What is Churn?
Churn refers to any kind of loss that a business suffers, including when customers leave or cancel their subscriptions. Churn rate is calculated by the percentage or actual number of customers that a company loses. A business uses churn analytics to measure how many customers leave.
Why is churn important?
The moment a company gets its first customer is the moment when that company should be tracking churn. For any company in the business of servicing customers (which includes signing subscribers), one of the most important formulas to know is how to calculate churn. Because while it’s important to always be attracting new customers, one knee jerk reaction to churn is it to quickly replace those customers with new ones.
In truth, it actually costs more to land new customers than it does to retain existing customers. And every company loses customers. That’s just a fact of running a business. So companies that have longevity also tend to have a plan in place for quantifying churn, identifying the reasons why customers leave — a.k.a., customer churn analysis —, and developing strategies for keeping customers, which can result in reducing costs in other areas — most notably, customer acquisitions.
Here are examples of customer churn:
|Financial institutions||Customers close their accounts||Banks and electronic trading platforms (e.g., Citibank, e-Trade)|
|Media companies||Customers cancel their subscriptions||Magazines, newspapers, streaming sites (e.g., NewYorkTimes.com, Netflix)|
|Telecommunications, services, and SaaS products||Subscribers don’t renew their contract or service agreement, or simply leave||Cable and cell phone accounts, subscription services (e.g., AT&T, Blue Apron, Slack)|
|Stores or wholesale warehouses||Customers stop shopping at a store or they go to a different product supplier||Online and brick and mortar stores, wholesale distributors (Home Depot, Amazon.com, office supply catalogs)|
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What does churn have to do with retention?
It has long been established by very smart people with a lot of business experience that it costs less money to retain customers than it costs to acquire new customers. So 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 help reduce churn and save money.
The average cost of acquisition is different from one company to the next since the numbers are based on total acquisition spending divided by the number of new customers. But according to the book Marketing Metrics, for businesses in general, the chances of keeping existing customers is about 60 to 70 percent while acquiring new customers is just 5 to 20 percent.
All companies have a percentage of customers who are thinking of leaving for any number of reasons. So there should be a plan in place to reach those customers before they leave. Fortunately, there’s a process for that.
- Calculate churn rate: If you know your churn rate, you can set goals and track progress.
- Identify why customers leave: Consider using tools like Mixpanel Insights, which tracks and analyzes users’ behaviors and helps pinpoint a variety of metrics, like where they drop off in a specific funnel.
- Create solutions for customers at risk of churn: A lot of reasons why customers leave can be rectified before someone cancels his or her subscription. This information can also be detailed in the company’s behavior analytics reports.
How to calculate churn
The way a company calculates churn depends on the type of business it is. For example, an online newspaper measures churn by the actual number of subscribers down from one quarter to the next, but a retail store like Walmart, or even Walmart.com, measures churn by the percentage of recurring sales a store is down for a specific period of time.
A company can measure churn rate in these ways:
- Total number of customers lost in a specific period of time
- Percentage of customers lost in a specific period of time
- Amount of recurring business lost
- Percentage of lost recurring value
Here is a sample formula to calculate churn for a media subscription company. Tally up the number of subscribers that ended their subscription during a period, like the first quarter of the year. Then divide the number of the ex-subscribers by the total number of subscribers at the beginning of Q1.
This is how the formula looks:
In January, a streaming video site had 100 subscribers. Between January and March, the streaming site lost 3 subscribers.
3 subscribers lost/100 starting subscribers
= 3% churn rate
So the churn rate for this fictional video streaming site is just 3 percent, which may not seem very high. And it’s not if the site really only had 100 subscribers. But for a company like Netflix, which had an estimated 60 million paying subscribers in 2019, according to the New York Times, 3 percent churn would amount to about 1.8 million ex-subscribers.
The reasons for customer churn may be different from one business to the next, but the fact is that out of all the customers who leave a business, 97% do so “silently,” according to customer strategy blog, ThinkJar. But there are lots of studies that show some of the most common reasons for churn.
- Customers are not getting the value of the service
- Customers don’t feel successful
- Customers had a negative experience
- Cost is too high or not worth it
Churn analytics real life examples:
- Messaging app: Viber improved its app interface and reduced churn
- Media and entertainment: A Fortune 100 media company cut churn and increased viewer consumption
- B2B SaaS: Comarch is a business IT software company that drove loyalty and reduced churn.
Create solutions and reduce churn
Of course, no one knows what Netflix’s actual customer churn is. The company does not release those numbers to the public. But Forbes did crunch a few numbers and came up with an estimated amount Netflix pays to acquire new customers. According to a July 2019 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 decided to cancel his or her subscription within those four years, then Netflix loses a percent of their investment.
On the other hand, supposing Netflix used a tool like Mixpanel Insights to track and analyze user behaviors and the customer success team identifies a cohort of subscribers who were only logging in a few times a month. The company can then use a data science tool like Mixpanel Predict to determine that historically, customers who log-in fewer than, say, four times per month have a higher chance of canceling their subscriptions. So Netflix sends that user cohort an email offering a free month of service, then it’s possible the company could convince a percentage of those subscribers to stick with the service. Further, the company can then employ a cohort analysis tool to see how that group of users responded to outreach efforts.
Yes, it would take Netflix a little longer to get back their initial acquisition investment, but as long as the customer keeps subscribing, it’s not a loss. But by letting that entire cohort end their subscriptions, rather than taking more time to recoup their initial acquisition fee, Netflix has to spend $539 to replace each lost subscriber (and remember, a percentage of those subscribers will not stick around for four years).
If it sounds like it takes a lot of strategy and circular thinking to track churn and do the work to reduce customer churn, it does. But it’s all part of running a company at a profit.
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