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 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. 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.
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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 do you 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 two things:
- The factors that led to customer churn
- The marketing, sales, or product changes that can address those factors
With these, you can develop a predictive theory as to why customers churn. It’s impossible to ever truly foresee if customers are about to churn, but you can discover correlations amidst churned customer demographics and behaviors that give you a fairly accurate idea. For example, if you experience relatively high app churn from customers who sign up on a 30 day trial and who rarely use the service during that time, there might be a correlation between the trial, the lack of use, and the churn. Analyzing customer data is of course easier for companies with technology services where, unlike with physical products, users’ actions can be tracked step by step. However, even those companies must take the steps to implement tracking and to properly organize their data, which few do. Gartner finds that while 90 percent of companies are tracking their data, only 5 percent use it wisely. Companies without technology products may have to make do with surveys, exit interviews, and user testing. Statistical validity is key to churn analysis accuracy, as false conclusions about user churn can be costly. If a company concludes prematurely that price is their leading cause of churn and offers discounts to its customer base, it might be in the uncomfortable position of losing revenue and watching those customers churn anyway.
To simplify the process of tracking customers, many companies use churn analytics platforms. These software tools automatically collect, tag, and store user data in order to run automated reports which identify the statistically valid causes of user churn and take immediate action. Learn more about how these platforms can help your business.
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.
Common reasons for customer churn and potential fixes:
|Customers don’t get value||More user testing and product improvements, add more valuable features|
|Customers don’t get how to be successful||Better onboarding, simplify product, invest more in more customer success|
|Negative customer experiences||Better customer vetting, streamline sales process, streamline customer success process, more marketing outreach and education|
|Cost||Better product education, discounts|
Find customer churn before it happens, and build apps and websites that create happy, loyal customers. With Mixpanel, more than 20,000 customers worldwide use customer data and analytics every day to understand user behavior and grow their businesses. Start fighting customer churn with a free Mixpanel account today.Try Mixpanel for free