Churn rate, the loss of customers over a specified period of time, is one of the most important metrics a company can track.
Churn rate has a profound impact on a company’s revenue. When most people think about losses, they’re thinking about things like overhead, ad campaigns, the marketing team’s frequent partying, that sort of thing: Looking for cash that has been spent and the investment it has (or hasn’t) returned.
Churn tends to avoid the spotlight in these discussions, but the spotlight is often exactly where it belongs.
Let’s take a closer look at what customer churn rate really means for your business, the most common causes of it, and what you can do about it.
Churn rate is the measurement of the number of subscription customers who have canceled their subscription over a set period of time. Churn is most commonly measured as a monthly number since most subscription payments are monthly.
Say you started May with 200 users. Your sales team added another 42 users by the end of the month, but you lost 14 existing customers along the way. Your monthly churn rate would be 14 / 242, or 5.785%.
Improving customer retention rates, even by just 5%, can increase profits by at least 25%. Increased customer retention can have a long-lasting impact on the overall success of a company.
Even if a company is gaining new customers each month, it is still missing out on tons of additional revenue if it has a low customer retention rate. Churn rate can have a significant impact on a company’s bottom line, with an estimated $1.6 trillion in revenue being lost each year due to failure to retain existing customers. Yikes.
While many companies prioritize growing their customer base and strategizing ways to lower customer acquisition expenditures, it costs five times more to acquire a new customer than it does to keep an existing one. Cultivating new customers should be a priority, but not at the expense of customer retention efforts.
There are many reasons a customer might churn, but identifying the most common causes can help you protect against them. Here are seven of the most common reasons for customer churn.
If you’re not attracting the right customers in the first place, they’re not likely to stick around. To reduce churn, the customers you onboard need to be a good fit for your product and company over the long term.
To improve customer fit, first, you need to examine your customer data to identify which types of customers are most satisfied and stay customers longest.
Then, take a look at your qualifying processes and make sure you’re only approving leads that match those attributes.
If customers don’t achieve some tangible success by the time their renewal is up, they’ll stop seeing value in your product, and there’s a high chance they’ll cancel.
What does it mean for a customer to achieve success? They need to make progress toward the outcome they wanted when they signed up for your product. That means success is individual to each customer, depending on their goals.
To address this reason for customer churn, focus on improving your onboarding process and your ongoing communication with your customers.
During onboarding, try to identify customers’ goals through surveys, forms, or direct communication. Then, show them how to use the features that will help them achieve those goals. Check in with customers regularly to ensure they’re still on track toward hitting their goals.
Offering additional value that is complementary to a company’s core business offering can make a noticeable difference when it comes to providing more reasons for customers to stay with a company. For example, companies can host free webinars filled with valuable information, create downloadable reports, or even offer engaging and educational tutorial videos. Providing these resources can increase perceived value.
When your product doesn’t work as it should, it affects how customers perceive your product and brand. Every software has bugs, but if your customers don’t believe you can and will fix them in a timely manner, they’ll eventually churn.
In addition to continually improving your product and fixing bugs, it’s essential to communicate with customers about issues when they arise and to regularly update customers about improvements you’ve made. Open, timely communication helps to establish trust.
Price is another common reason for customer churn. If customers don’t feel they’re getting enough value for the amount they’re paying or if they feel they can get a better price elsewhere, they may churn. Price increases can also trigger customer churn.
To address this, price your product strategically and align your pricing with factors like the value customers are getting and their willingness to pay. It’s also important to communicate openly about pricing so that customers know what costs to expect.
Another one of the biggest causes of churn is poor experience through onboarding, implementation, and interactions with customer support. If customers experience frustration when trying to communicate with your team or don’t feel valued by your company, you’ll see churn increase.
It’s especially important to have a good customer experience during onboarding. 40-60% of users churn after using the product just one time. This is often because users are unable to quickly understand how a product actually adds value to their business.
Poor customer service also has a major impact on retention. Almost 9 in 10 customers have left a business due to poor customer experience. In contrast, 86% of customers are willing to pay more just for better customer experience—product aside.
To improve customer experience, create a customer success strategy and emphasize customer support. Focus on creating a seamless, enjoyable experience for customers that makes them feel valued.
Improving the onboarding process and communicating clearly with users during each stage of the sales funnel is important in mitigating this. When people understand what they’re signing up for, it makes sense that they’re not going to ditch it after only using it once.
Excellent customer service should be a core component in the strategy of every company seeking to retain customers long term. Many companies think of customer service as an overhead that should be reduced as much as possible rather than an investment in customer success.
When customers are treated well, they’re more likely to remain loyal to that organization. With a rockstar customer service team, your customers will reward you by referring their peers, helping the business to grow.
When personnel, especially leadership, change at one of your customers’ organizations, the likelihood of churn goes up.
New company leadership might want to make sweeping changes or switch to software they’re more familiar with. If your main contact at a company leaves the organization, there might not be anyone else who will advocate for using your product.
One of the best ways to address this challenge is to cultivate multiple relationships in an organization. Also, aim to make it as easy as possible for customers to demonstrate the value of their product to leadership by providing metrics or reports.
Competition is a constant for any business. If a customer believes one of your competitors has a better product, offers more of the features they need, or has a better price, they might decide to switch to them.
Keep an eye on the competition and pay attention to elements like their features, pricing, value propositions, and marketing strategies. Proactively tracking competitors can help you adjust quickly to changes in the market so you can retain more customers. Make sure your team understands how to position your company against your top competitors.
Customer churn rate is just one of several important metrics to track. Here are three other essential metrics that are related to customer churn.
Subscription length is the amount of time an average customer spends paying for a company’s goods or services. Typical subscription length varies based on the type of service offered. While a mobile fitness app may offer monthly subscriptions, it is more practical for a tax preparation software company to offer annual renewals.
Having a month-to-month subscription billing model can be attractive and advantageous in initially winning over new customers, but may result in a higher churn rate when factoring these new users into the calculation, since nearly half of new month-to-month users churn in their first month.
Because the first month is so notoriously turbulent, some companies run reports that exclude customers who are still in their first month. Companies with a month-to-month model often can reduce churn by offering a small discount when customers subscribe for a longer period of time.
Numerous acquisition factors impact a company’s churn rate, and tracking those factors can lead to a substantial difference in long-term revenue. As illustrated below, two companies with identical growth but different churn rates will see drastically divergent trajectories over the course of just five years:
Another crucial factor in churn rate is customer acquisition cost, or the amount of money spent to gain one new customer. If a company has a high customer acquisition cost, it will need to maintain a high customer retention rate in order to grow efficiently. When companies have both a high customer acquisition cost and a high churn rate, they’re burning precious capital to acquire new users, only to lose those customers in a short time.
The ideal scenario is to have low customer acquisition costs and a low churn rate, which means a company is not spending tons of money to increase its customer base, while simultaneously keeping most of its users. When both these numbers are under control, it’s smooth sailing.
Customer lifetime value (CLV), measures a customer’s total value towards a business over the duration of their relationship. This metric is useful when considered alongside customer acquisition costs.
When customer acquisition cost surpasses customer lifetime value, the company is receiving a negative return on investment (ROI) on each customer. To avoid this, companies try to create ways to increase the lifetime value of their customers.
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Churn rate is calculated by dividing the number of customers lost (churned customers) by the total number of customers:
Number of Churned Customers / Total Number of Customers
The total number of customers for a period can sometimes be difficult to pinpoint. Total customers for a given month, for example, are not always well-defined because the number of total customers can change throughout the month due to new customers onboarding and cancelations from the current user base.
Because of how unstable churn rates can be in the first month, subscription-based companies often define new customers as users that are coming up on their first renewal, rather than identifying them as customers in their first month of service. Calculations of churn rates that include new customers still in their first month of service (a trial period for example), cause the percentage to skew higher. For this reason, it is vital to understand exactly when a customer churns.
Companies can define the moment of churn in two ways:
When a subscribing customer cancels, they have not yet technically churned, as there is still time to win that customer back and evoke a renewal before their subscription ends. There are also other industry-specific factors at play, like seasonality for one.
While it is most common to measure churn using the total number of customers as a baseline, companies may also elect to measure churn based on other factors, like revenue, the number of product licenses, or even product downgrades.
Some companies calculate customer retention rate by the number of customers at the end of an arbitrary period, minus the number of new customers during the period, divided by the number of customers when the period began, times 100.
Gaining a firm understanding of a company’s churn rate sets the stage for long-term success and can dramatically increase revenue over time.
Knowing the value of repeat customers will ensure retention is prioritized over simply gaining new customers at a continuous rate. While companies will inevitably face some degree of churn, smart businesses can persevere by reducing the impact churn has on their bottom line and increasing revenue by actively working towards a negative churn rate.
Reducing churn begins with listening to customers and understanding what they desire. With the right systems in place to gather and analyze this knowledge, companies can gain sales opportunities, add value to their customer experience, and increase revenue as well as customer loyalty.
To improve your customer retention rate, you need to keep track of your customer relationships. The best way to do that is with an easy-to-use CRM like Nutshell. With Nutshell, you can easily track all of your interactions with customers, automate customer outreach, and measure performance with reports.
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