From the software user who doesn’t renew their subscription to the gym-goer who cancels their membership; these are the customers who have decided to stop conducting business with your company. This loss of business is known as customer churn. In this article, we’ll look at the many factors behind why customers churn and what steps you can take to reduce it. We will also look at calculating your churn rate and how that rate should be considered in other contexts to gain a more accurate picture.
Why do you need to understand customer churn?
In today’s world of digitalisation and crowded marketplaces, it’s easier than ever for customers to make comparisons. Then, they can choose their best option from a wide array of providers. Companies, therefore, face the challenge of not only convincing customers to choose them in the first place, but also retaining their existing customers once they get them.
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Acquiring a new customer costs five times more than retaining an existing one. This alone shows why tracking—and managing—customer churn is so important. Focusing on long-term relationships and observing customer behaviour is more profitable than spending a lot of money on marketing and campaigns to attract new customers. Churn is important because it affects your company’s profitability. Also, the more you learn about your customers and their behaviour, the better understanding you’ll gain of future expected revenue.
What causes customer churn?
Understanding why customers leave is important when it comes to managing customer churn. Only by knowing the causes can you develop a clear strategy to tackle it. So let’s take a look at some of the most common reasons:
Poor customer service
This is one of the most significant factors behind customer churn. Customer buying behaviours are influenced heavily by customer service experiences, with 70% of people choosing to stop buying from a business due to poor service. Furthermore, 52% of dissatisfied customers would actively recommend others against conducting business with you, creating a slippery slope of lost opportunities.
Nonexistent or failed onboarding
Onboarding isn’t just for new employees joining a company. Customers should feel confident using your product or service and the value of it should be communicated early. Welcome emails, product tutorials, documentation, and phone support, all work together to form a successful onboarding experience. A lack of guidance can leave customers feeling over—or under—whelmed, causing them to abandon your product or service.
Lack of perceived value
Customers need to feel that they are getting good value. Pricing plays a significant role in this, with the market rejecting offerings where cost doesn’t match expectations. Or perhaps a competitor has a significantly better deal. Furthermore, perceived value is lost if there isn’t a clear sense of how a product or service is beneficial to the buyer. Considered in relation to our previous point. You should always ensure that every customer has a solid onboarding experience and is enlightened to the ways your offering is the perfect solution to their needs.
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Poor market fit
Successful companies continually monitor and work with their markets in order to ensure that their product or service develops to meet changing needs. In today’s busy marketplace, the company that falls behind will lose customers to the competitor who is looking ahead. To learn more about staying ahead in your market, read our article on the importance of market research here.
A common problem for subscription-based business models, involuntary churn occurs when a customer’s automated payment fails. Whether it’s out-of-date billing information or expired cards. This type of churn isn’t the result of a negative experience or issues with the service being offered. Involuntary churn is often overlooked, but it is is one of the most insidious factors, causing significant damage in the long run. In order to increase customer retention, it needs to be tackled as aggressively as voluntary churn.
Desired outcomes achieved a.k.a. Positive churn
Not all churn is bad. In some industries, like health care or online dating, it’s a sign of a job well done. Take a dating agency, for example. The ultimate goal of this kind of service is to help clients find love and live happily ever after. As a result, success in these scenarios means cancelled subscriptions, closed accounts, and the sound of wedding bells in the distance.
How to calculate your customer churn rate
Often expressed as a percentage, your customer churn rate is a measure of customer losses across a defined period of time. In an ideal world, your business would experience perfect customer retention with a 0% churn rate. In reality, every business will lose customers, and it’s important to track, manage, and analyse these losses closely.
Your churn rate can be measured by month, quarter, or year, with different industries preferring different time frames. Annual tracking is used across many industries, but Software as a Service (SaaS) companies and other subscription-based businesses will often measure their churn rate each month.
Before you get started, you need to ensure that your company has a clear policy in place to indicate when a customer is considered churned. For example, a customer’s auto-renewal has failed, but they also haven’t been in touch to explicitly cancel their subscription. Are they active or lost? You should remove all ambiguity before calculating your churn rate.
Customer churn rate
Customer churn rate (%) during [x] period = # customers lost during [x] period# customers at the start of the same period100
To determine your churn rate percentage, you must first identify the number of customers lost in your selected period (e.g. a month). To do this, simply start with the number of customers you had at the beginning of the period, and then detract the number you had at the end. Next, you divide the number of customers lost by the number of customers at the beginning of the same period, before multiplying by 100. The resulting number is your churn rate percentage. For example:
Company A started November with 110 customers and ended with 108. They lost 2 customers. They must then divide 2 by 110 (0.01) before multiplying it by 100 (1.8). Company A’s churn rate percentage for November is 1.8%.
Revenue churn rate
Revenue churn rate (%) = (revenue at start of [x] period – revenue at end of [x] period)revenue at start of [x] period100
Every time a customer is lost, you are losing the revenue that they generate. As a result, this metric is arguably more important than your customer churn % alone because it highlights the impact of churn on the financial health of the business. The amount of revenue each customer brings in can vary depending on the amount they buy or their subscription type. If revenue churn isn’t carefully considered, you could be lulled into a false sense of security.
Let’s look at Company A again. They see £10,000 revenue at the beginning of November and £9,000 at the end (upgrades and expansions not included), leaving them with £1,000 churned. Following the above calculation, they then divide £1,000 by £10,000 before multiplying it by 100. Their revenue churn percentage is 10%. Unfortunately for Company A, the two customers they lost in November subscribed to their most premium package, so their relatively manageable churn rate of 1.8% was not giving them the full picture. This demonstrates the importance of considering customer churn from a number of different perspectives, so that you can take appropriate action.
Analysing your customer churn rate
What makes a good churn rate varies across different business types. For an SaaS company targeting small businesses, you might expect a monthly churn rate of 3-5%. This figure changes to over 9% in the consumer goods industry, with B2C companies experiencing more considerable variance in churn rates. The size of a company can also affect churn averages, with larger companies tending to see 15-30% lower churn.
As you can see, there are so many different factors that can impact churn rate. With this in mind, you should identify other benchmarks that you can measure your own rate against. For example, if you are a newer company, you will likely see higher churn rates and should aim to steadily reduce them over time. Established companies, on the other hand, should have processes in place to maintain low and steady levels of churn.
We already know that the churn rate shouldn’t be considered in isolation. Alongside revenue churn, you should also review your churn rate in relation to your customer growth rate:
Growth rate (%) during [x] period = # new customers (who didn’t cancel) during [x] period# of customers at the start of [x] period 100
Customer growth rate is generally self-explanatory: it’s an assessment of how much—or how little—your customer numbers are growing. If the final figure is greater than your churn rate, it indicates that you are still seeing growth. If it is lower, however, it means that you are losing customers overall.
As we’ve seen, newer businesses lose new customers at a higher rate than older ones. This means that if your company is expanding rapidly, your churn rate percentage may not offer an accurate representation of your overall performance. This is why it is so important to utilise a number of different metrics when trying to pull together an accurate picture of how you are losing customers, why you are losing them, and what those figures actually mean in the grand scheme of your business.
How to reduce customer churn
We’ve looked at some of the factors behind customer churn and you now know how to calculate your own. So what steps can you take to begin actively reducing your customer churn rate and act before the customers leave?
Investigate why customers have already churned
This is one of the most important steps in reducing customer churn. Only by understanding why customers have already left, will you truly understand how to make others stay. Using a robust feedback system, contact churned customers are soon as you can. If you need help getting started, take a look at our guide to preparing your customer churn survey and at three sample questions to ask in a churn survey.
Anticipate customer losses in advance
Keep an eye on customer activity to try and identify those who are at risk of churning: Has a customer been in touch to complain? Is their usage declining? Has their payment method failed? Address these signs as soon as you notice them because there might be something you can do to make them stay.
The power of annual subscriptions
Companies with annual subscribers see 40-60% less churn. The decision to commit to a year’s subscription is significant, with extended thought and planning behind it. As a result, these customers typically show an increased desire to get the most out of their purchase. A knock-on effect of this is that annual subscribers are less likely to abandon a product at the first hurdle, putting in more effort to uncover the value it brings them. And as we know: perceived value is one of the most important factors behind customer retention.
Tackle involuntary customer churn
Involuntary churn is an avoidable problem. When it comes to customer payments, make sure that you have a good alert system in place. Card details due to expire? Let the customer know in advance. Payment has failed? Alert the customer and give them the opportunity to try again. A few simple—and easy to automate— steps could potentially reduce your churn rate by up to 78%.
Try to win customers back
What do you do after losing a customer? The worst reaction is to immediately give in to resignation without a fight. As we discussed at the beginning of this section, you should investigate why your customers are leaving you. If you do this as soon as possible or before a cancellation, you may be able to offer a solution and win the customer back.
Continual product/service improvement
We know that a lack of customer perceived value is a significant factor in generating churn. We also know that ‘investigating why customers have churned’ and ‘trying to win customers back’ are two key steps towards improving customer retention. Considering all of this, it’s important that you continually strive to improve your offerings with the help of a) regular customer experience surveys and b) research into how customer needs are changing and developing. Positive action is the enemy of churn.
Generate customer loyalty
Customer loyalty is the customer’s willingness to work with, and buy from, a company again and again. Most importantly, loyal customers are also going to be more forgiving if you make mistakes or if they face issues with your offering. You can create loyal customers by providing excellent customer service, communicating with them regularly, and offering them additional perks for continually doing business with you.
What about positive customer churn?
For businesses expecting positive churn (e.g. weight loss, dating, or health services), it’s still worth checking in with your ex-customers. In a best-case scenario, you’ll receive confirmation that your product or service has been so successful that they don’t need you anymore. On the other hand, you might find that they need your help again. For those customers who don’t need to return, you should still seek out insights as to why; afterall, their feedback will help you to give existing customers the same, positive experience.
The churn rate metric is a good way of assessing how many customers are leaving your business and how much revenue you are losing as a result. It’s the overview you need before getting down to the nitty-gritty. Your next step, therefore, is to take your churn rate and start investigating the people behind it