How to reduce customer attrition rates: Smarter pricing strategies

What is customer attrition?

Customer attrition is the loss of customers by a business over a specific period. Simply put, it's when your customers stop doing business with you. 

Every business experiences customer attrition, as no customer remains active indefinitely. Understanding and measuring customer attrition is crucial for assessing the health of your business and making informed strategic decisions.  

Customer attrition isn't limited to one type of business. In a B2C (business-to-consumer) context, it might look like a subscriber canceling a streaming service, a retail customer no longer making purchases, or a user abandoning an app. 

Conversely, in a B2B (business-to-business) setting, customer attrition could involve a company deciding not to renew a SaaS subscription, switching to a competitor's software, or ending a service contract. 

Regardless of whether you serve individual users or other businesses, the principles of understanding and reducing attrition remain vital. Performing customer attrition analysis helps both B2C and B2B firms spot areas for improvement and strengthen user relationships.

This post will get into the concept of customer attrition, exploring what it is and why it happens. 

Read on to learn:

• How to define and calculate your customer attrition rate
• The key differences between customer attrition and customer churn
• Methods for analyzing customer attrition using both data and customer feedback
• Strategies to reduce customer attrition, focusing on smarter pricing and billing

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Why does customer attrition happen?

Understanding why customers leave is the first step in preventing it. By recognizing the signs, you can take measures to improve retention. Here are some common reasons for customer attrition and how you might spot them:

• Product misalignment: Customers may leave if they don't perceive the value they expected from your product. Perhaps the features don't quite meet their needs, or maybe they don't fully get how to use them effectively. 
  
  You might spot this through low feature usage, negative feedback regarding product functionality, or a lack of engagement with product updates and educational materials.

• Pricing issues: If your pricing doesn't align with the perceived value, or if you introduce unexpected price hikes, customers may look for more affordable alternatives. A pricing structure that doesn't suit different customer segments or sudden, poorly communicated price changes can be significant drivers of churn. 
  
  Keep an eye on complaints related to pricing, downgrades to lower-priced plans, or customers citing cost as their reason for leaving.  

• Friction in the onboarding or billing experience: A difficult or confusing onboarding process can lead to early frustration and attrition. Similarly, billing issues, such as errors, lack of clarity, or inconvenient payment methods, can erode customer trust. 
  
  If new users struggle to get started or existing customers face repeated billing problems, they are more likely to churn. Look for high drop-off rates during onboarding, complaints about the billing process, or instances of involuntary churn due to payment failures.  

• Lack of feature usage or product engagement: When customers aren't actively using your product or engaging with its key features, it suggests they aren't finding it essential. 
  
  Low login frequency, infrequent use of core functionalities, or a lack of interaction with new features can be indicators of disengagement. Monitoring product usage metrics and engagement levels can help identify at-risk customers.  

• Lack of perceived return on investment (ROI): Especially in B2B scenarios, customers need to see a clear return on their investment. If your product or service isn't helping them achieve their business goals, they will likely seek a solution that does.
  
  A failure to show tangible benefits or a lack of alignment with the customer's key objectives can lead to attrition. Pay attention to feedback about unmet business needs or a perceived lack of impact from your offering.

Note: Addressing these drivers of customer attrition is linked to your pricing and packaging strategies. Thoughtful monetization approaches and well-designed hybrid pricing models can directly impact user perception of value, reduce friction, and improve customer retention.

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How do you calculate the customer attrition rate?

Next, learning what is customer attrition rate and — how to calculate it is the next logical step. The basic formula for calculating the customer attrition rate is straightforward:

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Example in the SaaS industry

Let's walk through a SaaS example. Imagine your company started January with 500 subscribers. By the end of January, 25 subscribers had canceled their subscriptions. Your customer attrition rate for January would be:

Customer attrition rate = 25/500 ×100% = 5%

So, in January, you lost 5% of your starting customer base.

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Annual vs. Monthly attrition tracking

When tracking customer attrition monthly versus annually, the timeframe you consider will naturally impact the rate. A monthly rate provides a more immediate snapshot of customer loss, allowing for quicker identification of potential issues. 

However, monthly fluctuations can sometimes be volatile. An annual rate offers a broader perspective, smoothing out short-term variations and revealing longer-term trends in customer retention.

It's common for SaaS businesses to monitor both monthly and annual rates to gain a holistic view. Keep in mind that simply multiplying a monthly rate by 12 doesn't always give an accurate annual rate due to compounding effects.

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Upgrades and downgrades

Finally, it's important to consider the impact of upgrades and downgrades on your attrition metrics. While a customer who downgrades their subscription isn't technically leaving your service entirely, it represents a contraction in revenue. 

Conversely, an upgrade increases revenue. Traditional attrition rate calculations typically focus on complete customer loss. However, to get a more nuanced sense of customer health and revenue trends, some companies also track metrics like net revenue retention (NRR), which factors in upgrades, downgrades, and churn to show the overall change in recurring revenue from existing customers. 

Remember: A customer completely leaving is still considered attrition, but downgrades signal a potential risk or a change in customer needs that's crucial to monitor.

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Customer attrition vs. Customer churn

The terms customer attrition and customer churn are often used interchangeably, and both refer to the loss of customers. However, there's a distinction. While attrition invariably points to lost customers, churn can sometimes refer to the loss of either customers or revenue. 

For instance, a high-value customer leaving would contribute significantly to both customer churn and revenue churn. Conversely, the departure of a customer on a very low-priced plan might count as customer churn but have a negligible impact on revenue churn.  

In SaaS metrics, you might track both. Your customer attrition rate would specifically measure the percentage of customers who canceled their subscriptions during a given period. Your revenue churn rate, on the other hand, would measure the percentage of lost recurring revenue during that same period, taking into account the value of the customers who left. 

While a data system might simply label a canceled subscription as "churn," a more sophisticated analysis would differentiate between the number of accounts lost and the associated revenue impact. 

For example, a SaaS company might report a 3% monthly customer churn but a 2% monthly revenue churn, indicating that the customers who left had, on average, lower subscription values.  

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How do you analyze customer attrition?

To effectively reduce customer attrition, you need to understand not just the what, but also the why and the who behind it. A comprehensive analysis involves both quantitative and qualitative methods.

Quantitative analysis

This involves looking at hard data to identify patterns and trends. Think:

• Usage drop-offs: Analyze when and where customers stop using your product. A sudden decline in usage of key features can signal dissatisfaction or a lack of perceived value.
• Billing history: Examine billing cycles, payment failures, and downgrades. Frequent payment issues might indicate involuntary churn risks, while downgrades can precede complete attrition.  
• Cancellation patterns: Look for common points in the customer lifecycle when cancellations occur. Is there a spike after the initial onboarding period, after a price increase, or before renewal?

Qualitative analysis 

This involves gathering insights directly from customers to understand their reasons for leaving.

• Exit surveys: Implement surveys for canceling customers to gather direct feedback on why they decided to leave. Be mindful of response rates and potential biases in self-reported data.
• Customer support data: Analyze support tickets, transcripts, and notes for recurring themes, complaints, or unresolved issues that may have contributed to attrition.

Segmentation 

Breaking down your customer base into smaller groups can reveal valuable insights into attrition drivers. Consider segmenting by:

• Customer size: Enterprise clients might churn for different reasons than small businesses or individual users.  
• Pricing tier: Attrition rates may vary across different subscription plans, indicating potential issues with value perception at specific price points.
• Lifecycle stage: New customers might churn due to onboarding issues, while long-term customers leaving could signal evolving needs or competitive pressures.  

Customer attrition models 

Using data to predict and understand churn can be super useful. You can do this through: 

• Predictive churn scoring: By analyzing historical data and customer behavior, you can build a customer attrition model that assigns a churn risk score to each customer. This allows you to proactively identify and engage at-risk customers.
• Cohort analysis: Grouping users based on their acquisition date or a shared trait and then tracking their attrition rates over time can reveal trends in customer retention and the impact of changes you've made to your product, pricing, or processes.  

Note: Understanding your specific SaaS churn rates and comparing them against relevant SaaS benchmarks is crucial for evaluating the health of your business. 

Plus, for companies dealing with larger clients, a strong grasp of enterprise billing nuances can impact user satisfaction and retention. We encourage you to explore our posts on SaaS churn rates, SaaS benchmarks, and enterprise billing for a deeper dive into these related topics.

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6 proven strategies to reduce customer attrition

Here are six proven strategies to help you reduce customer attrition.

1. Align pricing with customer value

One significant driver of churn can be a mismatch between what customers pay and the value they receive. Consider moving towards pricing models that scale with customer usage and growth. 

Usage-based pricing allows users to pay only for what they use, preventing the feeling of overpaying for unused features. Then, hybrid pricing models that combine a base subscription with usage-based components can cater to different user needs and usage patterns. 

By aligning your pricing more closely with the value customers derive, you can reduce price-related customer attrition.

2. Improve onboarding and time to value

A smooth onboarding process is critical for setting new customers up for success. Faster activation and a quicker realization of value lead to stickier customers. Guide new users to key value milestones early in their journey. 

Provide clear tutorials, helpful resources, and proactive support to ensure they understand how to best use your product and achieve their desired outcomes. A positive initial experience significantly decreases the likelihood of early churn.

3. Create flexible billing experiences

In today's dynamic environment, customers appreciate billing experiences that adapt to their evolving needs. Allow customers to scale their subscriptions up or down with minimal friction. Avoid forcing plan changes or surprising them with unexpected billing adjustments. 

Offer clear communication about billing policies and provide options for pausing or modifying subscriptions when necessary. A flexible and transparent billing system enhances customer trust and reduces frustration, a key factor in attrition marketing.

4. Monitor usage and intervene early

Proactively spotting at-risk customers allows you to intervene before they decide to leave. Track key indicators such as feature adoption rates and usage decline. When you spot these risk indicators, trigger proactive outreach from your customer success team. 

These indicators might include a significant drop in login frequency, decreased use of core features, or a lack of engagement with new product updates. Early intervention with helpful resources or personalized support can often re-engage these customers.

5. Experiment with pricing plans

Don't be afraid to test different aspects of your pricing strategy. Experiment with various thresholds for usage-based plans, bundle different features to appeal to specific segments with specific feature-gating strategies, and offer attractive trial periods to new users. 

Carefully analyze customer behavior in response to these experiments. Which plans have the lowest attrition? Which bundles are most popular? Use this data to refine your pricing structure and better cater to customer needs.

6. Communicate ROI consistently

Continuously showing the value customers are getting is crucial for long-term retention. Help them visualize the return on their investment. Provide regular usage summaries, clear and informative dashboards, and transparent billing statements. 

Highlight the key benefits they've achieved using your product or service and quantify the value whenever possible. When customers clearly see the ROI, they are far less likely to churn

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How Orb helps companies lower attrition at scale

We've discussed the critical importance of reducing attrition — that is, minimizing the rate at which customers stop doing business with you. For SaaS and GenAI companies striving for sustained growth, actively combating customer loss is vital. 

This is where Orb steps in. Orb is a done-for-you billing platform designed to help these businesses manage billing and strategically leverage it as a tool for enhanced customer retention. This is how Orb helps lower attrition:

• Pricing agility for value alignment: Static pricing models can lead to customer dissatisfaction and churn if they don't reflect the value users get. Orb's agility, powered by Orb RevGraph, allows you to rapidly experiment with and implement flexible pricing models like usage-based or tiered pricing. 
  
  By aligning pricing with actual customer consumption and value, you reduce the likelihood of customers feeling overcharged or underserved, a key driver of customer attrition.

• Seamless billing and trust: Billing errors and surprises are friction points that can erode customer trust and lead to churn. Orb RevGraph guarantees precise, error-free billing by ingesting and processing raw event data. This results in auditable invoices. 
  
  Providing transparent, real-time usage monitoring and accurate billing builds confidence and reduces billing-related attrition. Customers are more likely to stay when they understand what they're paying for and trust the accuracy of your billing.

• Flexible scaling without disruption: Forcing users into rigid plans that don't adjust to their growth or contraction can lead to eventual churn. 
  
  Orb's API and modular platform scale with your users' needs by supporting a high volume of events per second and allowing users to adopt the features they need. 

• Proactive insights and intervention: Spotting at-risk customers early is crucial for retention. Orb's built-in revenue analytics reports and customer usage dashboards provide valuable insights into customer behavior. 
  
  By tracking usage patterns and identifying indicators of disengagement, you can trigger proactive customer success outreach. Orb helps you spot potential churn before it happens, allowing for timely intervention and personalized support.

• Risk-free pricing experimentation: New pricing strategies in a live environment can be risky. Orb Simulations allows you to test, optimize, and predict the impact of different pricing models using real data before you commit. 

By understanding how pricing changes might affect customer adoption and retention through risk-free simulations, you can confidently roll out strategies that minimize churn and maximize revenue.

Ready to transform your billing from a back-office function into an asset for customer retention? Explore Orb and our flexible pricing options to find a plan that works for you.