Thus, customer churn as a metric helps business to see the rough truth about its customer retention strategy and its effectiveness, which means that building customer retention starts from from measuring customer churn and understanding the reasons which drive it. This is also the only way to ensure financial health of your organization.
So, what is customer churn analysis and what customer churn model you should use to measure it? How to calculate customer churn? What is customer churn probability? Finally, how to make customers happy and provide sustainable growth for your business?
Let’s find the answers together.
What is customer churn?
Customer churn is a business metric that points out to the percentage of customers who quitted the relationships with your brand within the certain period of time. In other words, customer churn is a metric that directly shows how many customers you have lost within a time frame your personally choose to measure. Customer churn is also known as customer attrition.
There are two types of customer churn - involuntary churn and voluntary churn, they create the percentage of customers lost combined, but you have to measure them separately - through survey responses, customer relationship management and with the voice of customer feedback.
Thus, customer churn is a metric that is interdependent with customer retention - for instance, if you have 80% customer retention, you have 20% of customer churn respectively and vice versa.
Some managers prefer to measure customer churn without measuring the number of customers churning, but with the use of other formulas that allow to calculate the value of recurring business lost or the percentage of recurring value lost. Nonetheless, we prefer the traditional way to measure it.
Thus, let’s move further - to the customer churn formula itself.
How to calculate customer churn?
Well, the formula for measuring customer churn is quite simple and we pretend you have already constructed it in your mind. Let’s presume you measure the customer churn for last month, and the number of customers at the beginning of the measured time period was 500.
Therefore, here is the customer churn formula:
Customer churn, % = Number of customers you have lost during the measured time period/ Number of customers existing at the beginning of the measured period * 100
Let’s presume you have lost 50 customers, which will make the result of:
50/500 * 100 = 10%
What’s the customer churn industry standard?
Obviously, most businesses would say that it is 0%, but let’s come back to reality - every business is going to lose some of its customers even if it does everything perfectly and there are no causes for customer churn - people will keep quitting. Nonetheless, there is a big difference between 5% customer churn and 20% customer churn, so you probably wonder - what is the border between “normal” customer churn and a moment when it can be considered a problem?
Well, the answer can frustrate you a little - every business is unique and saying that 5% customer churn is generally acceptable for every industry, sector or business model isn’t right.
Nonetheless, we could have left this question unanswered - and we have started seeking for data. Recurly Research provides following data regarding customer churn benckmarks:
- Average annual customer churn rate for SaaS industry is 4,1%.
- In general, 5-7% of annual average churn rates and 4% of monthly churn rate is considered a good benchmark for SaaS (Software as a Service) businesses
There are also many other benchmarks for different industries, nevertheless, each one is unique, thus we recommend to monitor industry benchmarks regularly in order to be acknowledged of ongoing trends and compare your internal data with open research.
For instance, CustomerGauge provides following average customer churn rates by industry:
- Energy - 11%
- IT services - 12%
- Finances - 19%
- Telecom - 31%
- Manufacturing - 35%
- Logistics - 40%
- Wholesale - 56%
Sounds a bit scary, doesn’t it? Anyhow, data from different sources can differ a lot, so keep researching - the truth is always somewhere in the middle.
Why is customer churn important?
There is no way to build customer retention without measuring customer churn
Sounds obvious, but it is the truth as it is. Building customer retention is possible only when you understand what makes your clients quit the partnership with you - because there is no way to reach the goal without eliminating the obstacles. We are not goind to discuss why customer retention is important - here is a guide about it - but what we are going to say is that customer retention is the true factor of success for any business. Building customer retention is synonymous with providing excellent customer experience, exceptional customer service and high customer satisfaction levels, which means many benefits for your company - and it all starts here.
Acquiring new customers is a costly challenge
We keep to say it again and again - customer acquisition, even though it is an irreplaceable business strategy, still costs much more than customer retention. In fact, the price for acquiring one new customer is from 5 to 25 times more expensive than retaining an existing one - is there anything to add? Thus, focusing on customer retention can help you grow your revenue and profits without investing that much in marketing efforts, especially now, when competition in the field of digital marketing has become too tough to be affordable for most small and medium-sized businesses. Nevertheless, we say it again - customer acquisition is vital, but never more than customer retention, especially when it comes to customer acquisition costs.
The financial impact on your profits is fantastic
Anyone of you reading this article can think - is it worth the trouble to reduce my annual churn rate from 5% to 4%? Well, it is quite tricky to analyze these numbers from the first sight - they can confuse. Let’s consider your annual revenue from one customer is 20,000$, and the annual churn of 5% is 50 clients. This means that 1% of churn covers 10 current customers, and this is 200,000$ of revenue yearly - sound more preferable than the same numbers, but in percentage, doesn’t it? Thus, always convert numbers you get to see the real impact on your business - that 1% always looks insignificant, but is this how it really works?
It provides you with deep insights
One of the best things about measuring customer churn is that customer churn is a metric that always points to the things you do wrong about your customers - especially when the customer churn rate is too high compared to industry standard. Thus, when you move to the stage of root cause analysis of the customer churn, you can notice numerous issues you have never identified before - for example, even establishing a culture of conducting exit interviews with customers can help you to notice many problems on different stages of customer journey - especially at its customer service stage.
How to reduce customer churn?
Define customer churn in your case
As we have already mentioned, every business is unique - and in terms of such vital aspects as pricing model, industry, and so on. This means for every business the term of customer churn means something different: for SaaS industry it means canceled subscriptions, for retail - absence of new purchases, for manufacturing - no new contract signed. This means that you have to define what is customer churn for each of your products and services, because there will be different ways of resolution for each separate case. Thus, start from defining what is customer churn in your case, and then move to another stage - find out what guides to it.
Define and segment root causes for customer churn
Basically, there are not that many causes for customer churn, and even though they differ in details, they have the same root causes. In other words, we can define these causes as following:
Price - price isn’t something stable, which means it can change throughout the customer lifetime. For some of them, it won’t be acceptable, which means they will switch to a competitor.
Product fit or quality, market fit - if your product doesn’t resolve the problems of the customers, they will quit. This axiom is also relatable to the case when you product or service doesn’t meet quality standards or customer expectations - this happens often when salespeople advertise it too much and give false promises.
Customer experience - this is the most popular cause for customer churn, which can affect your customer retention in many ways: poor customer service in one of the customer interactions can destroy the entire relationships with the company.
Customer care - when a company ignores customer wishes and expectations and just doesn’t care about its customers, clients can seek for more caring options.
Thus, when you segment your customers by the cause of their churn, you will find out what is the biggest problem and start thinking on resolution. Also, this will help you understand what affects your customers the most.
Establish customer success team
Customer success team isn’t the same thing as customer service team - while customer service team is focused on resolving all issues that can influence customers and in most cases, customer service team doesn’t act proactively. On the other hand, customer success team often acts proactively and stays in permanent contact with the customer in order to help him or her to reach their business goals. Without customer success team, you won’t be able to show your care about customers, which can cause customer churn - and as customer success teams aren’t still something that can be found everywhere, you can benefit from it here and now.
Monitor customer reviews on third-party resources
Well, we have recommended to provide exit interview option for your customers, but there is one nuance - some customers won’t accept it because they either are too angry to continue communicating with you or they just don’t want to. Take it as it is - engagement rate with such options isn’t high, and it will be great if 3 of 10 of your customers will accept exit interview invitation. Thus, always monitor third-party resources for customer reviews - those who weren’t satisfied customers can share their opinions there, and it is a great way to find out what led them to a decision they made.
Work on the quality of customer service
Customer service quality is the main driving force behind customer retention, and customer churn as well. It is more likely to lose an existing customer at the customer service stage of their customer journey than a few hours after purchase - and in most cases, it isn’t the product that makes customers leave your service. Working on customer service quality covers regular training for your customer service agents and effective monitoring of their work - it is also a great idea to use quality assurance scorecards to make sure that agents can meet service standards you want them to fit.
Monitor customer experience
Customer experience isn’t synonymous with customer service - while customer service is only about customer service stage of customer journey, customer experience is covering all customer interactions and emotional evaluation - customer sentiment - about these interactions throughout entire customer lifespan. Thus, the more positive customer experience is, the higher is customer retention rate. Customer experience consists of a few metrics you have to track: customer satisfaction, customer effort score, net promoter score and first contact resolution. By the way, there are more of them, but try to start from these four and work on reaching industry standards. You can idenitfy at-risk customers this way, and work with these at-risk customers to improve user experience and prolong customer lifecycles.
Provide customer loyalty programs
Customers love to be valued, especially when they stay loyal to your company and make repetitive purchases. Therefore, it isn’t a good idea to not reward loyal customers. Customer loyalty programs can be different, including bonuses, personal discounts, specific features or events, VIP support manager, etc. These all features will show your care about customers and become another argument in favor of continuing relationship with your company, which will help you reduce customer churn.
Make long-term relationships beneficial
Many businesses use this trick, so we could not ignore it. What do we mean by adding value to long-term relationships? Well, it is quite easy to explain on example of subscription-based payment model or even a regular clothes store. In first case, you can offer annual plan on discounted price compared to monthly subscription - yes, not all of your customers will accept it, but some of them will. In another case, you can for instance provide bonuses for each purchase which last for a limited period of time and can be used to pay a part of price for a new purchase - this will make extra purchases more beneficial for customers.
Adopt all modern solutions to stay competitive
This is extremely essential tip for any business - each month we see something new is developed in the field of customer service, customer communications, sales, and so on. All these solutions or tactics make difference, and it is not a good idea to adopt them when all your competitors have already done it - this will make you look as a company that can’t keep the pace in the race. Always monitor what steps are taken by your competitors and avoid being overcame.
Talk with your customers
Collecting customer feedback is an essential part of not only reducing customer churn, but for any other challenge in the case of your business improvement. Try to collect customer feedback every time there is a chance - but don’t abuse it, as bombarding customers with too much customer surveys, forms, and polls isn’t a good idea if you want to keep customer engagement high. Anyhow, customer feedback is the best way to find out what disturbs you customers before they will become angry customers and leave.
Conclusion
Customer churn is the thing everyone wants to avoid, but it is impossible - nevertheless, it can be and has to be managed. Analyze your customer churn data and thus reduce churn risks and therefore customer churn probability. Use client churn reduction tips we have provided you with and remember - the less customers you lose, the more revenue you generate.
Focus on avoiding bad experiences for customers, work with unhappy customers in order to help them overcome trouble and thus help you gain increase in customer retention, try to interview each lost customer, identify the risk of churn and build customer relationships with the brand in the way to avoid those risks. Provide excellent customer service to reduce customer attrition rate, and use customer segments to manage different types of customers' churn risks. Build a customer churn prediction model to forecast revenue churn rates, behavior of target audience and target market conditions, and other negative churn factors.
