Understanding customer churn is important for product managers, product marketers, and sales management.  Simply put, customer churn is the percentage of customers that decide not to renew their subscriptions or term contract agreements.  I came across an article recently entitled 43 ways to calculate SaaS churn (and why you should just keep it simple).  While they did not lay out all 43 formulas it was still an interesting piece.  I have always been a numbers guy – I find that facts can help you better understand a situation and minimize the effects of anecdotes on key decisions.  In this post I am going to talk about churn analysis and why, at the end of the day, numbers cannot tell the whole story.

Customer Churn Formula

Consider the following tables which describe the churn numbers associated with a SaaS product line:

Simple Customer Churn Formula

SaaS Customer Churn Analysis – The Next Level Tiering & Flux

9% of the customers left, but revenue only declined by 3.6%.  How is this possible?  Unless you have a product/service that has only one price and one standard amount of usage, there are going to be variations between the impact of churned customer numbers and churned revenue numbers.  Consider the following tables:

Customer Churn & Revenue Tiering
Customr Attrirition & Revenue Tiering

By tiering out customers by size of annual revenues and annual revenue trends (attrit, decline, flat, growth, & new) you can gain a more nuanced understanding of the nature of your customer churn.

Another dynamic to consider is the Money Wheel.  The Money Wheel is a revenue sourcing analysis technique that can help product managers better understand the drivers of product sales and customer churn.  Check out this post Moneywheel – A Revenue Sourcing Analysis Technique for Product Managers.

While metrics like these can help you identify specific segments in your customer base that are churning more than others, they fail to tell you WHY the customers are churning.  Quantitative analysis alone is not adequate to understanding and reducing churn.  A more qualitative approach is needed.

Churn Formulas Are not Enough – You Need Win/Loss Analysis

Win/Loss interviews provide an opportunity to dive deeply into the reasons behind customer decisions.  They can provide the qualitative data you need to develop effective strategy and tactics to counter customer churn.  In a typical project, a subset of customers who have dropped your solution and those who have decided to renew are selected.  You can also explore customers whose usage has either significantly increased or decreased.  Next, an interview guide is developed to help script calls with these customers to ensure that all appropriate bases are covered.  Next, customers are recruited to participate in the process.  Generally the sales people that were involved in the initial deal or renewal are encouraged to help get customers to participate in the project.  Sometimes an incentive like a $25 or $50 gift card is used as a reward for participating in the process.  Ideally 30 to 40 calls are arranged to provide enough of a sample set to derive real results.  Experience has shown that only one in four contacts end up agreeing to participate in Win/Loss calls.

Next calls are scheduled and executed, with all of the results being documented.  Usually a neutral third party is used to conduct the customer calls to encourage the customers to provide open, honest, and direct feedback.  Once the calls are completed, the team step back and analyzes the results of the calls.  Using the voice of the customer what were the key drivers behind cancellations?  Was there anything the company could have done to prevent the cancellation?  What did the customer perceive the pros and cons of y0ur solution to be?  Did a competitor succeed in undercutting your solution by offering a lower total cost of ownership or improved functionality? 

Once the analysis has been developed all of the impacted portions of your organization should be briefed on the results – Marketing, Sales, Customer Service, Professional Services, etc.  The team should identify a series of short and long term action items that can be implemented to reduce churn based on the learning gleaned from the calls.

If you are interested about learning more about how Win/Loss programs can help reduce your firm’s customer churn please contact the Win/Loss Agency.  They would be happy to share with you their experiences and insights.  In the spirit of full disclosure I am a board advisor to the firm.

By John Mecke

John is a 25 year veteran of the enterprise technology market. He has led six global product management organizations for three public companies and three private equity-backed firms. He played a key role in delivering a $115 million dividend for his private equity backers – a 2.8x return in less than three years. He has led five acquisitions for a total consideration of over $175 million. He has led eight divestitures for a total consideration of $24.5 million in cash. John regularly blogs about product management and mergers/acquisitions.