Losing customers is never an enjoyable process, but the worst thing you can do for your business is nothing at all. Instead, employers should always actively pursue better solutions for their product or service by analyzing their failures to ensure more success for the future.
It’s important to keep track of how many customers leave and why they leave so that you can make the right adjustments for future customers and hopefully improve customer retention. However, it can be difficult to measure these types of factors and produce usable data. That’s why businesses need to keep track of customer churn, which is the metric used to measure how well you are retaining customers. This article will cover the ins and outs of customer churn and what business owners can do to make the most of their circumstances.
What Is Customer Churn?
Customer churn occurs when someone chooses to discontinue using your products or services—or in other words, they are no longer a customer. Also known as customer attrition, customer churn gives a business owner insight into how well their business is doing over time, which is an essential part of management and growth.
More specifically, customer churn is measured and evaluated using a customer churn rate. This rate reflects the number of customers who stopped using services or products during a set period. This set period could be any relevant time frame your company is analyzing, including a year, a financial quarter, or even a single month.
How Is Customer Churn Rate Calculated?
The customer churn rate is usually expressed using a percentage, and the higher the percentage, the more customers are leaving and the more business you’re losing. At its core, churn rate is calculated by dividing the number of customers lost by the number of total customers in a set period.
Another way to look at it is by using a formula. The equation looks like this:
For example: let’s say a company has 500 customers at the beginning of the quarter, but by the end, it has 450 customers. That means the company lost 50 customers, and when you divide that by the total number of customers for that quarter (500), you get 0.1. Multiply that by 100 to get your percentage and there you have it: the company had a 10% churn rate for that quarter.
Depending on the service or product, it may be challenging to determine what losing a customer looks like. If your service is a monthly subscription to your product, it’s easy to determine when someone unsubscribes. However, if you have a one-time service, it’s more difficult to approximate when you’ve “lost” a customer. Some industries go months before services are needed, like a home furniture store or a car dealership. Those sales cycles are much broader and if they don’t see returning clients for even years, it doesn’t mean they’ve lost any value or money—that’s simply the nature of the field. Generally, you can estimate when a customer no longer uses your service by using the frequency of their purchases as a baseline.
Ideally, everyone would have a 0% churn rate, but that’s not a realistic expectation to have. A 5%-8% churn rate is usually considered average, but it depends on the market, the industry, the size of your business, and more.
Why Does Customer Churn Matter?
Churn rates are used to look at the recurring business and value lost over certain periods. It’s important to look at customer churn to prevent customers from leaving due to problems you could potentially solve, which protects your brand, money, and future. Here are some of the more specific reasons why customer churn is important to measure:
- Brand impact. Dissatisfied customers negatively impact your brand, and especially in a market that is driven by the internet and influencers, it can be dangerous to your company if customers are leaving for a similar reason and discussing online. Not only are you losing their business, but having dissatisfied customers also makes it more difficult to find new customers if the brand receives a bad reputation from dissatisfied customers. This could be news spreading by word of mouth, reviews, or social media.
- Costly consequences. Customer churn costs money, not only because you would be losing someone’s immediate purchases, but because loyal customers are a huge asset to companies. Returning customers tend to spend more money on a brand once they have made a decision to become loyal customers, and finding and persuading new customers can be very costly and time-consuming. Ultimately, losing customers that spend a lot on your brand can affect the bottom line in the present and over time.
- Future growth. You need the loyalty of your customers to sustain your business, especially when you roll out new products or initiatives. If there aren’t people around to get excited about new products and services, companies can wear themselves thin because they focus on the basics that need to be fixed rather than healthily expanding.
- Get ahead of the competition. With every industry getting more and more competitive, it’s more important than ever to be at the top of your game. The last thing you want is a new competitor stealing clients or customers, especially if you can offer a solution for those customers. This competition should encourage organizations to focus not only on new business but also on retaining existing customers.
- Proactive business strategies. Some problems arise seemingly out of nowhere and businesses must adapt as needed. Others, though, can be identified in advance by closely watching customer churn, which means you can put certain procedures in place to prevent serious losses. If you can predict customer churn after measuring it over time, you can do more to prevent it than wait until it is too late.
Why Does Customer Churn Happen?
Customer churn is more than a metric; it’s an indicator of how well your services, products, and sometimes employees are performing. Sometimes all companies go through a higher customer churn period, but it’s always important to know your potential blind spots and look for creative solutions. The most common reasons include the following scenarios.
- Your service is lacking. Whether you offer an immediate service or online resources for purchases, how people feel treated makes a big impact on whether or not they stick around. High customer churn rates may be an indicator that your employees or teams “on the field” directly interacting with customers may need more training or evaluations.
- You’re targeting the wrong audience. You may have a great product, but you aren’t going after the right group of customers. Marketing is a key element of any business venture, including gathering research about who needs your products and how. It’s also possible that customers need new or improved features, so you may have the right audience, but you don’t understand their needs. Feedback is critical to understanding the needs of your customer community.
- Your pricing or services aren’t right compared to competitors. If your prices are lightyears ahead of competitors and you don’t update your services, especially as other competitors join the market, even the most loyal of customers may switch to either a more affordable option or whoever gives them the biggest bang for their buck.
- Your market is seasonal. If you’re in a niche industry, you may not get consistent sales—a Christmas lights company isn’t going to have the same customer volumes year-round. You should consider this when calculating your churn rate and also see if there are things you can do during the off-season to bring in more customers. This could be adding products or services to make your offering more appealing outside of your primary season.
- Poor onboarding process. If your sign-up, purchasing, or renewal process is confusing or seems sketchy, people will go with a competitor that’s easier to work with and who has clearer benefits. The path of least resistance often wins out in these situations.
- Lack of brand awareness and loyalty. Most businesses need to have an online presence to properly promote and market their company and products. Without it, your brand awareness and loyalty will go down, meaning valuable old customers won’t stick around with a decent competitor actively drawing them away. Similarly, low-quality content and communications are also a turnoff for a lot of customers.
How can Customer Churn be Prevented?
Preventing customer churn is essential to your business strategy. It starts with measuring customer churn and finding the root of the problem. Then, you work on solutions. Here is a list of ideas and tips on how to tackle customer churn.
- Focus your attention on your best customers and recognize them. Loyal customers will share your content and be a promoter for your brand without being paid if they feel appreciated.
- Analyze churn as it occurs instead of waiting to fix the issue. The more preventative maintenance you can do, the better.
- Look for at-risk customers or customers who fit in similar categories to those who are leaving. Fix the problems for potential churning customers to increase loyalty and trust in the brand.
- Show your customers that you care, whether that’s with promotions, social media interaction, loyalty programs, etc.
- Do a competitive analysis to see what your competitors are offering that may persuade customers to abandon your brand.
- Educate your customers and help them as they use your products so they see you as an expert on your service or product. This will show that you care that they have the best experiences with your products and that you’re a trustworthy source.
- Track your Net Promoter Score to see how people are feeling about your products and how likely they are to return.
- Track your Customer Effort Score (CES), which helps you actively gather feedback and improve the experience and processes for customers.
- Provide exceptional customer service—even for expensive products, many customers will stick with companies who treat them exceptionally well.
Understanding the "Why" Behind Customer Churn
One of the most vital Experience Improvement (XI) efforts your company can take on is reducing customer churn. Why? Because it’s one of the four major ways your experience program can positively impact your bottom line.
In this Point of View article, expert Jennifer Passini, Ph.D. discusses why it’s so important to not only close the loop with disgruntled customers, but to discover why customers churn so you can be proactive about your retention efforts. Read more below!
Protect Your Brand to Lower Customer Churn
With recent technological advances and the influence of social media, the customer experience with the brand is just as important as offering exceptional products. Making sure that each touchpoint a customer has with your company is a positive experience is crucial in this day and age. By doing so, you can reduce your customer churn rate and see positive revenue growth.