Stay in the latest updates. Get the latest tips and advice delivered straight to your inbox. Email Guy Nirpaz | October 26, 2011 | 3 Ways to calculate SaaS Churn (and churn cohorts) Last week, Jason Cohen wrote a very comprehensive blog on software-as-a-service churn: Deep Dive – Cancellation Rate in SaaS Business Models. I required everybody at Totango to read this blog and recommend that you do the same. Jason looks at many different definitions for the SaaS Cancellation Rate metric. Eventually, Jason recommends performing cohort analysis when looking at cancellation rates. He suggests to divide customers in segments based on their “time to cancel” (i.e. cancelled after 30 days vs. cancelled after more than 30 days) and, for all intends and purposes, he recommends focusing in the long-term users who have greater business revenue potential and cancellation reasons which can be addressed and resolved more easily. This is indeed an interesting way to look at it, and very analogous to the importance of the “time to convert” metric when it comes to inbound marketing and trial conversion. However, I argue that this is not the only, and maybe not always the best, way to do cohort analysis on SaaS churn. Let’s take for example an email service application. If 2 users have signed up at the same time: One of them is using the service more frequently, creating many accounts, visits almost all application features and cancels after 10 days The other accesses the service 3 times a week but just checking very limited features and cancels after 31 days Who should be given more weight? If I’d measure by Jason, I would focus my efforts on the second user, but if I weigh my analysis with user behavior altogether, then my most valuable customer to understand is the first one. So this leaves us with three promising ways to segment customers for cohort analysis: Traditional way: create cohorts based on the week or month in which they signed up for the service. This will allow you to analyze the effect of changes you made to your product or service over time. Jason’s way: to create cohorts based on the “time to cancel” (or the “time to convert” for that matter). This will allow you to focus on long-time users of your product and sift out those who signed up in error. The customer engagement way: to create cohorts based on the “engagement level” with the product or service. This will allow you to focus on frequent users of your products, independent on how long it took them to cancel, but still sift out those who signed up in error (and never started to use the product). Of course, in all cases, measurement is just the first phase of the process and the complementary phase must be to prioritize the changes needed in the service which would ultimately lead to increase customer satisfaction and customer engagement. What about you? What is your definition for cohort analysis? [CTA-6-Steps-to-Boost-Sales] Popular Posts A day in the life of a Customer Success Manager: What do they do? 15,858 views The difference between Customer Success Managers and Account Managers 12,932 views Your 90 day plan as a new VP of Customer Success 5,496 views Guy Nirpaz Guy Nirpaz is a Silicon Valley-based Israeli entrepreneur and CEO of Totango, a Customer Success software platform. A pioneer in the Customer Success field, Guy established the Customer Success Summit and is a well-regarded industry speaker and community contributor. Guy loves people and technology and has dedicated his career to improving the way in which business is done through innovation. Fun Facts: Guy moonlights as the lead guitarist in a rock band based out of his garage in Palo Alto and used to command a tank battalion...as well as having grown oranges. Jason Cohen Great point. I agree “engagement level” is better. It’s better because it’s describing something more important, and because it’s more analog than just “cancel/no-cancel.” To be clear, though, I don’t recommend ignoring short-term cancellation. In fact, the short-term rate is always much larger, *and* more likely that your behavior/features/product can change it, therefore that, and not the long-term, is often where you should focus your attention. If the long-term rate is high, that’s a fundamental problem with the business. If it’s low, then short-term is more important. But your way is more valuable. Probably it’s best to think of cancellation as “I failed, and now it’s too late,” i.e. first warning that something is amiss. Whereas engagement is more interesting, if more subtle. I also agree: The person who really tried and still failed is more of a “business failure” than the person who never even really tried. Because the first REALLY should not have cancelled if you were doing a good job. You ought to be able to save them. Thanks for the insight. Guy Nirpaz Jason, Thanks for you kind comment. Pingback: Joel York: Why to Measure Customer Engagement in SaaS?() Pingback: VP Customer Success at Alcove9: on boarding SaaS customers() Pingback: 3 Outright Strategies to Improve SaaS Customer Success() Pingback: Using Customer Analytics to Increase Revenues of SaaS Business() Pingback: Tip on How to Reduce Churn (Even in Low-Touch Models)() Pingback: Best of 2011: Top Videos and Blogs on Customer Engagement() Pingback: Engagement Technique: Are you a Mad Man or a Math Man?() Pingback: Quora() Pingback: Quora() Pingback: Quora() James Im quite new to this and wanted to see if there are any programs that work like google analytics, enter a code and the site calculates the number of sign-ups and churn. As to do it manually seems impossible. 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