Doing a thorough analysis of a business to understand why subscriptions are terminated by users gives the management and marketing teams insights into issues surrounding the loss of clients and ultimately helps in customer retention. It is not enough to just assume reasons as to why people discontinue the use of a particular product. Rather, it is always better to get to the root cause as understanding this will satisfy the needs of consumers.
The problem with assumption is that you might make a bad situation worse. When dealing with a large Churn Rate, the worse thing to do is to hastily change prices of services or add new features to products, as this may lead to a greater revenue loss without addressing the problem.
When a proper analysis is carried out on why customers are churning, you will have a clearer picture of why this is, then you can set up controlled measures of handling the situation, and draw up appropriate modalities on how to avoid churn in the future and limit its impact. This analysis may be carried out monthly, quarterly, or annually depending on your objectives and the kind of enterprise.
This article aims at expanding your knowledge on why doing a Churn Analysis is important. It will help you understand the concept of churn, forms of churn, types of churn, tell you the kind of data to look out for when analyzing your Churn Rate, and a step-by-step guide on how you can perform Churn Analysis in Excel.
Table of Contents
Introduction to Microsoft Excel
Microsoft Excel is a spreadsheet application that is used to analyze numerical and statistical data. It was developed by Microsoft and is a part of its Office suite. An Excel Spreadsheet can be seen as a collection of rows and columns in which English alphabets are used as identifiers for columns and numbers are used as identifiers for rows.
The point where a row and column meet is referred to as a cell. Each cell can be identified using its column alphabet followed by its row number. For example, cell C10 is the identifier for the cell that is at the intersection of column ‘C’ and row 10. Various features that can help you perform different kinds of mathematical operations and analysis like Churn Analysis in Excel are provided.
Key Features of Microsoft Excel
Some of the most well-known features of Microsoft Excel are as follows:
- Advanced Mathematical Operations: Microsoft Excel is capable of performing various kinds of mathematical operations. This includes various basic operations such as addition, subtraction, etc. along with advanced operations such as Financial calculations like Future Value (FV), Present Value (PV), Internal Rate of Return (IRR), etc.
- PivotTables: This is one of the most widely used features of Excel. It is used to summarize tables having extremely high volumes of data. This summarization could be performed over various functions such as sum, count, etc. For example, in the following image, the small table on the right is a PivotTable that summarizes the table on the left by adding the sales for each color of the product.
- Conditional Formatting: Changes the formatting of all cells that satisfy a user-specified condition out of the selected range of cells over which that condition was applied.
- Sorting and Filtering: Allows users to sort data in the required format for better readability and analysis or filter out all data that doesn’t satisfy a given condition.
- Visualizations: Microsoft Excel allows users to create easy-to-understand visualizations along with labels from their data. This could be of various types such as line charts, column charts, bar graphs, etc. A sample visualization in Microsoft Excel is as follows:
Microsoft Excel also allows users to create mixed-type of charts to display more data that can make your visualizations better and more in-depth. For example, the following graph shows the number of houses sold in each month along with the average price of houses sold in that month in a single graph.
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Introduction to Churn Analysis
Churn Analysis which is also referred to as the Rate of Attrition can be defined as the process of analyzing data to understand why customers stopped using certain products or services. It can further be defined as the rate at which customers stop doing business with an entity or the rate at which employees leave their position in a firm. It doesn’t only give you the rate at which users stop using your services but also tells you why, when, and how to fix the problem.
It is not possible to change the strategy of your business because of a reduction in customer retention without carrying out a comprehensive study behind the reasons why they left, categories of those who left, and mapping out models to alter future occurrence.
Churn Analysis is also very important for a subscription-based business as it calculates the rate at which subscribers discontinue their subscription within a period and it is expressed in percentage. For such organizations to increase their client base, the Growth Rate which is the number of new acquisitions must exceed their Churn Rate. There are various widely used softwares that can help you perform Churn Analysis. Churn Analysis in Excel is considered to be the easiest to perform.
Forms of Customer Churn
Having large occurrences of churn hurts your company’s ability to grow and a sustained high Churn Rate can eventually lead to the demise of a company. There are various forms of Customer Churn and a few of them are as follows:
1) Cancellation of Subscription
This is when clients decide to stop using your service. Several things could lead to this like failure of clients to get satisfaction from your product, when new features are not included on the product despite demands for it by users, selling your products to the wrong clientele, etc.
2) Non-Renewal of Subscription
Some churn may not be as a result of dissatisfaction from clients but rather an inactive customer relationship through customer care services to send reminders to clients in order to alert them when the expiration of subscription is due and as a result of this, the customer may just drift off from your product or service.
3) Switching to Competitors
It is necessary that even when you are focused on growing your business, you should keep an eye on offers from your competition as this will give you an inclination of what the market demands. Your prices may be higher for certain products whereas your competitors may be offering their subscription for less with more features. This will make consumers switch from your service to those with better offerings.
4) Closure of Accounts by Customers
Despite having good customer satisfaction records, some clients may still decide to close their accounts with you and this has to be accounted for in the Churn Rate. This may arise as a result of reaching a logical conclusion with such products or the product not having a repeat-use value. To avoid such scenarios, expansion of product range can be helpful to keep the customer engaged with your services or brand.
Types of Churn
Churn can be categorized into two categories which are as follows:
1) Voluntary Churn
When clients consciously deactivate their usage of your services as a result of attractive offers from competitors, negative customer experience, or ultimate closure of a business venture, it is referred to as Voluntary Churn. These types of churn are often tricky to prevent as it may be difficult to convince the user otherwise.
2) Involuntary Churn
Involuntary Churn occurs most times without the intention of the user. It can happen as a result of insufficient funds on credit cards, expired cards, failed payment processing, etc. Unlike Voluntary Churn, Involuntary Churn is easily handled as it is a result of a faulty business process and can be dealt with to avoid reoccurrence.
Knowing the different types of churns helps in segmenting your user base and analyzing them separately to come up with how they impact your business.
Importance of Churn Analysis
Calculating your Churn Rate regularly can be the difference between sustaining your business or crashing it. Not doing a comprehensive analysis of your Churn Rate would lead the enterprise to various failings which will hamper growth.
Effective handling of Churn Analysis helps you in focusing on areas where the loss of subscribers is prominent so that it can be stopped rather than trying to cover it through acquiring new customers. This loss may be from poor pricing, wrong or faulty payment systems, and all other problems which can be corrected as long as you discover where the losses are from.
Also, Churn Analysis will improve customer relationships as you will form a lasting bond with your clients. Deductions made during the analysis will provide ways of improving how you relate with consumers of your product and service thereby forging a considerable level of satisfaction. It would also mean you have loyal customers that would generate revenue instead of trying to acquire new ones all the time to maintain profit margins bearing in mind that the cost of acquiring new customers is relatively higher compared to maintaining existing ones.
Data Needed to Perform Churn Analysis in Excel
To build a Churn Model for effective and efficient Churn Analysis in Excel, certain details are necessary. These data can be segmented into different parts such as customer information, seasonality of products, and so on. The data required to build a Churn Model is as follows:
1) Customer Details
This would include the names of customers, addresses, job titles, employment status, etc to build an in-depth customer profile and is one of the most important parameters required to understand the root cause for churns while performing Churn Analysis in Excel.
2) Purchasing Information
It is paramount to know your user’s purchase and billing history to perform a comprehensive Churn Analysis in Excel. Doing this gives you a picture of how billings affect churn as you would know when they signed up, canceled a service, upgraded to a higher package, and a customer’s general lifetime value.
3) Level of Interaction with Products
Another useful parameter to keep track of is user interactions as this shapes their experience with your service. Monitoring interactions between users and your team also contributes to lowering the Churn Rate as it identifies areas where improvements can be made and can help you make your Churn Analysis in Excel more comprehensive.
4) Seasonality of Products
Some products or services are required during a time of the year therefore having this knowledge is a pointer to why clients may decide to cancel your service and that may not be a cause for alarm. Also, certain periods of the year see an increase or decrease in the purchasing strength of consumers. All this has to be understood to perform Churn Analysis in Excel.
5) Common Complaints of Consumers
Having an anonymous cancellation survey given to users would give an insight into complaints and would indicate why services were halted. This information can then easily be used to determine the root cause of churns while performing Churn Analysis in Excel.
Setting up Churn Analysis in Excel
Churn Analysis in Excel mostly carried out on a spreadsheet as this will show in detail the information required and changes can be inputted subsequently without altering it.
Calculation of Churn Rate is based on the formula:
number of customers that left your service during a given period/total number of customers during that period
To get the exact number of customers that left, subtract the number of users at the end of that period from the number at the beginning of the period. That is:
number of users at the beginning of the period - the users at the end of the period
These formulas can easily be applied in Excel for large number of rows without any manual input. This is why Churn Analysis in Excel is considered to be one of the easier analyses that can be performed on it.
In the example below, we will look at how to perform a Churn Analysis in Excel. This example is a simple company showing new customers for each year or period of time, number of new customers, number of customers that churned during that period, and Churn Rate.
In the illustration above, Column A (A7-A16) shows the number of years (10), Column B shows the number of customers at the start of the year (B7-B16) and it is equivalent to the end customers of the previous year. Column C (C7-C16) indicates new customers for that year added to the start customers of that year. For example, 15000 + 400 = 15400 for year 1.
Column D shows the number of churned customers for that given time/year (D7-D16) calculated as B7 * B3 (Churn Rate which is fixed for demonstration at 8%). Column E indicates the total number of customers at the end of the year. For example, for the first year, C7 – D7 = E7.
In cell B1, it was assumed that the initial number of customers at the start of the first year were 15000, cell B2 is the assumed number of new customers at a fixed rate for all the years is 400, while cell B3 is a fixed Churn Rate (calculated with the formula stated previously).
The illustration above is a simple form of calculating customer Churn Rate to perform a simple Churn Analysis in Excel but there are more complicated models but the basics remain the same for all of them be it customers Churn Rate, revenue generated by a customer before churn, etc.
In this article, you learned about Churn Analysis in Excel, forms of Customer Churn, and types of churn. You were also shown how to set up Churn Analysis in Excel using a simplified example. However, you can use proven processes to run your Churn Analysis in Excel to avoid your business crumbling or incurring further revenue loss.
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