Your customer churn rate, also known as customer attrition rate, is the rate at which customers cease doing business with you.
Churn rate and growth rate are the direct opposites of each other. The churn measures the rate at which you lose customers, and the growth rate refers to the rate at which your business acquires new customers.
For your business to succeed, you must have a higher growth rate than churn rate.
So let’s see why knowing your customer churn rate is important, how it can affect your business, how you can determine your churn rate, and give you a couple of tips for reducing it.
Why is it important to know your customer churn rate?
All businesses will experience churn, as you will always have customers leaving for various reasons. However, you want to keep your churn rate as low as possible. Keeping your growth higher than your churn is essential for success.
Keeping on top of your customer churn rate helps you understand any flaws in your business and what strategies improve your business’ performance.
Churn vs retention
A high churn rate can also harm your retention rate. Your retention rate tells you how many customers stay with you over a long period. For this reason, it’s important to keep an eye on your gross retention rate.
Customer retention is extremely important for every business, as the cost of acquiring new customers is more than the cost of retaining your existing customers.
On top of that, long-term customers are more profitable than new ones. In fact, increasing customer retention rates by only 5% increases profits by 25% to 95%.
How a high churn rate can affect your business
A high churn rate can be detrimental to your business, as it can lower your profits and slow down growth. New customers are expensive to acquire compared to the cost of retaining existing customers, so you want to hang onto the ones you’ve already got as much as possible.
Businesses need to look at the churn rate vs growth rate to determine whether there has been growth or loss for that period. Knowing this information will give you a better insight into what steps you need to take to improve performance.
If you’re experiencing a high churn rate, you’ll know that something within your current business model is causing customers to leave. Knowing these figures means you can put your effort into customer retention strategies to decrease your churn rate.
How do you calculate your churn rate?
There are a few different ways to determine your churn rate—but let’s look at the simplest way. You don’t want your analytics to be overly complicated, and by keeping it simple, you can focus on how you can improve.
You can determine your churn rate (Z) by dividing the total number of customers you lost over the period you’re looking at (Y) by the number of customers you had on the first day of that period (X).
Customer churn rate formula: (Y/X) x 100 = Z
So, if you start with 10,000 customers at the start of the month and lose 1000 customers by the end of the month, you would have a monthly churn rate of 10%.
(1,000/10,000) x 100 = 10
How you can reduce customer churn
Identify which customers are at risk
Understanding when customers are leaving is important to understand which customers are at risk. For example, let’s say you’ve recently introduced an introductory promotional offer, and you notice significant churn afterwards.
In this case, it’s clear that newer customers who have taken advantage of an introductory offer are at high risk. You then know you need to take steps to stop these customers from churning.
Listen to customer feedback
Finding out why your customers aren’t happy is the best way to identify flaws in your business. You can fix the problem before they leave.
Reward loyalty
Customer loyalty reward programs are one of the most proven ways to increase retention. Plus, adding a loyalty program to an e-commerce platform can increase average order quantity by 319%.
Final thoughts
You should now have a better understanding of what a customer churn rate is and why it’s important for your business.
Keeping an eye on your churn rate will give you a better idea about what areas of your business you need to improve upon and encourage you to focus on how you can improve customer retention.
Using the method shared here, you can easily determine your customer churn rate and start monitoring your customer churn and take steps to reduce it. Your business’s bottom line will thank you for it!
Resources:
https://www.investopedia.com/terms/c/churnrate.asp
https://www.salesforce.com/resources/articles/how-calculate-customer-churn-and-revenue-churn/
https://www.profitwell.com/customer-churn/calculate-churn-rate
https://hbswk.hbs.edu/archive/the-economics-of-e-loyalty
https://www.incentivesolutions.com/blog/ecommerce-incentives-case-study/
https://www.zendesk.com/blog/customer-churn-rate/
https://clevertap.com/blog/churn-rate/