Today, customer churn is a concern for most businesses at one point or another. Understanding it and implementing the right strategies to reduce customer churn is key for future growth.
Every year, companies lose an average of 10% of their customers.
While the number of customers fluctuates in all business sectors, companies offering long-term services with subscription payments, such as SaaS software publishers or telecom operators, are the most affected.
But, how do you calculate customer churn? How should it be interpreted? And how can it be reduced?
Discover all of our tips and recommended tools on customer churn to improve your marketing strategy!
What is customer churn?
Customer churn, also known as customer attrition, is the loss of customers or clients.
To measure customer churn, it is recommended to use a customer churn rate which is a marketing indicator used to get the percentage of customers or subscribers that have stopped using your product or service over a given period.
Measuring customer churn is a fundamental step in analysing your company's ability to retain customers. And, it will give you information about the general health of your business and the match between market expectations and the features of your product or service.
Voluntary and involuntary customer churn
When calculating your customer churn rate, it is important to distinguish customers who leave you by choice and those who leave by force.
Customer churn is voluntary when the customer decides to stop purchasing your product or service. This may be because he no longer has a need for it or he decided to purchase it from a competitor.
Customer churn can also be involuntary. This is when customers leave due to factors beyond your control (e.g., they go out of business).
Why should you measure customer churn?
To understand why customers leave
Customer churn is useful for companies that offer products or services in the form of a subscription (with recurring payment) such as telecom providers or SaaS publishers.
Customer retention is a key issue for them because they are faced with the highest churn rates among all industries.
Today, the leading causes of customer churn are:
1. Poor onboarding
During an onboarding, customers interact with your team and this is where you can make the first positive impact.
They pay for your product or service because they want it to solve a problem for them. If you take too long to show results, they might look for a better alternative.
2. Weak relationship building
It is important to maintain a healthy relationship with your customers. The key is to show them that you are listening to their needs and that you are constantly providing bespoke solutions to solve their problems.
If you do not take care of your customers, someone else will.
3. Poor customer service
To prevent this from becoming a deal-breaker, and driving your customers away from your service, you need to offer fast, responsive customer support.
To define a strategy
Relying on a Key Performance Indicator is helpful, but not sufficient. If you collect data, it is mainly to monitor its evolution. Evaluating your company's churn rate will allow you to identify the reasons why customers switch to the competition.
It is by measuring that you learn... and take the lead!
Moreover, by identifying customer churn, you will be able to detect possible weaknesses and find correct actions to implement to improve your solution.
To focus on customer retention
The customer churn rate also indicates the extent to which the volatility of your customer base affects your sales.
Since the cost of acquiring a new customer is higher than the cost of retaining one, it may be more worthwhile to focus on customer retention to secure your revenue in the long term.
Therefore, a loyal customer should be an asset that you take advantage of since he is likely to purchase more and recommend your brand to others.
How do you calculate a customer churn rate?
Customer churn rate formula
First, quantify the following information:
- the number of customers lost during a given period
- the number of customers at the beginning of the given period
Then, divide the number of customers lost by the total number of clients over a given period and then multiply by 100 to get a percentage:
Here is an example:
To calculate the churn rate for a company that had 650 customers at the beginning of the month and 600 customers at the end of the month, the churn rate formula would be:
- Number of customers lost: 650 – 600 = 50 customers
- Number of customers at the beginning of the period: 650
- Churn rate formula: 50/650 = .0769 or 7.7%
Gathering this data can be more complex when you are selling a product or service that does not involve repeat purchases or subscriptions. Indeed, it is easier to obtain the number of people that have terminated a contract than it is to identify those who repeat purchase.
How to understand your churn rate
It is generally recommended to not have a churn rate of more than 10%. However, this number depends on your product or service and your industry, and it can be much higher for some companies, without being a potential danger.
You can adjust it, by modifying the way it is calculated. Indeed, not all customers have the same value for the company. It is therefore important to segment your customer base and to adapt both the actions taken and the analysis of the indicators.
Other Key Performance Indicators
Calculating a customer churn rate gives you an idea of the number of customers that you have lost over a specific period. However, this rate is not sufficient to monitor the performance of your company. It is recommended to use other types of Key Performance Indicators as well.
Here are some of the best Key Performance Indicators you can use:
The retention rate
The retention rate, which is a counterpart to the churn rate, measures the number of clients kept over a given period. It is calculated as follows:
Therefore, if a company has a 20% churn rate it will have an 80% retention rate.
ARPA and Customer Lifetime Value (CLV)
ARPA is the Average Revenue Per Account (of customers) for a defined period.
This represents how much a customer spends on average during a given month.
For monthly ARPA, divide the revenue generated from monthly subscriptions by the number of monthly customers.
On the other hand, Customer Lifetime Value (CLV) is an estimate of the average gross revenue that a customer will generate before they churn (cancel).
By calculating your CLV, you can set a marketing budget for customer acquisition. Moreover, you can adjust the way how you calculate your Customer Lifetime Value by using formulas based on different segments, such as marketing profiles, geographical areas, and so on.
Net Promoter Score (NPS)
This indicator measures the likelihood of your customers recommending your company, service or product to a friend, and the degree of their attachment to the brand.
By using a Net Promoter Score, you will identify:
- Promoters (score 9-10), loyal customers who will keep buying and referring the brand to others
- Passives (score 7-8), satisfied customers who are vulnerable to leave if there is a better offer from a competitor
- Detractors (score 0-6), unhappy customers who can damage your brand through negative word-of-mouth
It is not recommended to use colours on your NPS as it may bias the answers.
How can you reduce customer churn?
With a general upward trend in recent years, it is becoming necessary to implement marketing campaigns to improve retention strategies and counter customer churn.
The purpose of a business is to get and keep a customer
Adopting or reinforcing a customer-centric approach may be one of the best techniques to promote customer retention. Therefore, you should focus on improving customer experience to increase customer satisfaction and loyalty.
Here are 4 steps to reduce customer churn:
Step 1: segment your customer base
To analyze your customer churn more accurately, segment your customer base and identify the most profitable customers. You will then be able to take actions adapted to different groups of customers that have similar expectations or characteristics (budget, habits, channels used...), to increase their satisfaction.
Customer Relationship Management (CRM) software is the perfect tool to do this with. It allows you to segment your customer base, develop marketing or persona profiles, and follow the entire customer life cycle, from prospect to loyal customer.
By using this type of software, you will be able to pinpoint drivers that encourage different customer profiles to stay with you or switch to the competition.
Step 2: collect consumer data
There are several types of relevant data that you can collect, this includes:
- customer engagement
- psychography (opinions, interests, etc.)
- interactions with the brand in a given environment and on the communication channels used (chatbots, social media, hotline, etc.)
This data can be analysed to have a better understanding of the expectations and purchasing behaviours of your targets.
Likewise, it is possible to directly ask for their opinion, with surveys and questionnaires, by using tools such as Qualtrics.
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Step 3: improve your response time
Offering customers the opportunity to easily interact with your brand has proven to be a source of customer satisfaction. A company that is reactive and proactive in delivering information or solving problems builds a relationship of trust with its customers.
Customers are very sensitive to the quality of their interactions with a brand. Improving your response time limits the number of unsatisfied customers that could spread negative impressions about you to others.
Moreover, a customer engagement platform such as RingCentral Engage Digital is ideal to improve the management of your digital communications, and not miss any opportunity to answer a customer or prospect.
This solution is perfect for telecom companies since there is a high churn rate in that industry, sometimes as high as 30%. By using RingCentral Engage, you can cover all digital channels and improve customer service by answering your customers, wherever they are.
Step 4: personalise the customer journey
Reinforcing customer relations requires personalised features and messages. To do this, you can create workflows adapted to your targets by following each step of the conversion funnel.
With a CRM or marketing automation solution, you can set up different automated scenarios, focusing on each of the key moments of the customer's purchasing journey to ensure you send the right message to the right target at the right time.
You will guide your prospects or customers throughout all of the steps of their customer journey and increase their loyalty by offering them exactly what they need.
Reward your loyal customers!
To reduce customer churn, the main challenge for marketers is to retain customers and develop loyalty. Acquiring customers is not enough: once the link is created, it must be nurtured.
You can use the churn rate to measure customer satisfaction with your brand, measure the impact of your acquisition strategies, but also define or reinforce your retention campaigns.
Identify the reasons for customer attrition, understand the possible points of friction at each stage of the funnel, and design your loyalty programs with this information in mind.
Finally, track your metrics to study the impact of your marketing actions and observe the evolution of the attrition rate over time. This will allow you to gain insights to improve your marketing campaigns for customer acquisition, retention, and loyalty.
Now that we have provided you with all of the right tools to reduce your customer churn, what will be your first step towards customer retention?