As a business owner, one of the key things you can do to improve your company is to keep track of customer churn. Churn analysis helps you identify why customers are leaving and what steps you can take to prevent it. In this blog post, we’ll show you how to predict and analyze customer churn so that your business can stay ahead of the competition.
Churn Analysis: Why Customers Stop Doing Business with a Company
Churn analysis is the process of investigating the reasons why customers stop doing business with a company. This type of analysis is important for businesses to understand to keep their customers happy and avoid losing business in the future.
Measuring customer turnover, or client loss, is the method of determining how many customers of a company stop buying their goods or services.
A churn analysis tells you what percentage of your customers do not return, compared to those who come back.
By digging into your numbers, you can uncover trends and patterns that can help you avoid failures or take your already successful business to new heights.
There are several ways that businesses can measure their customer churn.
One method involves calculating KPIs over different time periods and comparing those trends.
Another way is to measure the results of customers who leave and compare them against KPIs that are crucial to the company’s bottom line.
By understanding the reasons why some—or all—customers don’t purchase more products or services, companies can gain insight into what they need to do to succeed.
Analyzing why your customers are or aren’t purchasing more goods and services is vital to your success. This starts with understanding which of your clients are going somewhere else.
When you analyze customer churn, you can identify commonalities among customers who have left your company. This allows you to improve your business and avoid losing more customers in the future.
When is Customer Churn Acceptable?
Nobody likes to lose customers, but it’s an unavoidable aspect of a business. If your company experiences unusually high levels of customer turnover, however, it could indicate a problem. This could be an issue with your prices, the quality of your product, your customer service, your delivery times, or something else.
If this is true, you should address the problem immediately to retain more of your current customers and prevent them from leaving.
Customer Churn Analysis Example
Understanding customer attrition is understanding the number of customers who have stopped purchasing your products or services.
For example, you have 1,000 customers on January 1 but only 800 renewed the following year. Your company’s churn rate would then be 20%.
If each customer brings in $10 per month, then churned customers cost the business $2,000 per month and reduced profits from $10,000 to $8,000.
Companies that survive 20% monthly customer turnover do so by maintaining high margins and by acquiring customers at an efficient rate.
The streaming video market is an interesting one, where companies like Netflix and Hulu are direct rivals. According to market research, Netflix has lost about 9% of its subscribers over the past year, while 50% of Hulu’s customers left during the same period.
If Hulu could cut its customer turnover by a few points, it could become a lot more competitive.
How to Conduct Churn Analysis
To perform a customer churn analysis, you’ll first need to collect your customer’s information into a database. Then, you can use Excel or another spreadsheet application to analyze the data.
You can improve the accuracy of your customer retention analysis by importing data from your ERP system. This will provide important metrics such as your churn rate and rate of renewals, which will give you valuable insight into your customer base.
Break down your customer data by specific products, regions, or customer segments. This can help you identify where and why you’re losing your customers.
That’ll give you insight into where and why your customers are leaving.
Let’s say you have a chain of salons with an average of 5% churn. If one of your salons has 10% or more customer turnover, you know that something’s wrong.
When looking at which of your SaaS applications have the most customers leaving, you’ll want to take a good look at which of your apps need the most work. This could be an indication that the features or design of the application itself need some tweaking, or that the price or packaging should be changed. By taking a look at the data, you can make changes that will help keep more people using your service.
When you successfully resolve customer issues, you should see a corresponding decline in your customer churn rate.
How to Calculate Customer Churn
To calculate customer churn, you will need the following information:
- Number of customers at the beginning of the period
- Number of customers at the end of the period
To calculate the customer churn rate:
Churn Rate = Number of Lost or Cancelled Customers / Ending Total Customer Count
Let’s use an example of subscription businesses. If a business has 100,000 customers in 2021 and 120,000 in 2022, that’s an increase of 20,000.
The company’s 20% growth rate is impressive and indicates that they are doing something well.
If a company lost 40,000 customers and grew only due to increased spending on customer acquisition, that indicates a problem that can be addressed through customer churn analysis. This type of analysis can be very useful for managers and executives to identify and solve problems within the company.
In this case, the churn rate is:
40,000 lost customers divided by 120,000 end customer count = 33%
If the company had reduced its rate of losing customers by 50%, its end-of-year profits would have looked even healthier.
Why Is Churn Analysis Important?
It’s important to keep existing customers happy because the cost of acquiring new customers is much higher than selling more to existing ones.
The importance of customer churn analysis cannot be understated — it can make or break a SaaS business. By retaining customers, businesses see an increase in average customer lifetime value. This makes future sales more valuable and improves unit margins.
The best use of a company’s time and resources is to focus on increasing its monthly or yearly subscriptions rather than focusing on acquiring new customers.
Keeping customers happy for many years is a great way to weather any financial difficulties you may have.
The 33% churn rate in our previous example could still be in line with industry standards, or it could be much higher or much lower.
It’s important to benchmark your company’s churn rate against others in your industry, as this will give you a good indication of how well you are performing. This data is usually available through public sources or trade organizations.
By tracking your metrics over time, you can identify any negative trends early and take steps to address them.
When to Analyze Churn
While your ERP system may be calculating your customer attrition rate daily, doing formal analyses on your customers’ loyalty too frequently can obscure the improvements you’re making.
It’s better to keep an eye on your customer attrition rates on a continual, recurring schedule. Most companies tend to look at their retention numbers every month or every quarter. Larger companies may have financial analysts perform regular, more intensive analyses of their customer retention figures.
For instance, a company that has three major products might choose to refresh their customer attrition data every quarter, or they could cycle through each product line.
How to Detect Customer Churn
It’s crucial to keep track of every subscriber who decides to cancel, leave, or opt out of your services. By keeping track of these customers, you can better identify any patterns or trends that may lead to future cancellations.
You can use a technique known as Cohort Analysis to determine your retention rate, which can also reveal your rate of customer loss.
First, figure out which of your customers are most likely to leave you.
To figure out what’s causing your customers to leave, send out a survey. Then, use personalized outreach to them to try and keep them from leaving you.
Benefits of Analyzing Customer Churn
Why waste your time on projects that offer little benefit when you can spend that time on activities that actually matter? Here’s a quick overview of the benefits of measuring and tracking your customer attrition rate.
A successful business makes money by selling its products and services. The goal of a customer retention strategy is to lower the number of customers who leave.
If customers stick around for longer, you’ll see your revenue go up and your profit follow suit.
Improve Customer Experience
One of the most common reasons for losing customers to competitors is a mistake that could have been avoided, such as sending them the incorrect item. Learning why your customers leave will help you better understand their priorities and your own strengths and weaknesses.
Customer experience, or CX, is a customer’s perception of their interaction with a business.
Your company’s reputation is heavily influenced by the customer journey, from initial touch points to after-sales care. This has a knock-on effect on your entire business, from sales to marketing to customer service. That’s why providing a good customer service experience at every stage of the customer journey is incredibly important.
Optimize Products and Services
If customers leave because of a specific problem with your product or service, you now have an opportunity to improve. If customers are unhappy with your delivery methods, you also have the opportunity to make changes that will keep them coming back.
If you act on the feedback you receive from customers who are leaving, you can improve your products and services. This will lead to decreased customer churn and more growth for your business in the future.
Increase Customer Retention
The opposite of churn is customer retention, or the ability of a business to continue generating income from its customers.
Strong customer retention is key to a business’s success. By retaining existing clients, businesses can increase profitability and maximize lifetime value.
If you sell a service that costs $1,000 per month, you can increase your revenue by $3,000 per customer by keeping them for just three additional months.
The scale, and amount (of money), vary by industry, but the principle is consistent: repeat custom is lucrative.
Here are examples of how customers leave for different types of businesses.
Example: Midsize Business
Company ABC sells subscriptions for $50 per month. It has 20,000 subscribers and rakes in $1 million in revenue every month.
Over the past 12 months, the company lost 1,000 customers.
The annual churn rate is:
1,000 / 20,000 = 5%.
Example: Large B2B Company
A toy company sells pool toys in 700,000 stores. It added 15,000 new distributors last month but lost 9,000.
The monthly churn rate would be:
9,000 / 700,000 = 1.3%.
How to Predict and Analyze Customer Churn With Software
As your company continues to grow, it will become increasingly difficult to track and analyze your customer attrition rates. It’s important to continue tracking these metrics, however, so you can spot any potential problems early on.
ERP software can help your company predict and analyze customer churn from various perspectives. This information can then be used to forecast future churn rates and plan accordingly.
A solid customer attrition rate calculation will help you predict your future cash flow, help you create a staffing plan, and allow you to make other critical decisions.
Don’t neglect customer churn analysis or you may miss easy opportunities to improve your monthly revenue.
When you successfully use a customer attrition strategy, you should find yourself on the road to profitability.
Customer churn is a huge problem for businesses, but by understanding and analyzing it, you can take steps to prevent it. Churn analysis is the key to success for any business looking to improve its bottom line. Thanks for reading!