Churn Rate is measured to give businesses an indicator on where it’s headed ie. it is the core metric around a company’s business health. But in the current scenario, most businesses use the industry standard Churn definition which is inaccurate may not be best suited for their business. This could be fatal for your business because if the metric on which you base your decisions is wrong, then your decisions are probably wrong.
In this post, you will understand the Churn definition which is fit for your business.
- Is measuring Churn even relevant for your business?
- Breaking down the Churn Definition
- Critical Event: Finding the business event which matters for your business
- Interval Analysis: How often should you expect your user to perform the critical event
- Summing it up
Do you even need to measure Churn?
Companies selling Furniture do not expect their users to buy Furniture again in the near future and therefore their focus will be on acquisition and conversion instead of Churn. So not all businesses need to measure Churn.
For businesses who do not have repeat purchase behaviour it might be a good idea to look at tweaking the business model(subscription model for example) to include more repeat purchase behaviour as it is 5 times easier and cheaper to sell to existing users than new users.
Breaking Down the Churn Definition
Churn for a business is defined as non completion of business/critical event by a user in a specified interval of time.
Choosing the critical event for your business
The critical event to measure for your business lies at the intersection of what the Business wants to measure and what the Customer actually does on your platform
What the Business wants to Measure
Businesses want to measure an event which is directly correlated to revenue because in the end that is what matters for a business.
What does the Customer use your platform for
The customers use your platform to solve a certain need they have. The goal is to understand that event which makes users stay retained on the platform.
One way to find this out is, segmenting out users who have stayed on the platform for a long time to understand the kind of events which helps users stay retained on the platform.
Check list for good critical event
- Should be a good leading indicator for Churn
- Should be what most users want to perform on the platform
- Should lead to revenue
On a side note, knowing what most of your users do on your platform helps form interesting business models. For example, in case of Medium, Readers come on the platform to find well written content. Medium recently launched the Membership program to help users find curated content easily and at the same time made money out of it.
How often you should expect your users to perform this event?
Would you expect most people
- to order food today and order again tomorrow? Maybe
- To order furniture today and order again tomorrow? Probably not
- To book a cab to work today and then book a cab to work again tomorrow? Probably yes
The critical event for your business needs to be measured over an interval of time which is again, specific for your business.
The Quantitative way of defining the Interval
- Find the users who have completed critical event at least twice on your platform.
- Find the Average number of days it takes for a user to complete a critical event
- Plot a cumulative distribution curve between the Interval of days and the percentage of users who fall under the interval
The tradeoff is how you can capture most of your users who perform a critical event in the least number of days. A good rule of thumb is to find the interval where there is an inflection point in the curve
Summing it Up
Now combining the critical event and the window, you would have your new Churn definition.
Some examples of Churn definitions:
- Customer Not Placing an order in 7 days for a Food delivery company
- Customer Not opening the app in 3 days for a Social Platform
- Customer Not finishing a lesson in 15 days for an Education Platform
This way of defining churn is just a start, the problems which still persist are:
- The Churn definition is too rigid and might not be valid for all customer segments on your platform
- The Churn definition which you made today might not valid anymore as your business grows
- Now you can measure Churn, how can you use it to push your company in the right direction? (Churning out a blog post soon!)
More reading up!
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If this interests you and you would like to discuss this further, do drop in your comments or ping me at email@example.com.