Brands invest heavily in customer acquisition, expecting and anticipating that these newly acquired customers will have a high customer lifetime value and remain associated with the brand for a long time. But customer churn is as inevitable and unpredictable as the stock market. According to a study by Kolsky, “1 in 26 unhappy customers will complain, the rest will churn.” As inescapable as it seems, customer churn can be controlled and monitored to foster business growth. We’ll cover what customer churn means, how it can be calculated, and important business strategies that can help you reduce churn rate.
Customer churn is the number of customers, or resources, that have discontinued their purchase or subscriptions in a given period. Customer churn rate, also known as customer attrition, represents the speed at which a company is losing its customers during a certain period (in percentage format). Since a company’s churn rate and growth rate are dichotomous factors, calculating the churn rate is a decisive metric that aids in understanding, gauging, and analyzing business growth, the effectiveness of marketing, and customer retention strategies.
Customer acquisition is an uneconomical process. According to Forrester, “It costs approximately five times more to acquire a new customer than to retain one.” Customer acquisition is only beneficial when it directly and positively impacts customer lifetime value. Therefore, it becomes extremely important to at least recover the acquisition cost and break even if making a profit seems unachievable. Calculating the churn rate can help you determine whether you have recovered your initial acquisition investment.
Measuring churn rate will also help in amplifying the performance of your marketing strategies by enabling you to identify customers that are likely to discontinue their transactions with the brand. Measuring churn rate will also indicate factors causing customer decay and help you reduce the churn rate, along with aiding in locating customers who appear more prone to attrition. This data could be crucial in creating targeted marketing strategies that focus on retaining these high-risk customers.
The foundation of a successful business is a base of loyal customers. Strategizing to reduce churn rate significantly improves the customer retention rate, and combined with engaging loyalty solutions, you can turn your customers into a strong set of brand advocates.
The churn rate can be determined through a simple calculation:
For example, if you had 100 customers during November, but by the end of the month, you lost three customers/had subscription cancellations. You would calculate churn rate like this:
3 (Lost Customers) / 100 (Total Customers) = Customer Churn
To calculate the percentage form, you would simply multiply the sum with 100:
3 (Lost Customers) / 100 (Total Customers) = Churn Rate * 100 = 3% (Churn Rate)
Calculating the churn rate will give you the correct estimation of your customer decay rate; however, whether you are losing old or new customers, frequent purchasers, or seldom purchasers cannot be determined. Losing newly acquired customers is the norm in many sectors and industries, but losing longer-term, valued, and loyal customers can be truly detrimental to business. It indicates that there is some major fault somewhere in your new marketing tactics, newly adopted brand values, product qualities, and such other important factors. It is crucial that you identify and remedy these factors as soon as possible to reduce customer churn and improve brand loyalty and credibility.
Also, there is no official sector-wise churn rate comparison available. A certain amount of churn rate is unavoidable; the acceptable number of customer decay varies from industry to industry. Hence, there is no official parameter to gauge whether your churn rate is acceptable. It depends on the individual brand as to whether they deem the churn rate ‘normal’ or strategize to reduce the churn rate of their company.