a path of sustainable, profitable growth.
The longer you wait, the more revenue you may lose. Reach out now, and let's get to work safeguarding your MRR.
