Definition: Churn is a measurement of the percentage of accounts that cancel or choose not to renew their subscriptions. A high churn rate can negatively impact Monthly Recurring Revenue (MRR) and can also indicate dissatisfaction with a product or service.
Churn is the measure of how many customers stop using a product. This can be measured based on actual usage or failure to renew (when the product is sold using a subscription model). Often evaluated for a specific period of time, there can be a monthly, quarterly, or annual churn rate.
When new customers begin buying and/or using a product, each new user contributes to a product’s growth rate. Inevitably some of those customers will eventually discontinue their usage or cancel their subscription; either because they switched to a competitor or alternative solution, no longer need to product’s functions, they’re unhappy with their user experience, or they can no longer afford or justify the cost. The customers that stop using/paying are the “churn” for a given period of time.
How is Churn Calculated?
In its most simplistic form, the churn rate is the percentage of total customers that stop using/paying over a period of time. So, if there were 10,000 total customers in March and 1,000 of them stopped being customers, the monthly churn rate would be 10%.
But where and when you start counting and calculating can impact the math and eventual churn rate. For example, if the product began March with 8,000 customers and added 2,000 new customers that month, should the 1,000 customers who quit be divided by 10,000 (total customers at the end of the month) or 9,000 (total customers at the beginning of the month, factoring in the addition of 2,000 and the subtraction of 1,000.) or 8,000 (total customers at the beginning of the month, regardless of how many were added)? That could change the monthly churn rate from 10% to 11.1% or 12.5%.
Beyond that, there’s also settling on the “moment of churn”: do you calculate churn based on when users cancel or when their subscription actually ends (which maybe later in the month or even the end of the year). If you choose the latter option, it becomes impossible for a customer to churn in the same month they sign up, which may hide the fact that some customers are quickly dissatisfied enough with the product to cancel almost immediately.
However, many companies have adopted slightly more sophisticated and nuanced approaches to calculating churn. Some will take an average of the number of customers at the beginning and end of the time period in question as the denominator in the churn equation. Others will use weighted averages or rolling metrics to try and divine more accurate churn rates.
Other tactics may include breaking out the total customer base into different cohorts and calculating individual churn rates for each one. This more granular approach can identify which customer types are churning more often, as well as breaking out new customers from long-standing ones.
Regardless of which calculation method is ultimately used, the most important thing is using the same formula consistently for accurate period-to-period comparison and creating a reliable KPI. There may be dips and spikes when there’s a large influx of new customers, but it at least provides a reliable methodology.
Why Do Customers Churn?
Although there is no magic answer to this question, there are a few likely causes for churn:
Of course, each departing customer has their own motivation for discontinuing their usage. Exit surveys/interviews and analyzing the usage behavior of churned customers may reveal larger trends.
What Does Churn Mean for Product Managers?
Churn could quite possibly be the most important metric for SaaS product managers since it is a very telling measure of the perceived value the product delivers. While marketing and sales are primarily responsible for bringing in new customers, the product experience itself will determine how many stick around and for how long.
The cost of acquiring new customers is much higher than the cost of retaining those already onboard, so reducing churn is a real financial priority. Everything possible should be done to keep current customers satisfied, maintaining their usage and increasing their lifetime value. Plus a high churn rate can also damage a product’s net promoter score.
Product managers have two key tactics to employ in reducing churn: user research to understanding customer behaviors and proactively addressing product shortcomings. Having a sense for which usage patterns are predictors of potential defection allows for both forecasting future churn and activating account management to engage wavering users while prioritizing features and enhancements specifically targeting the concerns of current customers both displays customer-centricity and reduces their reasons for leaving.
How Can You Reduce Churn?
Churn is reduced by increasing the perceived value proposition of the product to current users. This can be achieved in a number of ways since the value is determined based on several factors.
Market cannibalization is a loss in sales caused by a company's introduction of a new product that displaces one of its own older products. The cannibalization of existing products leads to no increase in the company's market share despite sales growth for the new product.
Market cannibalization can occur when a new product is similar to an existing product, and both share the same customer base. Cannibalization can also occur when a chain store or fast food outlet loses customers due to another store of the same brand opening nearby.
Also referred to as corporate cannibalism, market cannibalization occurs when a new product intrudes on the existing market for an older product. By appealing to its current customers instead of capturing new customers, the company has failed to increase its market share while almost certainly increasing its costs of production.
Marketing cannibalization is often done unintentionally when the marketing or advertising campaign for new products draws customers away from an established product. As a result, market cannibalization can hurt a company's bottom line.
However, market cannibalization can be a deliberate strategy for growth. A supermarket chain, for example, might open a new store near one of its older stores, knowing that they will inevitably cannibalize each other's sales. However, the new store will also steal market share from nearby competitors, even driving them out of business eventually.
Cannibalization as a marketing strategy is generally frowned upon by stock analysts and investors, who see it as a potential drag on short-term profits. As companies design their marketing strategies, marketing cannibalization needs to be avoided, and individual product sales need to be closely monitored to determine if cannibalization is occurring.
For example, when looking at the fast expansion of chains such as Starbucks or Shake Shack, these companies constantly weigh the opportunities for sales growth with the risks of local market cannibalization.
One familiar type of cannibalism occurs every year when companies like Apple and Samsung release new versions at the expense of older models. Although these new releases cut into sales of the older models, which may still be popular, they also attract new buyers from other brands.
Many retailers regularly put products on sale, either to increase cash flow or to make room for newer products. But regular discounts can have a cannibalizing effect, if buyers start to expect routine discounts. If customers refuse to buy items at full price, the retailer may be forced to offer increasingly steep discounts.
Many traditional retailers now offer online sales, which could come at the expense of their brick-and-mortar stores. However, these losses could be a net benefit, if online shopping attracts new customers from outside the retailers' normal base.
In order to prevent new products from cannibalizing on older ones, it is important to consider how the two products are branded. Products with similar pricing and placement—such as new flavors or added features—pose a high risk of market cannibalization, according to the Nuremberg Institute for Marketing Decisions.
This risk can be reduced through more distinctive branding—for example, creating inexpensive "fighting brands" to compete with low-cost competitors without cannibalizing from the premium brands. New offerings can also be carefully timed to avoid disrupting older offerings.
Sometimes, market cannibalism cannot be avoided. Every major department store now operates an online store, knowing full well that its sales can only cannibalize its brick-and-mortar business. Their only other choice is to allow internet retailers to continue taking market share away from them.
Macy's, as of 2021, is in the process of closing 125 brick-and-mortar stores nationwide, according to CNBC. Meanwhile, Amazon is busy opening a chain of convenience stores called Amazon Go. Will the new stores cannibalize the website? It's not likely since Amazon Go only sells items that can't be purchased on the website, namely ready-to-eat fresh meals.
Market cannibalism is not always to be feared, especially if it can protect or expand a company's market share. Apple founder Steve Jobs is reported to have embraced the practice, saying: "If you don't cannibalize yourself, someone else will." Although the newly-released iPhone did cannibalize buyers from older iPods, they made a bigger dent in Apple's competitors.
Market cannibalization may also be an appropriate defensive measure against competitors, as when Airbnb started cutting into the margins of the hotel business. Marriott then started their own home rental business, which cannibalized from their own hotel revenue—but ultimately denied market share to Airbnb.
But there are also major risks to market cannibalism. High-end retailers should be cautious about introducing low-priced versions, which could dilute the value of their premium brands.
There is also a danger of market saturation, as might occur when two identical fast food restaurants appear on the same block. Depending on local market dynamics, the brand might end up competing against itself.
As with other marketing decisions, thorough market research and careful timing can make all the difference between positive and negative market cannibalization.
Benefits of Market Cannibalization
Risks of Market Cannibalization
Apple is an example of a company that has ignored the risk of market cannibalization in pursuit of larger objectives. When Apple announces a new iPhone, the sales of its older iPhone models immediately drop. However, Apple is counting on its new phone capturing competitors' current customers, increasing its overall market share.
Companies often risk market cannibalization in hopes of gaining a bounce in overall market share. For example, a company that makes crackers may introduce a low-fat or lower-salt version of its brand. It knows some of its sales will be cannibalized from the original brand, but it hopes to expand its market share by appealing to health-conscious consumers who otherwise would buy a different brand or skip the crackers altogether.
Market cannibalization is measured by the Cannibalization Rate:
While product cannibalization is an expected consequence of launching a new product line. While a poorly planned entry may harm sales of existing products, a well-planned market launch can help a company gain more overall market share.
Product cannibalization is represented by cannibalization rate, the percentage of new sales which occurred at the expense of old product lines. The cannibalization rate is calculated by dividing the lost sales for older products by the total sales of the new product.
Product cannibalization is an important factor in brand marketing. Since any new launch runs the risk of poaching customers from other product lines, it is essential to carefully research the market and conduct thorough testing to determine if the risks outweigh the benefits.