Why Retention Stats Often Give You Zero Insight Into the Customer Experience

5 stages for improving ROI

There's a better way to measure churn.
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Not long ago, I was sitting in a meeting discussing the profit-and-loss (P&L) statement for one of our new product lines. The P&L manager was running through the key performance indicators (KPIs), and we got to the churn metric, when she extolled, “Churn is holding flat, so we are looking OK on that front.” Everyone in the room nodded their heads, and then we started to move on to other parts of the agenda. At that moment, I internally debated whether to let the comment go or to interject. I just couldn’t help myself.

“Sorry to bring this back, but I think we might need to look a bit closer at our churn. If our base churn is holding steady, it means we are actually getting worse at retaining our customers.”

Everyone looked at me with befuddled faces. Are you equally confused? A lot of digital advertisers just haven’t been taught the right concepts, therefore let me explain.

Base churn is the ratio of customers you lose in any given month relative to the size of your customer base. If you have a customer base of 100 and 10 stop using your product or service, then your base churn is 10 percent. The problem is that, in truth for the vast majority of companies, your new customers churn at a much higher rate than your existing customers. This is because many of your new customers are just giving it a try.

In the early days of your product, your new customers make up a high proportion of your customer base; so your average churn looks really high. But over time, new customers make up a smaller and smaller proportion of your customer base. And as a result, your average churn should decline over time. Therefore, if your base churn is holding steady, it’s highly likely in reality you have a churn problem.

So what’s the best way to measure churn? Here’s a five-stage outline that I’ve created:

Stage 1: Evaluating base churn

This is where most companies start. And as I mentioned above, at a basic level, it is a simple ratio of your lost customers to your base customers. See the calculation below.

You can see that the new customer churn is holding steady at 50 percent while the existing customer churn is standing flat at 1 percent. But as the existing customers become a greater proportion of our customer base, the base churn percentage declines. The other issue with this metric is that it gives you zero insight into the customer experience. It’s a dumb outcome metric.

Stage 2: Calculating cohort churn and graduation rates

To truly get to grips with churn, you need to look at KPIs that give a much better insight into how customers are really feeling about your product. So let’s look at cohort churn analysis, or simply “cohort” for short, which compares a customer base on when they became customers and shows where in the journey major attrition events occur. An obvious evolution of the above base churn calculation is to look at each acquired cohort separately.

If you look at your January cohort distinctly from your February cohort, you can now track any given customer cohorts churn over time. Reformatting the above table, you would then see something like this:

You can see now that we can compare each cohort’s churn rate month over month. We would see that for each cohort we retain 50 percent into the second month and then 10 percent into the third month. We are now comfortable that our churn rate is holding.

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