Customer Churn – The No. 1 factor hindering business growth
What is customer churn?
Customer churn is the layman’s term for customer attrition which essentially tells businesses the rate at which customers are drifting away from being regular customers or remaining loyal to the business. Customer churn is when customers stop interacting with your business in a way that generates revenue for the business.
It is calculated using mathematical formula called customer churn rate. A higher churn rate means that more and more customers are stopping doing business with your product or service which is often considered bad for a firm after a certain limit. A low churn rate is considered healthy for a business as it indicates less and less number of people drifting away from your business.
Customer churn rate should be kept in check by business organizations as it can act as a huge bump in the road to success for the firm. Also, firms should have customer redemption strategies planned out to prevent churn as much as possible as this will reduce the company’s cost in many areas. The simple justification for cost reduction through the prevention of customer churn is that keeping a customer loyal to the firm is less costly than acquiring a new customer.
Importance of predicting customer churn
It is something we do not hear when we talk about businesses. Like revenue rates, growth rates, and many others, customer churn rates are of great importance to businesses but are often not considered the reason for the success and growth of businesses. Churn rates are overshadowed by other rates but are of high importance. Let’s look at some of the reasons why it is important to predict customer churn rates.
- Predicting customer churn rate can help save huge costs to the companies as when you know that more and more customers are drifting away from your business you can develop customer redemption strategies to keep your existing customers which is less costly than acquiring new customers.
- Having customer rates predicted and finding ways to retain existing customers gives you the upper hand with your competitors because opening a new business or expanding is not the only reason that will contribute towards the growth and success of the firm.
- It is not incident specific and is because of the whole customer journey in your organization. When you predict customer churn rate you will also know at which stage of the customer journey customers are drifting away from your business and can find ways to improve customer experience and retain more customers.
- Many a time customers make a decision to drift away from your product or service over a period of time. This adds to the churn rate and the best way to prevent this kind of customer churn is to constantly take feedback from your customers and know their preferences and level of satisfaction. This will keep you updated about your customers, will help in preventing customer churn, and also keep you a step ahead of your competitors.
Calculating customer churn rate
In order to understand the calculation of customer churn rate let’s take an example and see-
Let’s assume that your business has 100 customers in total at the beginning of the month. Over the period of time, the business gained 50 more customers. But out of that 100 customers, 5 customers did not come back. And from the 50 newly gained customers, 10 did not come back.
In this case, total churn = 5 + 10 = 15
Hence, with the churn of 15 customers, the customer churn rate will be (15/1000)*100 = 0.15%.
The above calculation can be understood if we understand the formula-
Customer churn rate = [Total number of customers lost / Total number of customers (Period)]*100
Let’s dig a little deeper into the calculation and understand how customer churn leads to revenue loss for the business in mathematical terms.
For the beginning, let’s say your business earns $10 from each customer and in case 1, let’s assume that there is no customer churn for your business.
Taking the above example and the assumption we made –
Total customer in the beginning = 100
Customers gained = 50
Customer churn = 0
Total customer = 100 + 50 = 150
Revenue = 150*10 = 1500
Hence without customer churn, the business will earn $1500.
Now including customer churn rate in our revenue calculation, let’s see how much revenue the firm loses –
From the total of 150 customers, 15 customers drifted away from the business, leaving a total of 135 customers.
In this case, the total revenue = 135*10 = 1350
Hence with customer churn, the business losses $150 and earns a total revenue of $1350
Challenges while predicting customer churn
With the mathematical formula and technique, predicting customer churn seems to be a very easy job. But that is not the case. Predicting customer churn is a very tricky task as it solely depends on customer behavior which is very subjective in nature. Let’s look at some of the many challenges one might face while doing such a prediction.
- The marketers and customer success teams need to analyze the customer behavior pattern for a long time in order to predict which ones are likely to churn away from the business in the future.
- Once the customer behavior has been identified who are likely to churn away from the business, it is important to find tactics and ways to retain them, and given the subjectivity of the situation, it becomes difficult to track ways to retain all the customers.
- Given the subjectivity of, it becomes really important to be aware and accurate about the ways and techniques used to find the customers likely to churn.
- One of the crucial things while predicting is to always have real-time customer data as you cannot use historic data to calculate customer churn rate.
- Have customer retention focused offers and incentives for the customers likely to churn while making sure that the existing customers are not being impacted.
Ways to reduce customer churn
Now we know how customer churn affects the revenue of a business and therefore it becomes very important to find ways to reduce it. Below mentioned are a few ways in which you can reduce the customer churn rate for your business.
- The best way to retain a customer is to provide exceptional customer service that will land up to the customer’s expectation, increasing their level of satisfaction and happiness.
- Take special care of the customers that are loyal to your business by offering them rewards for their loyalty in some form or other.
- While focusing on retaining customers that are likely to churn also make sure that your other customers and not getting impacted in a bad manner.
- Always conduct customer surveys and keep a track of customer data and try to solve the customer issues then and there only, if any, before it’s too late.
What's a good churn rate?
On average a churn rate of 5% to 7% annually is considered to be a good churn rate and indicates a solid base for a company to expand its business.
Why is churn a big deal?
Churn is a big deal as a high churn rate costs big to your business revenue, profit, and hence growth. This is so because gaining new customers is far more expensive than keeping new ones.