A practical guide to customer attrition for product managers
88% of your users are leaving your site – and that’s not even the worst part. For the average product manager, feedback is everything, and each new user represents an opportunity to improve. But, when users become customers, the importance of maintaining a positive relationship with them skyrockets. For many service-based companies, monthly recurring revenue (MRR) is a north star metric, and customer attrition is like a poison pill that prevents the most important users of a product (those who have already reached their “aha” moment) from receiving value from their purchase. The impact of this is wild fluctuations in MRR and a constantly shifting foundation that prevents a business from attaining steady growth.
A real world example: Disney+ has a monthly customer attrition rate of 4.3%, while Apple TV+ has a monthly customer attrition rate of 15.6%... but why? What is it that separates the products customers actually want to spend time with from the ones that they abandon? The simple answer: the quality of a user’s experience.
Customer attrition (customer churn) definition
There are several terms that get thrown around to describe the same thing; whether it’s referred to as customer attrition, customer turnover, customer defection or customer churn, the meaning of these terms is roughly the same (read our blog comparing churn vs attrition to learn more about the distinction between these two terms) - while there are some subtle differences between the two, churn is generally used as an attrition synonym for simplicity.
Customer attrition is broadly defined as the loss of customers or clients to a business for any reason during a set period of time. In practical terms, customer attrition is used as a churn synonym and is calculated as the rate at which a business’s customers end their relationship with the business by canceling their ongoing commitment or withholding a second purchase. Businesses who rely heavily on recurring revenue from their customers like service providers are typically impacted the most by churn as the cost of creating a new customer is often significantly higher than the costs associated with retaining one. Keep in mind that there’s no such thing as a company with no attrition whatsoever.
Voluntary churn vs passive churn
There are two types of customer attrition for SaaS companies:
- Active customer attrition (voluntary churn) – this is the primary type of churn faced by subscription-based companies, in which customers have to take a conscious action to cancel or stop their subscription. If you’re a company who relies on month to month subscriptions, then your bottom line has and will undoubtedly be impacted by this type of customer defection.
- Passive customer attrition (passive churn) – this variety of churn occurs when a customer is prevented from renewing their subscription by issues they’re unaware of or unable to control like a failed paymCent. These defections are often rectified with swift customer service intervention and make up roughly 20% of the total churn a company faces on average.
Gross vs net churn
There’s also several ways to quantify attrition (typically referred to in this context as churn). Gross churn and net churn are two metrics used by businesses to measure customer churn. Here’s a breakdown of gross vs net churn and their usefulness as measures of customer attrition:
- Gross churn refers to the total percentage of customers who have stopped using a product or service over a given period of time, regardless of whether they were replaced by new customers or not. It measures the rate at which a business is losing customers.
- Net churn, on the other hand, takes into account both the customers who have left the business and the new customers who have been acquired over the same period. It calculates the percentage change in revenue resulting from the change in the total number of customers. Net churn can be calculated by subtracting the percentage of new customers acquired during a given period from the percentage of lost customers during the same period.
Net churn is generally considered a more useful metric as it gives a better indication of the overall health of a business. If the net churn rate is negative, it indicates that a business is retaining more customers than it is losing, while a positive net churn rate means that the business is losing more customers than it is acquiring.
You’ve likely also heard the term customer retention before. So what’s the difference between customer retention and attrition? To put it simply, the two rates are inverse of each other (ie, retention is the opposite of churn) - if customer churn is the rate at which customers abandon your product, then customer retention is the rate at which customers stay subscribed to your service over a given time period since it’s the inverse or opposite of churn.
In a simple example, a SaaS company who starts the financial quarter with 1,000 customers & ends it with 900 would have a customer retention rate of 90% and a customer attrition rate of 10%. The measures are two sides of the same coin, but in order to optimize for retention, it’s necessary to understand why customers churn in the first place, and directly address the pain points that led them to abandon your product.
Why is customer attrition important?
According to the Harvard Business Review, “acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.” This is because the likelihood of an existing customer repurchasing or continuing a service and providing a company with more revenue is far greater than the likelihood that a new customer will purchase a product or service for the first time. In other words, new customers cost more than existing ones. Additionally, loyal repeat customers are the lifeblood of product-led growth (PLG) companies, who rely upon low acquisition costs and a high degree of customer evangelism to spread their product within and across organizations.
Losing a customer hurts for any business, but even more so in the world of SaaS, where low barriers to entry and freemium/free trial models are aimed at minimizing the amount of time it takes a user to see real value from a product experience and increasing the likelihood that they share the product with friends and colleagues. For a company with a high customer churn rate to maintain steady growth, it has to continually compensate for its losses by acquiring new users, a recipe for disaster given the discrepancy in unit economics between acquiring vs retaining a customer. This is ten-fold for bottoms-up PLG companies, whose viability explicitly requires not only that users are retained, but that they actively spread the product themselves to co-workers and other potential customers.
This is easiest to understand through a real-world example that PlayerZero sees nearly every day: imagine that a co-worker at your organization has just invited you to try out a new freemium software product that they’ve fallen in love with. You eagerly accept your invitation and are prompted to complete several onboarding steps before you can get started. You make it to the very last step of the onboarding process and click the “continue” button, only to be met with an error message. You try again… another error message. You refresh your browser and restart the onboarding process, complete each step again and make it to the final page - but again, you’re stopped in your tracks by a bug. What do you do now? Well, if you’re like 88% of users that encounter bugs on the internet, you’ll likely abandon the software. Your coworker is unable to spread the product through the organization, and inevitably, your account is lost. For any PLG company, this represents a fundamental breakdown of the flywheel that creates growth.
Hundreds of product & engineering teams use PlayerZero to find out what’s breaking, why it matters, and how to fix issues in their frontend applications.
How to calculate customer attrition rate
While there are several ways to quantify customer attrition, the most basic formula for calculating customer attrition rate is:
This is often expressed as a percentage. For example, if your business had 1,000 customers at the beginning of Q4, and lost 100 customers by the end of the quarter:
Customers lost during Q4 = 100
Customers at beginning of Q4 = 1,000
Your equation would look like this: Q4 ARCustomer = 1001,000
= 0.1 x 100 = 10% customer churn in Q4
Thus, the steps to calculating customer attrition rate are the following:
- Decide on the time period you’re interested in observing. Typically this will be a month, quarter or year.
- Figure out how many customers your business had at the beginning of the time period you’re observing.
- Figure out how many of your customers churned during the period in question.
- Divide the number of churned customers by the number of customers you had at the beginning of the time period.
- Multiply that by 100 to produce a percentage.
For SaaS companies, however, this formula alone isn’t sufficient as it doesn’t account for crucial variables like free vs paying customers. For instance, a software company with a forever-free tier, a growth pricing tier, and an enterprise pricing tier could miss the big picture as it relates to revenue by using this model alone to calculate their customer attrition rate.
If your business has a tiered pricing model, it may be more useful to quantify customer attrition by pricing tier. Since each tier is naturally more attractive to users at different stages of the customer lifecycle, attrition analysis can show you where your product shines and where it lags behind the competition. For instance, if free tier customers have a churn rate of 20%, but growth tier customers have a churn rate of only 10%, you know that something isn’t resonating with your free-tier users – this could be because of a poor onboarding experience, a lack of value added by your free tier and a reticence to upgrade due to price, product usability issues, or any number of other causes. In many ways, the rate at which customers defect is a canary in the coal mine for the actual value that customers get out of your product.
This said, there are several alternative ways of analyzing customer attrition. Here are just a few methods you can use if your business requires a more detailed approach:
- The dollar-value of monthly recurring revenue (MRR) lost
- Percentage of customers lost in a time period
- Monthly revenue churn = MRR lost in a time periodMRR at the beginning of the time period
- Retention rate = (1 – churn rate)
There’s no firm customer attrition benchmark that can be applied to each and every subscription business, but for the sake of comparison, we can consider a problematic customer churn rate to be any rate greater than about 15% per year. However, many high-performing companies maintain rates either lower or higher than this benchmark. Here’s a couple for comparison:
- Slack has an annual churn rate of around 10% for its free users and around 2% for its paying customers. Source: 10 Beasts.
- Peloton has an annual churn rate of roughly 8% for all of its users. Source: Subscription Insider.
- Disney+ has maintained a monthly turnover rate of 4.3%, while Apple TV+ continually struggles with an industry-worst monthly rate of 15.6%. Source: MediaPost.
An additional consideration when analyzing your customer turnover is the time period of observation. Naturally, yearly customer attrition rates should be lower than monthly rates. Why? Because, monthly turnover compounds over time. So, what would a 15% annual churn rate look like month-to-month? To determine this rate, we can use the following equation:
Monthly churn rate = 1 – (1 – annual rate)1/12
Thus, we find that in order to achieve an annual rate of no more than 15%, a company would have to maintain a monthly customer attrition rate of 1.3%.
= 1 – (1 – 0.15)1/12 = 1.3%
What causes customer attrition?
There are many, many potential causes of customer attrition, but almost all come back to the quality of a customer’s experience with your product. Here are a few of the most common causes:
- User experience – bugs are the bane of any SaaS product’s existence. Too often these problems become systemic due to a combination of unwieldy error monitoring mixed with a lack of context around the actual user impact of engineering issues. This is the primary driver of customer churn for software products and we’ll talk more about it below.
- Product/market fit – if your product is a poor fit for the market you’re attempting to service, not only will you spend more to acquire customers, you’ll also struggle to keep customers as they naturally cycle out of a product that doesn’t align well with their needs.
- Price – is your product priced properly? If you’re in a crowded market with many alternatives, you have to provide the most optimum possible price-to-value ratio. If you’re finding that a large number of customers churn due to price, it’s time to re-evaluate your pricing strategy.
- Customer support – you should seek to preemptively answer common questions that customers have through content and clear in-product communication in order to minimize the amount that customers have to reach out to your support staff. The longer a customer is confused, the more likely they are to defect from your product.
- Onboarding – onboarding is your first chance to show off what your product can do and make a positive impact on brand new users. Unsurprisingly, this is one of the most common sources of churn due to bugs, poor messaging, and/or an insufficient user experience.
Each customer is different, they have differing pain points and use cases for products and therefore there’s no one-size-fits all solution to counteracting all customer churn. However, for SaaS companies, the primary cause of churn almost always lies within the product itself. For both paying customers and new users of software, there’s nothing nearly as frustrating as being excited about a product that’s supposed to make your job easier, only to be met with bugs that make it unusable.
How to decrease your attrition rate with engineering
As we’ve established, product bugs are the primary cause of customer churn for SaaS companies - but what is it that makes them such an outsized detriment to customer retention?
Bugs prevent users from seeing how great your product is, whether they’re still in the consideration phase or have taken the plunge and become a customer, your business simply can’t afford not to put its best foot forward. No matter where they are in your funnel, once they’re engaging with the product, customers are liable to churn due to bugs that render their experience frustrating, disappointing, or unfulfilling.
Being stopped by a bug is a frustration that’s hard to compare to other daily inconveniences. It’s somewhat like being caught in rush hour traffic – you know where you need to go, but something beyond your control refuses to let you proceed. Except, unlike rush hour traffic, bugs are (seemingly) random and unavoidable.
Compounding this is the fact that the vast majority of software companies make users themselves responsible for reporting bugs. Imagine this… you’re a non-technical person simply trying to use a software that you were promised would make your life easier when all of a sudden, not only are you unable to proceed to actually get the value you need out of the product, but you’re in the uncomfortable position of having to relay your experience back to a developer in language that they can understand. At this point, not only has the company served you a poor experience, but they’ve made you responsible for the cleanup. Of users that encounter a bug, on average only 1 out of 26 will report it. Even the most patient user is likely to churn in a scenario like this.
You don’t want users to be responsible for reporting bugs. It’s not their responsibility to try to help you fix a problem that they’ve already been inconvenienced by. A restaurant wouldn’t hand a customer a spray bottle after they complained that their table was dirty, so you shouldn’t ask your users to do work to make your product usable when you’ve already failed them. Even when a user is patient enough to report a bug, until now there’s been no guarantee that their needs will be met in a timely manner. This is because until PlayerZero came around, there was no good solution for the inefficient game of telephone that ensues inside a product team once a bug is actually reported. The game of telephone typically goes something like this:
- A user runs into a bug and reports it back to customer support.
- Support wants to help, but doesn’t have the technical expertise to troubleshoot, so they relay the user’s report to a product leader.
- The product leader interprets support’s description of the bug and does their best to prioritize it amidst a large list of other engineering tasks.
- The engineering team attempts to decipher what exactly the problem was without the technical context they need to actually solve the problem.
- Finally, armed with incomplete and potentially misleading information, engineering is tasked with rooting out the cause of the issue and fixing the problem.
The end result? Everyone is annoyed, your customer has long since given up on the product, and your engineering team is still scrambling to debug the issue to this day. Your customer attrition rate ticks up, and your customer satisfaction ticks down.
So, how can you identify & prioritize bugs more efficiently and end the game of telephone once and for all? By finally eliminating the need to write bug reports, PlayerZero cuts out the frustration and faulty communication that stems from the inefficient chain of command that usually handles product errors. That means no more translating what Support says happened and no more prioritizing based on faulty context. PlayerZero serves as the direct voice of your users, facilitating accurate communication of the exact issue faced by a user and delivering your engineering team with the full context and user telemetry they need to efficiently prioritize and solve the issue. We help the members of your team who are naturally the closest to the user (engineering) do their jobs more efficiently - giving you more time to build world-changing products, and keeping your customers happy.
By moving your engineering team closer to your users, PlayerZero eliminates the fundamental problem with bug monitoring and prioritization - the fact that with other platforms, once you’ve found a bug, it’s already too late. PlayerZero’s trending issues puts your engineering team in the driver’s seat for product quality issues by showing you the direct impact of a bug in aggregate and on an individual user basis. Beyond just the raw number of users impacted by a bug, we show you what led to the bug, and what actions the bug prevented. It’s context that actually makes a difference. Fix the bugs that prevent important user actions like completing onboarding or making a purchase while scoping out the ones that don’t have a meaningful impact - all the while decreasing your customer attrition and increasing your retention rates.
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