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A 4-step guide to analyze and reduce customer churn

Getting to the bottom of customer churn takes some detective work. You may have stats about how many customers unsubscribe from your service or decide to stop buying your product, but that doesn’t really give you the full story of why they decided to leave in the first place.

That’s where customer churn analysis comes in. It helps you find out the root causes of customer dissatisfaction, pinpoint what’s going wrong, and better empathize with future customers to meet their needs.

Last updated

7 Nov 2022

This guide gives you a step-by-step framework for customer churn analysis, so you know how to respond to problems like slow help-desk support or a poor onboarding experience—and prevent current and future customers from leaving.

Want to understand why customers churn?

With Hotjar’s tools, you won’t have to second-guess–you'll know exactly what customers need

What is customer churn analysis?

Customer churn, also known as customer attrition, is a metric that shows the percentage of customers who decide to stop doing business with you during a given period of time. For example, customers may decide to stop paying for your meditation app or unsubscribe from getting snack boxes delivered monthly.

Customer churn analysis is a way to identify and understand the ‘why’ behind this metric. 

Higher churn rates damage company growth and create the stress of needing to find new customers quickly. Analyzing customer churn and taking steps to reduce its rates help you dramatically increase profitability.

Often when companies experience large amounts of customer churn they end up investing money in the wrong places—either ads or marketing—and often eroding potential profits. By having the correct analysis of your customer churn, you should be able to understand where your effort and potential investment are required.

Phil Ohren
Founder and Head of Strategy, Intender

There are several causes of churn, such as a lack of competitive pricing plans or targeting the wrong customer. You won’t really know why customers are leaving until you conduct an analysis of customer churn.

How do you calculate customer churn?

Calculate your customer churn rate by dividing the number of customers you lose during a time period by the total number of customers at the beginning of that period. The formula for customer churn is:

Churn rate = (lost customers / total customers at the beginning of the period) x 100

Let’s say you want to calculate your company's annual customer churn rate. You started the year with 1000 subscriptions. Throughout the year, 200 customers decided to cancel, while 800 customers decided to renew. Your churn rate would look be:

20% = (200/1000) x 100

You can use the same formula to calculate your annual, quarterly, and monthly churn rate. Many companies choose to calculate and analyze customer churn annually or monthly. 

While customer churn rates vary from company to company and from industry to industry, an acceptable figure for SaaS churn is between 3-5%If you’re trying to reduce your churn rate, analyze churn as it occurs, so you can quickly make changes and improvements, like creating an onboarding experience that shows users the value of your product.

How to analyze customer churn: a step-by-step guide

There’s more to understanding churn than simply calculating percentages. To get to the truth behind customer churn, you need to collect voice-of-customer (VoC) insights, so you can uncover the real reasons why people stop using your product.

But whose job is it to analyze churn? Increasing customer retention isn’t specific to just one team—it should be everyone’s priority to retain customers and boost user engagementTeams like customer support, marketing, sales, product, and customer success should all participate in the process.

Let’s take a look at the four steps to effectively run a customer churn analysis:

1. Look for clues: collect insights from customers

Perhaps customers thought they needed your product but quickly realized it didn’t give them what they wanted or help them achieve their jobs to be done (JTBD). Or maybe customers want your product but aren’t yet ready to invest. Whatever the reasons may be, the first step is to gather quantitative and qualitative insights to find out what’s behind customer decisions to churn. 

Qualitative insights to collect to understand customer churn

To find out why customers are churning, send a survey to them straight away. Not only will this give you valuable insight, but it’s also a chance to leave a positive impression on customers who are about to leave.

#With Hotjar’s Survey tool, you can ask for feedback the moment customers churn
With Hotjar’s Survey tool, you can ask for feedback the moment customers churn

Try to keep things short and sweet, as quick-to-complete customer satisfaction surveys are likely to have a higher response rate. Also, be sure to include a mix of open- and closed-ended questions in surveys to keep participants engaged in the content. Here’s a set of example survey questions to give you an idea:

  • If you could improve anything about our product, what would it be?

  • Would you consider becoming a customer once again? Under what circumstances?

  • What tool will you use instead of our product? Why?

  • Which tools, would you say, are essential to your success?

  • What’s the main reason you decided to stop using our product?

To bring in more qualitative insights, you might try these other customer feedback techniques:

  • Exit interviews provide you with the unique opportunity to listen to customers’ unfiltered problems. Since they’re leaving anyway, they won’t have a problem sharing their dissatisfaction with you.

  • Social media listening tools like Hootsuite let you track mentions of your brand (and your competitors) across social media platforms

  • Focus groups are a great way to tap into user frustrations through conversation and interactions. If your client base is spread out, consider conducting online focus groups as an alternative.

Quantitative insights to collect to understand customer churn

When used in tandem with survey and feedback responses, quantitative insights give you a different perspective on why customers are leaving.  

Perhaps you notice on Google Analytics that the conversion rate on your sign-up page is going down. For example, visitors might land on your web page and start to fill out your form, but then leave halfway through. 

To find out the story behind the numbers, use a Google Analytics integration to find out what’s happening during the user journey.

🔥Pro tip: use Hotjar’s Observe tools—Heatmaps and Session Recordings—to understand customer behavior and engagement while they’re using your site or product. Heatmaps, for example, help you gain insight into how users behave during the signup process by showing you the most and least popular page areas users click on. 

For example, if customers leave your website without completing the signup form, use heatmaps to see where users are actually clicking and find out which page elements are confusing or distracting them, so you can make changes that lead more people to sign up for your product.

Hotjar’s Heatmaps let you see where users click and scroll through a page

 2. Dig deeper: organize your data and analyze customers by segment

After you collect insights from your churned customers, you need to organize and visualize your data in a dashboard. Having everything laid out on a single screen helps you make comparisons and connections, and better analyze the information.

#Hotjar’s Dashboard tool allows you to see customer feedback scores alongside existing customer data
Hotjar’s Dashboard tool allows you to see customer feedback scores alongside existing customer data

Rather than trying to analyze churn cases one by one, it’s better to get a big-picture understanding first. Creating cohorts of churned customers helps you recognize larger trends and factors that might be leading customers away. 

Most businesses only look at all of their users in aggregate (e.g. lost users divided by total users). This doesn't tell you the full story. Using cohort analysis will help you track and reduce churn by analyzing groups of users.

Matt Lally
Founder and Growth Marketing Consultant, MattyAds

For example, you might notice that the majority of churning customers are from small start-up companies. They might be churning due to budget limitations and are choosing to go with a less expensive alternative. Once you recognize this pattern, you can create a campaign or special pricing option for these customers.

To create cohorts, first, you need to send user attributes or customer data that you already have, like the user’s geographical location and sign-up date to your dashboard. Then, send any additional data that you've collected through survey questions. 

Create user attributes to segment customers by:

  • Average revenue per user (ARPU)

  • Industry type

  • Product features used

  • Sign-up/subscription date

  • Engagement and behavior patterns

  • Geographical location

Powerful churn management software lets you send user attributes to your dashboard automatically. For example, easily segment users with Hotjar’s Survey tool by linking their responses to user attributes. Ask users, “What industry do you currently work in?” to segment customers by industry and find any underlying trends to churn.

#Hotjar's Survey tool helps you segment your customers into groups and prevent churn
Hotjar's Survey tool helps you segment your customers into groups and prevent churn

3. Use your evidence: find out when and why

After you consolidate all your information in one cohesive dashboard, it’s time to make observations and create hypotheses. Ask yourself the following questions to get a clearer picture of the reasons for customer churn:

  • At what stage are customers leaving? Is it early on or at a later stage of the process?

  • How do customers across different industries engage with your product or service?

  • Which customers frequently engage and make contact with your customer support team?

  • How do customers across different pricing plans differ in terms of churn?

  • Which customers are more likely to upgrade their plan?

Early vs. later customer churn

Understanding when customers are leaving will help you understand which stage in the product experience needs your attention and what you can do to better meet user needs and encourage loyalty.

To properly analyze customer churn, you need to know when customers are leaving. This can be determined by looking at the customer lifecycle or tracking customer behavior over time. This information can help you identify which stage of the customer relationship is most vulnerable to churn and take steps to prevent it.

Boris Jabes
CEO and Co-Founder, Census

For customers leaving at an earlier stage of the process, such as during sign-up, observe their behavior with session recordings to find out what's wrong—maybe you have too many data fields to fill that's frustrating users, or maybe your sign-up button isn't working properly and customers are rage-clicking

Use Hotjar's Session Recordings tool to capture customer interactions on your website and product and find out if users hesitate and click on something else halfway through the signup process.

#Hotjar’s Session Recordings tool lets you replay visitors’ real actions and identify any problems with sign-up pages.
Hotjar’s Session Recordings tool lets you replay visitors’ real actions and identify any problems with sign-up pages.

For customers leaving at a later point of the process, take a closer look at their engagement patterns over a longer period of time. Look for factors that point to this change. Are customers frustrated with your product in any way, or are they churning because they only needed your service or product for a set period of time? Let's take a look at the factors you need to keep an eye on to prevent customer churn:

Customer engagement

User engagement metrics are an excellent indicator as to whether or not customers are about to churn. If you notice that customers suddenly stop communicating with your support team, it doesn't necessarily mean they're having a smooth product experience. They might be on the verge of leaving and don't want to waste any more of their time trying to fix the situation.

Competitive pricing

While conducting customer churn analysis, continually keep tabs on the pricing plans and campaigns of your competitors. If you have customers who churn because they can’t afford the product, it might not mean that you need to cut prices across the board. However, it might be a good idea to create an alternative pricing option that covers their basic needs.

4. Take it one step further: actively reduce churn

Once you’ve gone through the analysis process, the next step is to implement a churn management strategy to improve customer retention. Depending on your findings, adopt one (or more) of the following tactics:

  • Ask for feedback often: the best way to reduce your churn rate is by proactively detecting pain points before customers decide to leave

  • Provide users with a more complete onboarding process: this helps ensure that customers are aware of all of the product’s features and can navigate it with ease

  • Send out regular product updates and newsletters: this is a great way to engage existing customers and build a lasting relationship with them. Sharing useful content to nurture customers will help encourage brand loyalty and increase retention. 

  • Try different pricing options: this works well if you’re having difficulty retaining customers from smaller businesses. Always have your eyes on the competition and make sure you’re offering the right audience the right pricing plan.

💡Pro tip: use a feedback widget on your website to help you reduce your churn rate by encouraging engagement and uncovering customer dissatisfaction. 

With Hotjar’s Feedback tool, customers can even attach a screenshot of the page element that they found frustrating.

Hotjar’s Feedback widget allows users to rate and comment on their experience of a particular webpage

Predict and prevent customer churn

It's inevitable that some customers will stop using your website or product. What matters is making the effort to learn why they leave by analyzing customer churn, and taking steps to prevent it in the future. Customer churn analysis lets you:

  • Better understand your customers’ pain points

  • Detect underlying frustrations and problems with your product or service before customers leave

  • Understand where to target your efforts and make improvements

  • Pinpoint weaknesses and take steps to overcome problems 

  • Provide future customers with a better overall experience

Tuning into why customers are leaving helps you make lasting improvements to your product, processes, and customer service, so you become more adept at meeting their needs.

Want to understand why customers churn?

With Hotjar’s tools, you won’t have to second-guess–you'll know exactly what customers need

FAQs about customer churn analysis