What does churn rate mean, and how can you monitor churn rate in a startup MVP? Let's take a look at what churn rates and retention rates mean for your business.
When you are responsible for a startup, you want to make sure your customers stick around for as long as possible.
How can you understand how many customers stay and how many move away? Through churn rate.
This useful metric lets you see what proportion of your customers no longer use your product or MVP, meaning you can take action to ensure more customers stick around.
In the past, Netflix has been praised for its low churn rate and ability to keep customers signing up month-on-month. However, this year the streaming platform saw a spike in churn rate, attributed to increased subscription costs, a crackdown on shared accounts, more competition, and poor-quality content. It's now vital for Netflix to make positive changes to turn this increase in churn rate around.
Not sure how to use churn rate to understand your business? Don't worry. We've put together this guide to the churn rate in a startup MVP. We'll explain what churn rate is, what the formula for churn rate is and how to keep your churn rate as low as possible.
- What churn rate means
- Retention rate and churn rate: what's the difference
- What is the churn rate in a startup MVP formula?
- What is the ideal churn rate in a startup MVP?
- How to lower churn rate and increase retention rate in your startup
- Understand why your churn rate has increased
- Ask your users why they left
- Look out for the signs of a dissatisfied customer
- Split your users up over time
- Offer exceptional customer support
- In summary: don't disregard your company churn rate
What churn rate in a startup MVP means
Churn rate is the number of customers who cancel their subscription to your product in a set time frame.
It is typically expressed as a percentage.
Churn rate can also be applied to a number of other business scenarios, for example, the rate of how many people leave a company over a period of time. In this case, it is also known as the 'Attrition Rate'.
Retention rate and churn rate in a startup MVP: what's the difference?
You may have heard retention rate used as an alternative to churn rate. While these metrics are not the same, they can be used to look at the same thing from a different angle.
Churn rate refers to the number of customers your business has lost, while retention rate refers to the number of customers your business has kept.
These metrics are mirror images of each other. If your retention rate over a month is 95%, your churn rate will be 5%.
Ideally, you want your churn rate to be as low as possible, and your retention rate to be as high as possible.
What is the churn rate formula?
There are a couple of ways you can measure the churn rate in a startup MVP – signups, and revenue.
Churn rate formula #1: number of signups (aka user churn rate)
The simplest way to identify the churn rate is to take the number of customers that canceled, divide it by the number of active customers, and times it by 100.
Let's say you had 250 customers at the start of the month, and by the end of the month, 10 had canceled. In this scenario, your churn rate would be 4%. We'll talk about whether this is a normal churn rate or not later.
Churn rate formula #2: revenue earned
Alternatively, you can calculate the churn rate by revenue earned and lost. This can be a good way of looking at churn rate if you offer a tiered pricing structure, as it takes customers that dropped to a lower-priced or free plan into account.
To do this you take your recurring revenue at the start of the time period and subtract the recurring revenue at the end of the time period, to get the money you have lost. You then divide by the recurring revenue at the start and time it by 100.
For example, let's imagine that your monthly recurring revenue at the start of the month is €130,000, and by the end of the month, it's €115,000. Your churn rate would be 11.5%
What is the ideal churn rate?
We're often asked what the typical churn rate is. Typically, it depends on what industry your business is in.
Here's some useful information about the industry standard churn rates. As you can see, some industries have a significantly higher churn rate than others.
Here's why some industry sectors experience higher churn rates than others:
- Shorter contracts, customers are freer to move around as they please
- More competitive, an increased number of offers to entice new customers to join
- Poorer customer experience, customers get frustrated with products and services more easily
- More expensive, customers looking for better deals
- The better adoption of technology, customers move around to take advantage of more modern products
As a rule of thumb, if your retention rate is over 5%, you're heading in the right direction. If it's over 20%, it's a really positive sign and means you've got lots of loyal advocates for your business.
Always understand what the average churn rate/retention rate in your industry is and have a goal in mind. That way, you'll have a target to achieve and will be able to take action if your company's churn rate is higher than you would like.
How to lower the churn rate and increase the retention rate in your startup?
You're putting together your monthly report to take to your stakeholders, only to find your churn rate is a lot higher than it usually is. Alarm bells ring. What do you do next?
When you've just launched your product, service, or MVP, it's not uncommon to see your churn rate go up and down a lot. However, this typically settles over time as customers get to know and understand your business. However, a widely fluctuating churn rate in a startup MVP more-established organization can be a red flag.
It can feel scary when your churn rate skyrockets, and you may feel you're weeks away from your startup adventure ending. The good news is that there is plenty you can do to drive those increased churn rates back down.
Here are our top five tips to help move towards a churn rate reduction.
1. Understand why your churn rate has increased
A spike in churn rate can generally be attributed to a recent change. Think back and see if you and your team have done anything recently that might have caused customers to leave.
For example, if you recently updated your app in the App Store or Google Play, there might be a UX issue that is frustrating customers. Roll back your update, test and fix your app and re-upload when the bug is fixed.
If you've amended your pricing plan, customers might not be happy with a price increase or loss of features. It's time to go back to the drawing board and make sure your pricing structure aligns with your customer's needs and the value they see in your product.
It might be that you recently offered a promotion to new customers, for example, three months at a reduced rate. While some users may stick around after the three months are up, others will cancel their subscription regardless.
2. Ask your users why they left
One of the best ways to understand why your customers are canceling their subscriptions is to ask them.
When they cancel, direct them to a form or send them an email asking why they want to leave. While not every customer will respond, the ones that do will give you a lot of valuable insight. If you see a pattern of comments, you'll know what you need to do to make things better.
A personalized, well-written message may even encourage a customer to give you another chance.
3. Look out for the signs of a dissatisfied customer
Customers that might be considering leaving may spend less time using your product. According to CleverTap, 40% of users uninstall apps because they no longer use them.
If you can identify customers who might be thinking of closing their accounts and saying goodbye to your business, you can take measures to win them back.
For example, let's say a customer hasn't logged in for two weeks. You can send them an email letting them know about a cool new feature or just check in and see if they need any help. This can get them to reengage and remember what they loved so much about your product.
4. Split your users up over time
You will always have some degree of churn over a specific time period. While a retention rate of 100% is amazing, this doesn't happen all that often.
One good way to see if your churn is natural is to look at the churn in relation to when your customers subscribed – this is known as cohort analysis. For example, if you see a small amount of churn from customers who have been with you for twelve months, it might be that their contract ran out and they moved somewhere else.
However, if you're seeing a lot of customers leave after one month, it might be a sign that something isn't right.
5. Offer exceptional customer support
Sometimes customers leave because they don't understand a product or aren't getting the right amount of value from it. You can mitigate this by providing as much assistance as possible.
Ways you can support customers and get back to your ideal churn rate in a startup MVP include:
- Providing a solid email onboarding procedure
- Offering a web chat service to answer customer questions. Utilizing chatbots means you can be available 24 hours a day
- Implementing a helpdesk and FAQ feature
- Providing blogs, videos, documents, and other resources that answer common customer queries
In summary: don't disregard your churn rate in a startup MVP
One of the most common issues we've seen when it comes to startups and MVPs is not understanding the churn rate. When it's not measured, you can't see if any changes you make are costing you customers… until it's too late.
Churn rate is easy to calculate and can be used with any product, not just MVPs but apps and Software as a Service (SaaS) too. You can even use churn rate to see how a simple landing page does.
Take the time to understand the ideal churn rate in a startup MVP of your industry, monitor it on a regular basis, and take action if your churn rate starts to creep up. That way, you're one step closer to startup success.
This is the first in a series of blogs about metrics you can use to see how your product and MVP are doing. In future articles, we'll look at metrics including revenue per user, lifetime value, and customer acquisition cost.