If your revenue is based on a subscription model, your churn rate is a major indicator of how likely you are to achieve viable long-term growth. If your net churn is above 2% per month, it means that you are losing more than 20% of your revenue annually – which consequently means that it’s time for a reality check. Customer churn may occur due to many different reasons, here we look at a few of those.
Expectations unmet: Does your solution go far enough?
Unmet customer expectations are the biggest reason of customer churn. Particularly, if you have a business model that prioritizes rapid customer acquisition to later mobilize them into paying customers, such as freemium or free trial periods, meeting the customer expectations is even more important. Is your product delivering on your promise? Are your customers getting enough value even out of a free trial or an introductory option? Is your solution meeting your reliability metrics for stability, bugs or crash rates?
Product unsticky: Is your solution a vitamin or Vicodin?
Your solution might provide some value at first but once the initial value is received, the customers may not want to keep paying. The question in any solution’s stickiness is this: what real benefits does your solution provide to the way your customers work, play, or live their lives? In order for a solution to be sticky it must be a key part of a customer’s routine workflows such that if they lose the access to your solution, they would lose a measurable amount of value.
Product over-engineered: Are your customers using all the key features?
If your customers have not successfully adopted your solution and used all the key features, chances are they will not be strong advocates of your solution. Over-engineered products are a good example of a case where customers do not receive commensurate value from a solution for what they have paid or expected. Study your usage metrics in depth and where possible, determine the frequency distribution of the usage patterns for your key features and by the different types of customers. If you realize a multi-modal distribution, then it may be possible to build versioning to align your offering with what your customers need and want – and price that accordingly.
Product incorrectly fenced: Are your versions aligned with each segment?
The key to customer adoption is to acquire sustained repeat customers who will recommend the value they receive to others. If your solution is offered to a set of customers who are not well suited to get the benefits, then they will not stick around. Your versions or tiers of offerings must be tightly aligned with the value of the benefits that are received by each type of customer. Are you targeting a set of customers whose pains and gains are only partially aligned with the benefits your solution provides?
Wrong customers: Are your customers sticky themselves?
If you’re experiencing high churn, it may be worthwhile to know whether or not you have targeted the right customers. Are your customers as sticky as your solution, in other words, are you selling to enterprises that go out of business themselves? Have you considered alternative versioning options to offer your solution to different types of customers that could result in higher retention rates?
Wrong pricing structure: Is your pricing structure aligned with the value your solution delivers?
Your pricing structure must be aligned with the value received by each different type of customers; otherwise customers will either leave because their needs are unmet or they are not benefiting from all the value that the product delivers. Versioning may help in order to address the needs of your premium and more price-sensitive customers, separately. Consider removing some of the features or capabilities of your solution to tailor your solution to the less demanding & more price-sensitive customers, and measure if this impacts their metrics for usage and perceived value. Also build in your retention strategy from the get go: establish the upgrade paths within the product family, for the low-end users, to follow as their needs advance.
If you’re dealing with high churn rates today, do not wait long enough to see or validate a pattern. The best way to learn why customers churn is to do an effective win-loss analysis. Establish a win-loss analysis process and follow up with your lost customers promptly. You can download a win-loss analysis template here.
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