Growth

Defining the 4 types of churn

Apr 21, 2017 3 minute read Mikko SeppäMikko Seppä

Growing your SaaS company is hard work, especially if your churn rate is out of control. It’s near impossible to achieve aggressive growth targets if you keep losing customers at a high rate.

But in order to grow your company, you should be able to keep the customers you spend so much effort in getting. Simply put, churn is basically one of the most important metrics in SaaS.

Defining your churn rate

Something I find really amusing is that people get so easily fooled by metrics. Especially aggregated metrics that really hide the truth more than they reveal it. Let’s take an example: Mikko and Bill’s average wealth is $42,6 billion. The little problem with this aggregated number (average wealth) is that Bill’s last name is Gates and he contributes to this equation with $85,2 billion. On the other hand, Mikko doesn’t really contribute with much money at all. So just staring at your averages won’t really tell you the truth.

This same problem also exists with churn rate and if you don’t understand the different aspects of churn, you’ll be making the wrong decisions. And what’s even worse is that those wrong decisions can cost you a lot of money.

Let’s take a closer look at what churn really is:

“The rate at which you are losing customers or revenue through subscription cancellations.”

- Chartmogul

So, to understand churn, you must first understand what are the different types of cancellations.

 

The four different types of churn

There are essentially four distinctive types of churn. In order to understand how your churn builds, you need to understand the difference between the four and how to calculate them.

#1 Pro-active Churn: This is the churn that comes from customers proactively cancelling their subscriptions. This is the bad, bad churn you want to do everything in your power to minimise.

#2 Reactive Churn: This is when a customer doesn’t remember (bother!) to update their credit card information, so the account was cancelled. Better recurring billing solutions have a feature called Dunning Management, which enables you to notify customers automatically when their charge was declined.

#3 Happy Churn: Chartmogul explains Happy Churn well: “Customers who finished using your product for their campaign (or similar short term use case), so cancel with a positive experience.” This is the type of churn that predominantly happens with software that delivers a one-off solution or is used for a specific timeframe without the need for constant usage.

#4 Fake Churn: Many SaaS companies have a 30 to 90 day money back guarantee available. While it technically IS churn, it would be good to measure this separately to understand how much it’s actually costing you.

#5 (BONUS): Dollar Churn vs. Customer Churn

Dollar Churn is the churn in dollars (or whatever your local currency may be) while the Customer Churn is calculated from how many customers churned. It’s certainly a good idea to check these two since one gigantic customer churning is just one customer churning, but it might be huge portion of your current MRR.

So, when calculating your churn, it might be a good idea to look at the churn on these different levels to better understand how your product actually sticks; if you have high Happy Churn it means you’ve got a different kind of problem compared to high Pro-active Churn.

Analysis Paralysis

While your recurring billing systems integrated with tools like Chartmogul or Baremetrics can quite easily give you this information, the biggest issue is what you actually do with this information.

Here are some thoughts you should consider:

  • If you see your customer churn go up, analyse from which of the four segments it came from
  • Compare various product versions to understand if there is a specific package that has higher churn rates
  • Check for geographical churn in case a competitor has increased sales and marketing activity in a certain region

Read more about SaaS Lifecycle Marketing and the role churn plays.