The success and productivity of your business depend on bringing in new customers regularly. But growing your clientele is only half the battle — you also need to retain the customers you have and avoid customer churn. If your business is constantly losing customers, the newer clients you bring in don’t make much of an impact on your profits or growth rate.
To develop an effective retention strategy, you must be able to identify how many of your clients are leaving and why. In other words, you need to measure the customer churn rate and identify the reasons behind it.
What’s the Definition of Customer Churn?
Simply put, customer churn (aka customer attrition) refers to the number of customers who leave your business. It’s usually defined as a rate: the percentage of customers who leave during a specified time period.
In most cases, this metric doesn’t take into account the reasons why a customer leaves. A client who leaves your business for any reason at all gets counted when calculating churn.
How to Measure Customer Churn
There are several ways to measure churn:
- The number of customers lost
- The percentage of customers lost
- The financial value of recurring customers lost
- The percentage of recurring value lost
While any of these perspectives can be useful in determining the impact of customer churn, most companies prefer to calculate the churn rate for a given time period. The rate is usually expressed as a percentage. To get the percentage, use the formula below, then multiply the result by 100.
For example, if you started the quarter with 300 subscribers and lost 10 of them, here’s how you would calculate the churn rate: (10/300)*100. Your churn rate last quarter would be 3.3%.
What is a “Good” Customer Churn Rate?
In a perfect world, you’d have a churn rate of 0% and never lose any customers. But, of course, that’s not realistic. A better way to determine whether your company’s churn rate is “good” is to compare it to the average in your industry.
For subscription-based companies, the churn rate tends to fall between 2% and 8%. Most sources place the average monthly churn rate at 5% and consider anything less than 3% to be good.
Another metric to consider is net revenue, which factors in revenue generated by existing customers and revenue lost due to churn. “Net negative churn” (NNC) happens when your company gets enough revenue from existing customers to offset the financial cost of churn. To achieve NNC, focus on increasing your expansion revenue. Encouraging existing customers to spend more by making more purchases or upgrading to higher-service tires.
If you want to optimize profitability for your company, focus on several aspects of revenue: improving retention, increasing expansion revenue, and reducing churn.
Why Is Customer Churn an Important Metric?
While most companies (regardless of industry) track churn, it’s particularly important for SaaS providers and other businesses with subscribers. Churn can be extremely costly, especially for subscription-based service providers.
These companies rely on their customers’ subscription payments as a significant source of revenue. When a client leaves, the service provider loses their subscription fees. Additionally, the company has to invest more time and money into acquiring a new customer to replace the one who left.
According to most estimates, acquiring a new customer costs at least five times more than retaining an existing one. That number may seem high, but it makes sense when you factor in the lost revenue and the additional investment in customer acquisition.
Another way to think about it is to consider the positive impact of customer retention. According to one study, even a seemingly insignificant 5% increase in customer retention can drive a profit increase of 25% or more.
And the financial rewards of reducing churn don’t just apply to subscription-based businesses. One study found that returning customers spend up to two-thirds more than a one-time shopper. Loyal customers may contribute even more to your company’s revenue if they help you bring in new customers through word of mouth.
Common Causes of Customer Churn
Numerous factors can contribute to churn. When you can identify the reasons your customers are leaving, you can take steps to address those issues and give your clients more reasons to stay. There are two types of customer churn: active and passive.
Also called voluntary churn, this is what happens when customers actively decide to leave your company. Common causes of active churn include a bad experience, inferior customer service, and better pricing/features from a competitor. Counteracting voluntary churn is all about improving the customer experience and developing attractive, competitive offers.
Churn isn’t always about a customer making the conscious decision to leave. Involuntary (delinquent) churn also happens — and it’s the most common type of churn in the SaaS industry. However, it’s also easier to fix than active churn.
Passive churn happens when customers passively leave (or stop paying for products/services). Credit card processing issues, subscription expirations, and security protocol updates are some of the most common causes of passive churn.
5 Ways to Reduce Customer Churn Rate
Now that you know how to calculate churn and what that number means for your revenue and sustainability, it’s time to figure out how to reduce your churn rate.
1. Identify Why Customers Are Leaving
As described above, countless factors can cause a customer to actively or passively leave your company. You need to identify which reasons are affecting your customers so you can address them effectively and begin reducing your churn rate.
Start with passive churn. Issues like expired subscriptions and credit card processing errors are often easy to fix. Once you’ve taken care of those issues, focus on active churn and identify the main reasons your customers are voluntarily leaving. Identify the problems that come up the most often and find ways to fix them.
2. Reach Out to Customers Who are Likely to Churn
If you actively monitor your customers, pinpoint the ones who are most likely to leave. Customer engagement can be a good identifier of potential churn. When clients stop logging in or actively using your products/services, it’s a sign they might leave. You can also use surveys and other feedback tools to identify dissatisfied customers who are likely to churn.
Once you know which customers are likely to leave, see if you can encourage them to stay. A quick email or notification can remind disengaged customers of the benefits your service offers. If you have customers who have expressed dissatisfaction with their experience, reach out to them directly to see what kind of changes would convince them to stay.
3. Reward Loyal Clients
Another way to increase retention (and thereby reduce churn) is to persuade your existing clients to stay. Loyalty programs tend to work well to increase retention. By giving loyal customers an incentive, such as a discount or bonus, you can make staying for a long time worthwhile. Reward programs can also encourage word-of-mouth referrals, which can increase acquisition and limit the impact of churn.
4. Improve the Customer Experience
Most customers view changing providers as a hassle, but they’ll do it if they have a bad experience. However, if they continuously experience good service and value from your company, they’re less likely to go through the work of leaving, even if your competitors offer a slightly better deal.
A better customer experience may mean adding more features to your service, reducing customer service wait times, and/or creating a library of self-serve training resources. If you’re not sure where to start, ask your customers! A quick survey can be a great way to gather ideas for improving your customer experience.
5. Streamline Onboarding
Don’t forget that churn often happens far earlier than expected. If the implementation process is slow, confusing, or frustrating, most customers will just leave — before even using your products or services!
Improving your onboarding process can help reduce active churn early in the customer journey. Plus, a great onboarding experience makes a strong first impression on new customers, which can persuade them to stay on for years to come.
Counteract Customer Churn With a
Better Onboarding Experience
Customer churn affects current and future revenue and impacts your company’s overall sustainability and reputation. It’s vital to reduce churn as much as possible by identifying and addressing the underlying factors. Simultaneously incorporating retention strategies and increasing expansion revenue can minimize the financial impact of churn.
Churn can happen at any point in the customer journey, but it’s especially likely during a client’s first few months with your company. In other words, your company’s onboarding process significantly impacts churn rates.
A smooth, efficient, and effective onboarding experience sets the foundation for long-term loyalty. Delays and miscommunications during implementation will likely contribute to churn — often before your customers fully implement your product.
Reducing churn starts with optimizing your onboarding process to make it faster and more effective. You can give your customers an exceptional experience from day one by eliminating bottlenecks and improving communications. The GUIDEcx customer onboarding solution facilitates an efficient and error-free process with integrated task management tools, powerful communication tools, clear analytics, and strategic automation.
If you see high churn rates during onboarding, it’s time for a customer onboarding solution. Our platform is specifically designed for onboarding — it incorporates all the features you need without introducing unnecessary complexity. To see how GUIDEcx can facilitate better onboarding to reduce churn, book a demo today or start your 30-day free trial.
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