As a business owner or a marketer, do you know how many customers you lose each month? Or every year? Customer turnover or customer churn rate is the number of customers you lose in a fixed amount of time.
It is an important metric. You need to know how many customers are leaving your business to gauge its impact. Once you know that, only then you will be able to create plans to reduce it and improve your strategy.
However, it’s difficult to calculate the churn rate and find remedies to reduce it. Therefore, in today’s post, we cover everything from understanding what is churn rate and how to calculate it. In addition, also understand formulas and how to predict churn rate.
Before we dive in, here are a few customer churn rates by industry to look at:
- Generally, American credit card companies have a churn rate of 20%.
- The churn rate of the daily newspaper subscription in the U.S was 58% in 2003.
- SaaS companies usually have a churn rate between 5-7%.
- European cellular carriers have a churn rate between 20-38%.
In pochi punti:
What is Churn Rate?
“The per cent of subscribers or customers that don’t renew or cancel their subscription during a fixed period of time is the customer churn rate.”
It’s an important factor for businesses whose subscribers pay on a recurring basis. Common examples of such companies include SaaS and OTT platforms.
As a rule of thumb, your subscriber must stick around for your business to recoup your average CAC (customer acquisition cost). This ensures your business stays in profit.
One of the easiest ways to find the churn rate is to use a CRM. for instance, if you are a SaaS organisation, then you may already have a built-in customer count. It might show how many subscribers you had at any given point in time.
So, customer churn rate is the natural business cycle of gaining and losing customers.
All organisations – no matter the customer service or the size of their business, face churns.
The churn rate is also known as the attrition rate. The higher it is, the more subscribers stop doing business with you. Therefore, the lower your churn rate, the better it is for your business.
As a business owner or marketer, it’s important to understand the churn rate. It helps check the effectiveness of the marketing efforts undertaken by your organisation. In addition, it helps you understand how satisfied your customers are.
The subscription-based business models are popular right now. Therefore, it’s cheaper for companies to keep their existing customers than get new ones.
This is the reason why it’s so important to understand why, how and where you’re losing customers.
How To Calculate Churn Rate
To calculate the percentage of revenue that churned, you need to:
- Take all the monthly recurring revenue at the beginning of that month.
- Divide it by the monthly recurring revenue that you lost in that month. Minus any additional revenue or upgrades from existing subscribers.
- Don’t include new sales of the month as you want to calculate how much total revenue you’ve lost.
For instance, if company XYZ had 5000 customers in January. But only 4500 at the end of January, the churn rate would be 10%.
Customer Churn Rate Formula
Customer churn rate = (number of subscribers at the beginning of the month – number of subscribers at the end of the month)/ number of subscribers at the beginning of the month
Using this formula, we get:
To calculate the annual customer churn rate, use this formula:
Customer churn rate = (number of subscribers at the beginning of the year – number of subscribers at the end of the year)/ number of subscribers at the beginning of the year
If you’re not good at maths, then you can use a free or a paid tool that automatically calculates the churn rate. One of the best tools to help you do this is Hubspot.
How to Predict Churn Rate
Businesses today have a lot of data that shows how their customers are interacting with them.
Some of the metrics include social engagement and website analytics. These data sources provide valuable customer insight and highlight areas of improvement.
Today, it’s possible to predict churn rates by implementing machine learning algorithms. These algorithms will not only detect similar behaviours but also churn indicators.
For instance, an OTT platform such as Netflix can examine historical subscriber data to identify which subscribers reduced their billing plans. They can also identify which customers stopped using their services altogether. They can then use this information to train the machine learning model. It will compare the behavioural traits between non-churners and churners.
To build a churn prediction model, follow these steps:
- Form a business case. Your goal should be to design strategies that improve retention. In addition, you need to prevent churns by identifying and eliminating factors that cause churns.
- Collect, clean and organise data. Capture and examine the data from your CRM. Use data from customer service software, social listening and sentiment analysis tools too.
- Select, extract and engineer features. This will help determine the attributes that represent behavioural patterns related to customer interactions.
- Build the model. Use different methods such as logistic regression, random forest, decision trees, binary classification, etc.
- Deploy, track and optimise. Integrate the software with your existing software or application. Test, monitor and adjust the features to increase the model’s accuracy.
Advantages and Disadvantages
Here are the pros of calculating it:
- It provides clarity on how well the organisation is retaining its customers. This is a clear reflection of the quality of service the organisation is providing and how useful it is.
- If it is increasing, then the company needs to review the way it’s doing business. One or more of the fundamental components of how it’s running are flawed. In addition, it’s possible that the product or the service is not attractive to the customers.
- It’s a metric that helps identify why and where the business is losing its customers. Use this information to improve your strategy and products/services.
- Since the cost of getting new customers is high, it’s wise to retain the old ones. The churn rate helps you do that by identifying the loopholes and optimising them.
- It’s easy to calculate.
Here are the cons:
- The types of subscribers that are leaving aren’t taken into consideration. This provides inaccurate results.
- It does not take into account the history of the customers. For instance, a customer may have been associated with your company for 5 years. Whereas, another customer may have purchased your product last month. Therefore, the impact of losing a new customer versus a long-term customer can’t be calculated.
- This metric isn’t a true industry comparison of the types of companies that are there in the industry. A new startup will have a high acquisition and attrition rate. Whereas, a mature company is likely to have a low attrition rate.
5 Ways to Reduce Customer Churn
Now that you know what churn rate is and how to calculate it, it’s time to learn how to reduce it. Here are the top five ways to reduce customer churn:
- Create a good first impression. Your customers will not look around for better products if your product exceeds their expectations.
- Be consistent. Deliver what you promise, stay consistent and keep your customers happy. Be honest with your customers so that they know what to expect from you.
- Provide excellent customer service. It’s the key to having loyal customers. Customers want quick resolutions and therefore, it’s your duty to provide them with the same.
- Pay attention to your customers’ demands. Listen to customer feedback. This will help you identify ways to improve your product/service. It will also help you gauge which customer is about to quit using your services. Fixing issues in time will help you save that customer. In addition, it will also the customers who were facing the same problem.
Customer churn rate is an excellent metric for companies to assess their performance.
Use a free calculator if you’re not good at maths that’ll automatically calculate it for you.
Ensure that your customers are happy. Therefore, take regular feedback by requesting them to take a short survey or share their concerns with you.
Figure out why you’re losing subscribers. Then, tackle the most common reasons why they’re abandoning you.
Hopefully, you will apply the tips we shared to your business and be able to reduce your churn rate.
What’s your customer churn rate and which tips did you find most useful to reduce it? Tell us in the comments section below!