Solving Churn Part 1: What is Churn and why should Consumer Internet companies worry about it?
This is Part One of the Solving Churn series. In this, we will talk on
- Scale of the Problem
- Existing Solutions to solve churn
- A brief on how Artificial Intelligence can be leveraged to solve this in an easier way.
Guide Points to help you go through the blog:
Churn affects all businesses. Large Companies have fallen in a matter of years because they couldn’t manage Churn well.
“Average life Expectancy of Fortune 500 Companies is less than 15 years now compared to 75 years in 1955. In the past 15 years 52% of the Fortune 500 Companies have vanished”
These companies might be traditional businesses but churn is now affecting a lot more companies than ever in the Internet first world.
The above table contains the top 5000 Apps based on number of downloads and their N- day retention rates( Percentage of Users returned after 7 days, 20 days etc.). As you can see from the table above, the top 5000 apps are still unable to retain 90% of their users after 90 days which goes on to show that the current Consumer Internet Businesses still do not have a good way to retain users.
The top 5000 apps are still unable to retain 90% of their users after 90 days
Lot of blog posts on Churn are focussed on Companies who have a subscription businesses. In this series, we’ll focus on churn for a non-contractual case in Consumer Internet Businesses.
So what is Churn really?
For subscription companies it’s pretty simple, users who stop paying for the product, they are considered churned users. For non-contractual businesses, if a user does not complete a critical event on the platform within a fixed window of time, then customer is considered churned from the platform.
The window is determined by how often you expect users to perform the critical events. For example, businesses which require frequent usage such as Games have windows as small as 1 Day and when it comes to Food Delivery, it can be a week and where the critical event is ordering food. Folks at Amplitude have written a very detailed blog around this.
Based on this, companies create a KPI of Churn Rate which has a whole blog post to define it. We will see later why this particular KPI is bad for your business.
Why is Churn so Important to worry about?
1. Funding just gets harder as you keep going forward
Churn is one of the main KPIs which good investment funds use to evaluate companies and it becomes more important as the company grows because as you raise further, you need to prove that people actually want to use your product. Moreover, the market becomes saturated so keeping customers you have already acquired becomes important.
Check out Jonathan Hsu’s Blog on how companies are evaluated at Social Capital.
As Jonathan talks about it in the blog, while evaluating 2 companies they choose the company with lower monthly active users but better retention rate than the company with higher Monthly Active Users but high churn Rate.
2. Increased Costs and Lost Revenue
Acquiring a new Customer is usually 5–25 times more expensive than retaining one.
5 % increase in Churn can decrease Profits by 25–95%
3. The Leaky Bucket problem in Growth:
A Company’s net customer growth will remain stagnated if don’t they manage Churn. Losing the same amount of already acquired users as you bring in new users is just not scalable.
4. Customer Dissatisfaction:
If customers are not engaged with the product, that means there is likely they’ll talk about your product and there is less chance for Companies to get Viral growth. This would mean that the Customer Acquisition Cost would still be high.
Existing Solutions to Reduce Churn
Let’s have a look at the Customer’s Engagement Journey on a company’s platform.
Efforts to reduce Churn when the customer is active
Companies keep users engaged through generic or segmented content during the time they are active.
Efforts to reduce Churn After the Customer is Inactive
1. Product Improvements:
Companies use tools to track online behaviour and wait for users to Churn and improve the product for future users of your product. Checkout Appsee’s blog on tools to track user behaviour.
2. Customer Support/Success:
Companies reach out to churned users to understand their reasons for Churn and improve the product based on this feedback. Check out Prism.io who do this to reduce Churn.
3. Resurrecting Users through retention emails:
A widely used yet impactful retention strategy by marketers.
The problem is Churn rate is a lagging metric. A lagging metric causes companies to take actions to improve things for the future based on what has happened in the past. So by the time you would have known something is wrong it would have been next month(if Churn rate is over a month)
What if you could take actions to retain users based on what is going to happen in the future?
Having a future indicator of Churn would be better actionable and have a direct impact on how customers will behave in the future.
Now let’s have a relook at the Customer Engagement Journey
What if companies could
- Run focussed retention campaigns before their customers churn
- Reach out to customers before their customers leave
- Improve product which can directly impact their current active users
- Contextual Engagement with their active customers
What we need is an Early warning system to Predict
- Customers at risk
- Why they are at risk
- What actions the company can take to retain them
And thus helping companies:
- Focus on the right customers and reduce team resource spend
- Reduce costs and losses
- Grow their customers with the compounded effect of reduced churn rate
Now is the right time to tackle this problem with Artificial Intelligence
In this always connected world, there is enough data on behaviour of users to leverage the emergence of Deep Learning to Solve Real world problems. Exponential growth in certain technologies and trends is making it more possible for this to happen.
In the next blog post we will see how Deep Learning and data can be used to accurately predict and reduce churn proactively.
P.S. Part 2 is here!
You can also Sign up here for early access to the Marax Churn Prediction platform here