What is customer churn?
Customer churn is the percentage of customers that stopped using your company’s product or service during a given time period—and one of the most important metrics for businesses to evaluate.
What is customer churn?
Sometimes referred to as customer attrition, nearly all companies experience churn (in fact, not all of it bad). Consumers do not have to be paying customers to churn; a user forgoing Google or Facebook is considered customer churn, as is a large corporation canceling its office building lease. Because churn hurts company growth, many brands are (rightly) obsessed with reducing it.
Why do companies care about customer churn?
Companies seek to reduce churn because it drags down growth. Departing customers take their revenue with them. But if companies can instead convince at-risk customers to stay, they dramatically increase their average customer lifetime value (CLV).
According to a now famous Bain & Company study, it’s vastly cheaper to retain customers than it is to acquire new ones, and companies are wise to spend their time trying to prevent customers from churning in the first place.
AN EXAMPLE OF HOW INCREASING CUSTOMER LIFETIME VALUE INCREASES PROFITS.
Companies often spend heavily to acquire new customers through sales and marketing efforts. They do this in the hope that these investments will be paid back several times over during the customer’s lifetime. But if customers leave earlier than expected, the company often ends up footing the acquisition bill. The longer that brands can hold onto their customers, the greater value each customer is worth over their lifespan.
For example, according to a July 2019 Forbes article, Netflix paid about $539 for each new subscriber. The article goes on to say that for a standard $13 subscription fee, it would take the streaming giant four years to recoup their acquisition cost. So if a subscriber decides to cancel their subscription within those four years, Netflix loses a percentage of their investment (of course, no one knows what Netflix’s actual customer churn rate is, so this example is for illustrative purposes only).
Ultimately, the goal for businesses is twofold: identify customers who are at risk of leaving and put more resources into keeping existing customers. Doing both of these helps reduce churn and save money.
By focusing on churn, companies can multiply the ROI of their sales and marketing efforts many times over. Provided, that is, that they know how to measure it.
How do you calculate your customer churn rate?
Customer churn rate is reported as a percentage of your overall user base, as in “13 percent of customers churned last quarter.”
To calculate your customer churn rate, you need to know four things:
- How you define churn (e.g., contract ending, no activity for 45 days, etc.).
- The time period over which you want to calculate churn (e.g., last month/quarter/year).
- The total number of customers at the beginning of that period.
- Of those customers, the total number who left your service during that period.
Caution: Customer churn is not as simple as subtracting the total number of customers you had at the start of the reporting period from the total number of customers you have today. Any net change may conceal the fact that there are multiple factors at play. For example, a company may lose many customers through churn, yet gain an equal amount through an aggressive marketing campaign in the same period.
For the full picture, calculate churn using the following equation:
(Customers lost during period / Total number of customers at the start of period) x 100 = customer churn
Ex. 13 / 100 = 13% customer churn
Keep in mind, companies may calculate churn differently depending on their business model. For example, some may choose to represent it as the net number of customers lost, the net value of customers lost, or the percentage of value lost.
Churn rates can also vary widely from industry to industry and company to company. The churn rate for mobile dating apps, for example, will likely be much higher than churn for an enterprise security software because B2C customers are typically easier to both win and lose than B2B customers.
How to reduce customer churn
Many of the reasons customers leave can be rectified before a user hits “cancel,” but it can be challenging to understand these reasons with 97% of users churning silently. No matter your company size or industry, your churn reduction strategy must begin with some amount of churn rate analysis, or churn analytics.
STEP 1
Identify what’s causing your customers to churn
Along with customer surveys and qualitative user research, consider using a product analytics tool like Mixpanel to pinpoint where users drop off in a specific funnel. You can then use the data you uncover to confirm your hypothesis, and test solutions in your product.
Though the reasons that customers churn will be unique to your product, they can include things like:
- Customers are not getting value (or finding success) from your product.
- Your onboarding funnel is too complicated, or there are too many steps.
- Your product doesn’t encourage a usage frequency that’s regular enough (e.g., daily, weekly, monthly), causing customers to forget about it.
- The cost of your product is too high relative to competitors, or to its real or perceived value.
- The product doesn’t align with the message customers were sold, or they had a negative experience with it.
- A bug or a broken UI element doesn’t let users complete an important action.
STEP 2
Create solutions that help reduce customer churn
Once you know why users churn, begin testing solutions. Make changes, analyze their impact, and keep optimizing until you improve your product, offering, or customer journey.
For example: let’s say that your product is a subscription music streaming service. After conducting a churn analysis with the help of an analytics tool, your team identifies a cohort of subscribers who log in only a few times a month. You determine that, historically, customers who log in fewer than, say, four times per month have a higher chance of canceling their subscriptions, or churning.
As a churn reduction strategy, you send that user cohort an email offering a free month of service. Then, you use cohort analysis to see how that group of users responded to outreach efforts. After a month, you’re able to determine that they were less likely to churn after receiving the promo offer. Success!
In this instance, taking the time to understand the “why” behind your customer churn rate provided actionable insights to help you recoup initial customer acquisition costs—and keep hard-earned customers engaged.
Depending on the drivers behind your churn rate, remember that churn reduction strategies can be applied at any point in the customer journey—from how your product is built or architected, to how it’s sold, marketed, and supported.