If you’re a business owner, then you know that customer churn can be a big problem. But what is customer churn exactly? And more importantly, how can you fix it?
Customer churn occurs when customers or clients stop doing business with your company. This can happen for a variety of reasons, such as poor service, high prices, or simply because they found a better option elsewhere. Whatever the reason may be, customer churn is costly for businesses and should be avoided if possible.
So what is customer churn and how can you stop clients from leaving? The first step is to identify why customers are canceling in the first place. Once you know the root cause of the problem, you can take steps to fix it. For example, if customers are leaving because of poor service quality, then improving your training and procedures may help retain them in the long run. If price is an issue, then consider running promotions or discounts to entice them to stay. No matter what the solution may be, it’s important to act quickly and efficiently so that your business doesn’t suffer from too much turnover.
What Is Customer Churn?
Customer churn is the percentage of customers who stop doing business with a company during a given period. Churn is also known as customer attrition.
For SaaS businesses, churn is the rate of customers who stop subscribing to your service.
You can measure this rate of client loss by determining how many of your clients you lost during a certain period (month, quarter, year) and dividing that number by the number of clients you had in that timeframe.
If you started with 400 customers and ended with 380, your rate of customer churn is 5% because you lost 5% of your customers during that period.
Your company is losing customers to competitors left and right. To prevent this from happening, you have to stay on top of your churn rate.
Customer churn is a metric that businesses use to measure financial health. It’s not always the happiest number to look at, but it can give your company an honest assessment of how well you’re holding onto customers.
You might strive for 100% customer retention, but that’s not always realistic. Instead, focus on reducing your customer churn rate over time.
Why Is Customer Churn Rate Important?
A churn rate of 5% may seem low, but losing even 1 customer is too much.
Customer retention is important because it can greatly increase your profits. Even a 5% increase can lead to a 25% boost in revenue.
Returning customers are 67% more likely to spend more money on your products and services. This means less money spent on acquiring a new customer.
Don’t waste your time and resources trying to convince existing customers to choose you over your competitors. They’ve already made up their mind.
A 5% monthly customer turnover is still considered healthy. You can make plenty of money with that level of attrition.
By dropping your rate of customer attrition from 3% to 2.7%, you could potentially add $100,000 in additional annual revenue to your organization. This may not sound like much, but it could make a big difference to your bottom line.
There are several ways you can reduce the rate at which your customers leave your business.
1. Focus on Your Best Customers.
Focusing on your most loyal and profitable customers can be much more beneficial than offering incentives to those considering churning. By pooling your resources, you can better support your best customers and keep them coming back.
2. Analyze Churn as It Happens.
Analyzing when and why your customers are churning can help you identify potential issues before they happen.
3. Show Genuine Care for Your Customers.
If you want your customers to stay with you, you need to show that you value them. Rather than waiting for customers to come to you, reach out to them.
Let them know about all the benefits you have to offer, and that you care about their experience with your company. With this method, they’ll be sure to stay.
Why Does Churn Matter?
Churn is a critical metric for SaaS businesses because it directly impacts the bottom line. Customer acquisition costs are typically high for subscription software companies.
So expensive, that vendors often don’t recover their customer acquisition cost until a few years into the contract.
Churn is a measure of how many customers cancel their subscriptions or stop using the product within a given period. A high churn rate means that the company is losing customers at a rapid pace, which is not sustainable in the long run.
Product analytics can help companies identify which customers are at risk of churning before it actually happens.
If a customer’s usage of your software drops, use proactive outreach to find out why.
How to Calculate Customer Churn Rate
You can calculate your churn rate using any of the following methods:
- Total number of customers lost during a specific period
- Percentage of customers lost during a specific period
- Recurring business value lost
- Percentage of recurring value lost
Let’s take a look at these examples.
You can calculate churn based on the number of starting subscribers you have.
You can also calculate churn based on the number of subscribers you have at the end of the period.
Calculating your customer retention rate is another way to measure your customer loyalty. Some businesses use a monthly recurring revenue (MRR) stream as a benchmark.
Now, let’s learn how to calculate your customer retention rate with MRR.
Company ABC had a $500,000 MRR at the start of the month and $450,000 by Day 30. Now, let’s say that $65,000 came from existing customers who upgraded to a higher subscription level.
The calculation of your churn rate is:
The company still made money despite losing $50,000 in MRR. This is called a negative churn.
Customer retention is incredibly important, and while there’s no magic formula, there are some things you can do to keep your current clients happy and reduce your rate of client turnover.
What Is a Good Customer Churn Rate?
In a perfect world, there would be no customer complaints, dogs and cats would live together in absolute harmony, and no one would post “Game Of Thrones” spoiler alerts on social media.
Sadly, no matter how good your customer service is or how great your products may be, you will inevitably lose some clients.
Just because your churning rate is high doesn’t mean it’s necessarily bad. But, what is an acceptable or “good” rate of customer turnover?
That depends on your business.
Some businesses have a higher rate of customer turnover than others.
It can be hard to find accurate data on the average rate of customers lost by different industries because many companies don’t share this information. This makes it tough to get a sense of how frequently customers are leaving certain industries and makes it difficult to compare different markets.
Customer Churn Rates by Industry
Here are average customer churn rates for a few popular businesses:
- Credit card companies: 20%
- Telcos: 0.84%
- Software-as-a-Service (SaaS) companies: 5% to 7%
- Retail banks: 20% to 25%
- Newspaper subscriptions: 58%
Churn rates that are low for some businesses may be high for others. Why?
Because not all businesses have the same business model, even companies that operate in the same industry might have different definitions of what “churn” means.
How long do your subscribers have to stay subscribed to your service?
The length of time it takes to recoup the cost of customer acquisition depends on the length of their contact. It’s more difficult to turn a profit with a shorter-term agreement.
How many new clients does your company acquire on average per month? This number is a good starting point for determining your expected customer turnover rate.
6 Ways to Reduce Customer Churn
Now that you’ve determined an acceptable rate of customer turnover, how do you lower it? By providing exceptional customer service from the start.
1. Make a Great First Impression
Don’t scare away your customers from doing business with you by blowing them away with your first interaction.
The first five minutes of your interaction with a new customer are important.
If a customer sees results immediately after using a product or service, they are much less likely to seek out opportunities to cancel their subscription or membership. This is because they believe that continued use will lead to even more success.
Therefore, businesses must provide an excellent first experience to reduce the chances of customers churning later on.
The stronger a customer’s commitment and buy-in are from the beginning, the less likely they are to churn later on. Creating a great first experience is key to keeping customers engaged.
2. Consistently Exceed Customers’ Expectations
If you don’t deliver on your promises, you’ll lose customers quickly. Many customer service agents have reported that dissatisfied and unfulfilled expectations are some of the major reasons for customer attrition.
It’s not just about first impressions – you have to constantly be meeting and exceeding your customer’s expectations.
It’s common to think that you exceed customer expectations once they’re using your product, but it actually starts much sooner than that – namely, with your sales reps during that first phone call.
Your sales team is the first point of contact for your potential customers, so it’s important to set the right tone from the beginning.
Don’t let your reps make promises that you can’t keep or oversell your business just to meet their monthly quota. This will make it very difficult to meet (let alone exceed) your customers’ expectations.
Always be upfront with your clients about what you expect from them, and follow through on your promises.
3. Provide Awesome Customer Service
Some companies just don’t seem to care about their customers. Have you ever been on hold for 30 minutes, only to finally be connected to a rude, unhelpful representative?
A recent study by Zendesk revealed that what annoys customers the most about dealing with customer service representatives.
- 42% of survey respondents said that the most annoying thing about customer service is having to repeatedly explain your problem to numerous representatives.
- 35% of customers will stop using your business after just one bad experience with your customer service team.
- 16% of irate consumers will voice their complaints on social media after a bad experience, but only 8% will compliment good service.
- 60% of consumers are influenced by comments on social media about a company.
Being proactive in your customer service will save you a lot of headaches in the long run.
Don’t wait until customers start complaining; make sure you check in with them regularly before problems even arise.
It pays to keep existing customers happy. It costs much less to keep them than to get new ones.
4. Listen Carefully to What Your Customers Tell You
Some entrepreneurs may believe that they know everything about their industry. But in reality, their clients may have a better understanding of it.
Listening to customer feedback is a great way to identify those who are at risk to leave. This can allow companies to make the changes necessary to keep their clients happy.
If a customer expresses dissatisfaction with your service costs, it’s important to explore their concerns further. They may not be aware of the full value of your product and thus be threatening to close their account prematurely.
By taking the time to listen to your customers’ feedback, you can avoid misunderstandings and keep them satisfied with your business.
Then again, it could be that you are actually overcharging.
Listen to what your customers are saying.
Sometimes, customers will throw out “red herring” objections to your sales pitch. But, it’s important to be able to address these real concerns and issues and come up with actual solutions to their problems.
5. Let Some Customers Churn
This is a difficult concept for some business owners to understand, but sometimes you have to let customers go. You can’t keep everyone happy and there’s no use in trying to please everyone.
This means that you shouldn’t just accept high customer turnover rates, provide mediocre customer service, or treat your customer base like a revolving door. But knowing when to let a client go is also an important skill.
When is it time to end your relationship with a client? By looking at the relationship from a business perspective.
Let’s say you’ve identified a set of customers who are at risk of being poached by your competitors. You quickly reach out with an offer of an incentive to keep them from leaving.
The first step you should take when trying to keep at-risk customers from leaving is to determine if they are worth saving.
Many businesses make the mistake of valuing all customers equally. This assumption can lead to losing out on potential customers who could be a valuable part of the company.
While it’s true that most companies do have a group of loyal customers, most businesses also have a few customers that spend the most money, spread positive word of mouth about the company, and stick with them the longest.
Even your most loyal customers can switch to a competitor if they feel that you’re not meeting their needs and expectations. This is why you should identify which customers are worth investing your time and money in.
Businesses should not only determine customers’ churn probability but also measure the following:
- How much they spend on your product
- The likelihood that they will respond positively to an incentive offer
- How much this offer will cost the business
6. Identify Why Customers Cancel and Fix It
Although it’s important to know your rate of customer turnover, it’s even more important to understand why your customers are leaving.
A lot of businesses fail at customer retention because they’re unwilling to ask themselves some tough questions.
Why do customers cancel? What can we do to improve our service? Admitting that we’re not perfect is the first step to providing better service and retaining more customers.
Identifying and addressing common reasons for cart abandonment is one way to reduce customer churn.
Give your customers plenty of chances to tell you why they’re leaving you. For example, you could send out a brief customer exit survey, or include multiple-choice or comment fields in a “We’ll miss you!” email to prompt them to leave feedback.
By doing this, you can figure out the most common reasons people are abandoning your company and take steps to improve upon them.
Conclusion
What is customer churn? Customer churn can be a big problem for businesses, but it’s important to understand what it is and how you can fix it. By taking steps to improve service quality or offering promotions and discounts, you can decrease the amount of customer churn your business experiences. Use our guide above to help you get started on fixing customer churn today!
