What is customer churn?
Customer churn is when a customer, user, or subscriber “breaks up” with a company and stops using its product or service. Sometimes referred to as customer attrition, nearly all companies experience churn. Consumers do not have to be paying customers to churn: a user foregoing Google or Facebook is considered customer churn, as is a large corporation canceling its office building lease. <b>Because churn hurts company growth, many brands are (rightly) obsessed with reducing it.
Why 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 them to stay, they dramatically increase the average customer lifetime value (CLV) and reduce the average cost of acquisition. According to a now famous Bain & Company study, it’s also vastly cheaper to retain customers than it is to acquire new ones, and companies are wise to spend their time trying to prevent customer breakups.
Churn breakups are expensive because 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. 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. By focusing on churn as the dramatic inflection point where customers either choose to break up with the business or stay, companies can multiply the ROI many times over on their sales or marketing efforts. Provided, that is, that they know how to measure churn.
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 customer churn rate?
Customer churn is typically reported as a percentage, as in “13 percent of customers churned last quarter.”
To calculate your customer churn, you must know four things:
- How you define churn (Contract ends, no activity for 45 days, etc.)
- The time period over which you want to calculate churn (last month/quarter/year)
- The total number of customers at the beginning of that period
- The number of customers 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 period from your current number of customers. Any net change may conceal the fact that there were big swings. For example, you might have lost many customers through churn and yet gained an equal amount. Your churn would appear to be zero, which is good, but you still would’ve spent a tremendous amount on acquisition costs, which is bad. For the full picture, calculate churn using the following equation.
The equation for calculating customer churn:
(Customers lost during period / Total number of customers at the start of period) x 100 = customer churn
Ex. 13 / 100 = 13% customer churn
Now, different companies 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.
Rates of churn 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 consumer customers are typically easier to both win and lose than business customers. How each company approaches its churn reduction strategy will also vary widely.
Curious why your users are churning? Read this in-depth article on why 97% of users churn and how you can identify your at-risk users before they leave you.
How to reduce customer churn
No matter your company size or industry, your churn reduction strategy must begin with some amount of churn rate analysis.
Look at the data on your ex-customers to find out the following:
Identify what is driving your customers to churn
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 that help reduce customer 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.
Use a churn analytics platform to test solutions
Once you know why users churn, begin testing solutions. Testing is key, as the answers to churn are often unintuitive. Make changes, track their impact, and keep optimizing until you improve your product, offering, or customer journey. Many companies with technology products simplify this process by using a churn analytics platform which allows them to:
- A/B test offerings and features
- Automatically track customer behavior
- Define and improve their customer journey
- Provide insights and feedback
- Send alerts and behavior-based messaging
Churn fixes can be applied at any touchpoint in the customer journey, from how your product or service is built to how it is sold, marketed, and supported. Through extensive testing you’ll hopefully discover your brand’s solution to customer churn so you can improve your growth rates.