What is customer churn and customer churn rate?
Customer churn or customer attrition is the phenomenon where customers of a business no longer purchase or interact with the business. A high churn means that higher number of customers no longer want to purchase goods and services from the business.
Customer churn rate or customer attrition rate is the mathematical calculation of the percentage of customers who are not likely to make another purchase from a business.
Importance of predicting customer churn
The ability to be able to predict that a certain customer is at a very high risk of churning, while there is still some time to do something significant about it, itself represents a great additional potential revenue source for any business.
It’s a fact acquiring new customers is a costly affair but losing the existing customers will cost even more for the business or the organization. As existing paying customers are usually returning customers who if happy will purchase repeatedly from your brand.
Customer churn rate calculation
In the simplest form, customer churn rate is the number of customers you have lost divided by the total number of customers. To have an estimate you can segment your customers on the basis of the frequency of their purchase.
The application of this formula for one iteration is simple, however, it is more complicated when you have to calculate customer churn over multiple time periods.
For example in the first year, the number of customers lost is 5 and the total number of customers is 100 then for the first year your churn rate is 5/100*100= 5%.
However, even with a constant customer churn rate, revenue loss is incremental in nature.
Customer churn calculation example
For example, if you acquire 10 customers every year who purchase $100 worth of goods and service, over 3 years at 0% churn rate, you will be making ($100 X 10) + ($100 X 20) + ($100 X 30) = $6000.
However, things get more complicated when churn rate kicks in. Now let’s take an average business churn rate of 30% and suddenly you have ($100 X 10) + ($100 X 17) + ($100 X 21.1) = $4810.
In other words, the churn cost the business $ 1,190, which over 3 years costs the company about 20% of overall revenue. This lost revenue due to customer churn is called revenue churn.
Most businesses spend a significant sum of money in acquiring new customers but very less focus goes into ensuring that customers continue to make repeat purchases. Some experts even suggest that more focus needs to go into higher customer retention and lower churn rate as a business grows.
Moreover, higher churn has a visibly negative impact on a business for the following reasons as well:
- Cost of acquiring new customers is significantly higher than retention costs.
- The rate of selling to an existing customer is at an average 60% higher than selling to a customer who is not familiar with your brand.
- Existing customers, when satisfied are an excellent source for brand promotions through the organic spread of “word of mouth”. In other words, they become your brand promoters and recommend your brand to others, thereby increasing your overall customer base without you having to spend more on customer acquisition.
So for any business to make incremental profits, it is critically important to have a low churn and high customer satisfaction rate.
Customer Churn Analysis
Now that we have a good understanding of what customer churn is, the next obvious step is to analyze it. There are two reasons for this:
1. Before you want to find solutions to improve your churn rate you should know what is causing it in the first place.
2. If you have implemented a solution to reduce the churn then you should know if its working or not.
There are many ways to track and analyze churn, here we will focus on two methods: cohort report, and churn by customer behavior.
1. Cohort Report: A cohort report analyzes units of your customers and their churn rate over the time. A cohort is a unit or a segment of customers who purchased from your brand in a certain time frame. A common cohort that can be used is customers who made purchases in a particular month, for example, your January 2018 cohort will be the customers who closed that month.
There are two major advantages of a cohort report: it produces clean numbers, not influenced by new customer acquisition and the second major benefit is that it helps you identify a pattern in the customer churn.
2. Churn by behavior: In addition to analyzing churn by the cohort report, you can also analyze churn by observing the customer behavior. What this means is you need to observe a certain customer behavior pattern of using certain features or complete a certain purchase action and determine its impact on the churn.
This method has advantages like:
- Businesses may decide to focus on products and features that need improvement to reduce customer churn.
- Brands can also focus on making the already existing features better that retain the customers.
How to reduce customer churn using 6 simple ways
1. Track your Net Promoter Score: Net Promoter Score not only helps you identify your loyal customers(Promoters) but also the dissatisfied ones (Detractors). You can reduce your churn by tracking your NPS score.
2. Target the right audience: It is important for a business or a brand to know who their target audience is. Selling the right products to the right person is the key to strategic selling and profit making. Brands and customers are like a jigsaw puzzle, there is a right fit for everyone.
3. Ask your customers the right questions: Customer is the king and rightly said. For a business, it is extremely important to know if their customers are satisfied with their products or services. The easiest way to know that takes a quick customer satisfaction feedback. Ask your customers the right questions to get the right feedback, that will ultimately help you make informed decision/ timely changes (if needed) thereby reducing the number of dissatisfied customers.
4. Keep your loyal customers happy: Give your loyal customers reasons to stick around with your brand. Loyal customers not only buy regularly from you but also suggest their family, friends and business associates to you. Offer loyalty or reward points, birthday/anniversary discounts rewards points that can be redeemed etc.
5. Offer more than usual to your loyal customers: Offer them with long-term discounts. A long-term discount or contract should benefit both, the business and the customer. A leading footwear offers a lifetime exchange offer on their shoes provided the shoes are still in good condition. Who would want to miss such an offer?
6. Provide an exceptional customer service: Make it impossible for your customers to go to your competitors. Customer service is the key to customer loyalty. If a brand provides exceptional customer service there are fewer chances of churn. Be better than your competitors. You don’t just sell a product, make sure you add value to it too!