The 4 types of churn (and what you can do about it)

Growing your SaaS company is hard work, especially if your churn rate is out of control. It’s nearly impossible to achieve aggressive growth targets if you keep losing customers at a high rate.

But to grow your company, you need to keep the customers you spend so much effort on attracting.

Simply put, churn is one of the most important metrics in SaaS.

Defining your churn rate

People get so easily fooled by metrics.

Especially aggregated metrics that really hide the truth more than they reveal it.

Let’s take an example: Mikko and Bill’s average wealth is $42,6 billion. The little problem with this aggregated number (average wealth) is that Bill’s last name is Gates and he contributes to this equation with $85,2 billion. On the other hand, Mikko doesn’t really contribute with much money at all.

So just staring at your averages won’t really tell you the truth.

This same problem also exists with churn rate, and if you don’t understand the different aspects of churn, you’ll make wrong decisions. And what’s even worse is that those wrong decisions can cost you a lot of money.

Let’s take a closer look at what churn really is:

“The rate at which you are losing customers or revenue through subscription cancellations.”

- Chartmogul

So, to understand churn, you must first understand what are the different types of cancellations.

The four different types of churn

There are four primary types of churn, each with its own characteristics and implications.

To effectively manage and reduce churn, you need to understand all four types and how to calculate your churn rate.

#1 Pro-active Churn

Proactive churn occurs when existing customers deliberately cancel their subscriptions.

This type of churn is often the one that keeps you up at night because it indicates dissatisfaction or a lack of value perceived by the customer.

To prevent it, you need to focus on improving customer satisfaction, enhancing product features, and offering better customer support to minimize proactive churn.

#2 Reactive Churn

Reactive churn, also known as involuntary churn, occurs when a customer's subscription is canceled due to failed payments, such as expired credit cards or declined transactions. This often happens due to customers forgetting to update their credit card or billing information.

Unlike proactive churn, reactive churn can often be prevented with better billing management. A good solution to minimize part of this churn are dunning management systems, which can automatically notify customers of failed payments and provide easy ways to update their billing information.

#3 Happy Churn

Chartmogul explains Happy Churn well: “Customers who finished using your product for their campaign (or similar short-term use case), so cancel with a positive experience.”

This is the type of churn that predominantly happens with software that delivers a one-off solution or is used for a specific timeframe without the need for constant usage.

Now, happy churn is also a great opportunity for you to collect testimonials or case studies to build up your social proof.

#4 Fake Churn

Fake churn occurs when customers take advantage of a money-back guarantee or free trial period and then cancel their subscriptions.

For instance, many SaaS companies have a 30 to 90-day money-back guarantee available (and, in turn, many users churn within this timeframe).

While it technically IS churn, it would be good to measure this separately to understand how much it’s actually costing you.

#5 (BONUS) Dollar Churn vs. Customer Churn

Dollar Churn is the churn in dollars (or whatever your local currency may be, while the Customer Churn refers to ... how many customers churn.

It’s certainly a good idea to check these two since one gigantic customer churning is just one customer churning, but it might be a huge portion of your current MRR.

When calculating your churn, it might be a good idea to look at it on these different levels to better understand how your product actually sticks; if you have high Happy Churn, it means you’ve got a different kind of problem than high Pro-active Churn.

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Analysis Paralysis

While your recurring billing systems integrated with tools like Chartmogul or Baremetrics can quite easily give you this information, the biggest issue is what you actually do with this information. 

Here are some thoughts you should consider:

• If you see your customer churn go up, analyze from which of the four segments it came from
• Compare various product versions to understand if there is a specific package that has higher churn rates
• Check for geographical churn in case a competitor has increased sales and marketing activity in a certain region

Read more about SaaS Lifecycle Marketing and the role churn plays.