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Knowing what churn means and how matters to your business is critical if you want to grow your business profitably. Countless big companies have gone out of business because they didn’t place enough focus on fixing customer churn.
To show how lethal churn can be to a company, a low churn rate of 2% per month can quickly add up. For example, if a company has $50 million annual recurring revenue, a monthly 2% churn rate means losing $12 million in revenue a year. That’s a lot of money just walking out the door considering a 2% churn rate is viewed to be on the low end of the spectrum.
Churn and Churn Rate
Churn is simply described as how many customers stop buying from your company over a given period of time. For many industries, churn is a key performance indicator (KPI) metric which is closely monitored because it is a key indicator of how well the company is performing in terms of profitability.
Industries like Software as a Service (SaaS), subscription-based services like media and some e-commerce, banks, and telecom that have recurring revenue models–where customers pay for services and products on an annual or monthly basis–all use churn as a KPI. As more companies move from a traditional one-time-purchase model to a recurring revenue model, churn will become a KPI of significant importance to more businesses.
Here’s a simple way to calculate churn rate:
- Choose the time period (month or annual).
- Determine the number of customers acquired during this period.
- Determine the number of churned customers during this period.
- Divide the number of churned customers by the number of new customers.
- Multiply by 100%.
Here’s those steps in a mathematical expression:
The higher the churn rate, the less profitable a company is. Companies with a high churn rate (over 5%) spend more time, effort and money to grow the company. This is why companies with higher churn rates are less profitable.
A good overall churn rate is 2% or less.
Why Should You Care About Customer Churn
1. Rising customer acquisition costs.
Acquiring a new customer is 6-7 times more expensive than keeping a current customer. The probability of selling more products and services to a current customer is 60—70% more likely than selling any product or service to a new customer. This is because your current customers know, like and trust your business while new customers haven’t yet decided how they feel about your business.
As customer acquisition costs continue to rise, it means that it costs more to acquire one new customer today than it did just a couple of years ago. To keep profits in check, many companies put a spending cap on how much money can be spent to acquire a new customer because acquiring a new customer is so expensive.
It makes economic sense, therefore, to focus on the customers you’ve worked so hard to acquire.
Many companies consider a 5% churn rate as a relatively good churn rate. However, they’re wrong. At a 5% churn rate, companies are losing 50% of their customer base each year.
Not only are they losing 50% of the customers they worked so hard to acquire, they’ve also lost all the time and effort needed to acquire and convert those same people into customers.
Lastly, they now have to work 4x as hard if they want to grow their company while they replace those customers. To replace those churned customers and still grow the company, they need to:
- acquire new customers to replace the ones they lost
- replace the exact amount of revenue lost when those customers churned
- acquire brand new customers to add to their overall customer count
- add those newly acquired customers to their monthly recurring revenue count
When viewed through this perspective—a 50% customer loss per year + 4x work in overcoming and growing the company—suddenly makes a 5% churn rate look not so acceptable.
2. It’s hard to get funding.
Nearly all investment firms or venture capitalists use churn as a KPI in the evaluation of a company. As companies grow, churn becomes an even more important metric as it’s directly related to the profitability of a company.
Investment firms look at different metrics to determine whether to invest in a company to help it grow faster. If a company has a low churn rate, it is likely to be more profitable. As seen in the example in the previous section, the higher the churn rate, the more expensive it is to grow the company.
Investors are looking for companies which have both high growth potential and high profitability. As illustrated by Jonathan Hsu, formerly of Social Capital Investing, investors prefer companies that have less active users and lower churn than a company that has more active users and high churn.
3. It’s harder to keep customers satisfied.
A company experiencing high churn means that their customers are unhappy. Customers are showing this unhappiness by stopping business with the company. More than ever, customers have choices when it comes to buying.
Customers no longer have to put up with poor products, service or bad customer experiences. With so many companies on the market offering similar products, it’s easy to switch from one company to another.
Customers switch. And they switch often.
According to one report, 63% of customers will switch to another company after having one bad customer experience.
With the rising cost of acquiring a new customer and the ability for customers to switch to a competitor so easily, it makes sense to focus on making your customer’s experiences the best they can be so that your customers choose to stay.
4. Stunted business growth.
Simply put, if churn is not managed, a business will experience stagnated net customer growth. If you just manage to replace all the customers you lose each month or year, the business will become what investors call a “Zombie company”. Zombie companies never really die. They just keep staying the same, spending a lot of time, effort and investor’s money. It’s effectively like putting them on never-ending life support.
No one wants to work so hard just to stand still.
3 Easy Ways to Reduce Customer Churn
1. Provide the best to all your customers.
With the power to easily switch to a competitor, customers are demanding better products, services and experiences.
And they should.
Gone are the days when customers had to put up with long wait times for service and sub-par products and services.
Your customers deserve the best your company has to offer. This means the best products, services and experiences.
The most obvious place to start reducing churn is when the customer becomes a customer. Guide them in getting to their goal as simply and easily as possible. This means creating guided walkthroughs of your platform, how-to videos answering common questions, or having a customer support representative contact them via email or phone to help them in those early days.
You need to determine the best way to help your new customers get up and going with their new purchases quickly and easily. Many customers are excited when they purchase but quickly churn when they cannot easily find answers to their questions or obtain a goal they were seeking.
Talk to some of your new customers—by video chat or by phone—to find out what they found easy about the onboarding process and what they found challenging. Then use what you learn to make changes in your onboarding so that it becomes a better experience.
2. Keep track of customer churn.
This seems obvious but many companies don’t track their churn. This article described a simple churn metric. But churn—both calculating it and reducing it–is very complex. For the sake of simplicity, track your churn by your different customer segments, like new users and longer-term customers. What you’ll find is that churn varies according to your different customer groups.
Having different churn rates will allow you to see which customer segments have the greatest opportunity to reduce churn. Focus on reducing churn for that group first. It will help get momentum going to reduce churn in other customer segments.
3. Find out what they really want.
The best way to reduce churn is to find out what your customers really want and need. And the best way to do this is to ask them.
Surveys, focus groups, and one-on-one interviews are the best way to find out exactly what your customers want, all in their own words. Ask questions around the product or service and about their overall customer experience. Find out what they like and what they don’t like. Ask them what it would take for them to fall in love with your company. You’ll discover nearly every time that it has nothing to do with how much your products or services cost.
Your customers will give you all the answers you need so you can make the changes to lower churn.
Churn is the Achille’s heel of any business. No matter how quickly a company grows, customers will churn. And the more they churn, the less profitable a business becomes.
Reducing churn takes work. Sometimes a lot of work.
But if you seek to give the best customer experience, and the best products and services, your churn will come down. Speak to your customers about what they want and need from your company. They will give you all the answers about what needs to be done to improve their experience with your company. And If you take what you’ve learned from your customers and make changes to improve your products, services and customer experiences, your churn will come down.