Customer Churn: Importance, Rate, Prediction & Reduction
Learn the essentials of customer churn from what it is, its importance, the churn rate along with examples, ways to reduce it and predicting customer churn.
Table of contents:
What is customer churn?
Customer churn also known as customer attrition or customer turnover, is a measure of the percentage of customers who have stopped buying a brand's product or service in a given time frame like a quarter or a year. This will help to ascertain the proportion of current customers who are unlikely to purchase a brand's products again.
Why do customers churn?
There are a number of reasons for doing customer churn as it helps ascertain why customers are leaving your brand such as your products are too expensive, level of customer experience (CX) is poor, your competition is better and customers needs are not being met. Plus, it can act as an early warning system for your brand to act to stem the flow of customers leaving.
The following are the top 3 reasons why customers churn:
1. The brand’s products or services are too expensive
If customers cannot see the value of using your products at the price your brand charges, then they will seek out alternative options, where your competitors charge a lower price that appeal to your customers. Also, you need to factor in your target market of the prices they are willing to pay and can afford.
2. Poor customer experience
If customers have had a bad experience at any stage of the customer journey particularly if there are unresolved issues or queries then they will not only likely to take their business elsewhere but also give negative feedback to others affecting perceptions of the brand. Efficiencies in the process need to be improved along with customer service and provide any additional training if required.
3. Products or services are not meeting customer’s needs
It is essential that the products and services are delivering on the needs of your target audience and providing value, otherwise it is too easy for your competitors to take your customers away with a better product. So, product design, processes and staff are all key aspects in delivering this.
Importance of customer churn
The reason why customer churn is important is it costs a lot more to acquire new customers than retaining your existing customer base, where the latter will provide greater profitability as more time and resources are spent targeting new customers through marketing and product development, which carries a larger risk of being unsuccessful. So, predicting customer churn is crucial in order for a business to act. Plus, it can lead to alienating your existing customers, so care needs to be taken.
Along with customer satisfaction (CSAT), customer churn is a good measure of the health of the business in seeing how many customers are leaving and establishing the reasons why that is. This will allow you examine if the current strategies for customer retention and marketing need to change or be improved, so that the customer lifetime value (CLV) can increase.
Customer churn rate
The customer churn rate measures the rate at which customers stop buying products and services from a business over a given time and is normally expressed as a percentage, which can have a knock-on effect on growth and profitability of a business. This could be cancellation or non-renewal of a subscription.
Calculating customer churn
Basically, the way to calculate customer churn is by dividing the number of customers who have churned over a specific period of time by the number of customers who have done business with the brand on the first day of that particular time period.
Note, please make sure to exclude any new customers that have arrived in that period of time, to get the true customer churn rate from the original number of customers at the start of that time period.
This is illustrated in the formulae below.
To make things easy, you can instead use this online calculator from Churnratecalculator.com to calculate customer churn.
What is a good customer churn rate?
The lower the customer churn rate the better, obviously 0% would be perfect but that is not reality. In general, a good customer churn rate is considered to be between 2% to 7% per year but that is dependent on what sector you are in or if your brand is new or established. Also, you need to factor in the higher the customer contract value like 1000 or more per month, the lower the average customer churn rate is likely to be.
Recurly research have compiled churn benchmarks for subscription businesses, which are broken down by industry and other splits.
Customer churn example
An example of customer churn is if an online clothing company had 1000 customers at the start of the month and only had 800 left at the end of the month, you would divide the difference between the two (1000 – 800 = 200) by the total number of customers at the beginning of the month (1000) and multiply that by 100 to give a customer churn rate of 20%.
A real-life example is online streaming giant Netflix as one of many subscription services that use customer churn extensively. Netflix have one of the lowest churn rates in the video streaming business at around 3% with the help of their advanced algorithm monitoring viewers behaviour and making recommendations to keep subscribers engaged.
How to reduce customer churn?
There are solutions to tackle this problem, the following are the top 7 ways to reduce customer churn:
1. Gather feedback and analyse why customer churn is occurring
By running a voice of the customer programme will allow you to gather customer feedback to see what the common issues and pain points that customers face. Therefore, using methods like surveys, social media monitoring, digital analytics, online feedback/reviews and live chat along with contacting customers directly that are leaving will give you an opportunity to analyse and learn the reasons why customer churn is happening in order to develop strategies to tackle this issue.
So, this is not just used when customers are leaving but should be monitored on a regular basis in order to enable your business to see the signs when this is likely to occur but also keeping your customers happy.
2. Incentivise your existing customer base
For those approaching renewals, offer incentives and discounts a couple of months early before their existing deals or subscriptions ends, which are often overlooked by many businesses in favour for new customers. As mentioned, before it’s lot more time consuming and expensive to attract new customers.
Plus, you can contact existing customers with seasonal promotional offers that are exclusive to them including rewards around customers birthdays. This will all help make customers feel they are valued by the brand.
The key is timing whether if you think certain customers are going leave when it comes to the renewal date or disgruntled customers annoyed that the product is not serving their need or want. A special offer for the latter will help you buy some time in order to come up with a solution to the problem.
3. Improve customer service
Having a great customer service will not only help with customer retention but will also aid in making your brand stand out better in the marketplace. Therefore, having customer service staff who are responsive, knowledgeable and motivated in helping to resolve problems or answer queries is vital.
It is crucial that the brand keeps its staff engaged and interested as well as providing the necessary training if needed.
4. Engage and educate customers of the benefits and features of using the brand
By engaging with your customers with support material and content such as product demos, videos, tutorials and online guides, you not only help educate customers of the benefits of using your brand but also stay relevant in helping to retain customers.
You can also have emails, blogs and YouTube videos with the help of influencers to show how your product solves common issues that your target audience face and highlight related topics to keep customers engaged.
Also, social media listening tools are another form of engaging with customers via social media whether that is positive or negative feedback, it’s your chance to only track common themes but also to openly respond directly with customers.
5. Enhance the on-boarding process of new customers
If new customers are having difficulty in using your products, they are likely to be disgruntled and will eventually look elsewhere, so having a smooth on-boarding process is essential.
Your brand should be in control of the on-boarding process for new customers, meaning the process should be broken down into stages where your brand can slowly feed customers with new information about setup, features and functions to use.
This will allow customers to feel more comfortable with the product at each stage rather than feeling overwhelmed and confused and keeps you in control of the situation. Plus, it should be easy to navigate in case customers need to go back a stage.
6. Develop a community for customers
Building an online community around customers and your business helps to improve customer loyalty even if things go wrong as customers can ask other members of the community how they resolve a problem or share tips and tricks.
Your brand can manage this online community via engagement in sharing knowledge and answering queries, organise events, asking for suggestions, ask customer feedback questions and share exclusive marketing promotions.
7. Customer relationship management of your most valuable customers
In establishing and focusing in on your most valuable customers and employing customer relationship managers to take care of them helps to retain customers that your business values the most.
This targeted approach will allow for your customer relationship team to be the direct line of contact for these particular customers to deal with for their queries or issues rather than waiting in line to speak to a regular customer service representative.
Predicting customer churn
Predicting customer churn is highlighting those customers who have a high propensity to leave whether that is moving onto another brand or cancelling a subscription based on key behavioural indicators that have been established via the information and feedback gathered from your voice of the customer programme.
The data can then be run through algorithms or modelling programs to predict which behavioural traits are key indicators for customers to leave a brand. There are business applications with machine learning capabilities to automatically do this for you once integrated into your business.
In being able to predict which customers are most likely to leave will help reduce the chance of lost investment from customers leaving and improve your bottom line as you can take action early on to help prevent it from happening by developing retention strategies and boosting operational practices. Therefore, you can engage with these customers earlier to address their issues, pain points and offer special discounts if required.
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