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What is churn?

Definition and strategies for churn reduction

Also known as customer attrition, churn is an important measure to track for revenue growth, especially for subscription-based businesses. In this article, we will define customer churn, go into ways to measure it, and provide effective strategies to improve and create customer loyalty. 

What is customer churn?

Customer churn is the percentage of customers who have stopped using your services over a defined period of time. In this way, it reflects customer disengagement with your business. 

To illustrate, if you start with 100 customers in a month and 10 decide to stop subscribing during that period, your monthly churn rate stands at 10%. This numerical representation provides insight into customer loyalty, so a high percentage signals the need for a closer look into distinct aspects of your customer experience. 

Is churn good or bad? 

Churn is a natural phenomenon in business that every company experiences. A level of churn is expected and even healthy, as it can be a sign of a dynamic customer base. However, keeping churn as low as possible is a business imperative, and a rising rate always demands attention.  

Types of churn

Not all churn is the same and it is important to understand the differences so you can identify potential points for improvement.  

Voluntary churn – when customers choose to leave

Voluntary churn occurs when customers actively decide to end their subscription. This decision can be the result of a range of factors: changing needs, dissatisfaction, or enticing offers from competitors. Understanding the motivations behind voluntary churn to develop targeted retention strategies and address root issues that might be weakening your customer relationships is important. 

Involuntary or passive churn – silent departures

Customers who involuntarily churn do not proactively cancel. Instead, their departure usually results from other factors like payment lapses, expired payment cards, or other logistical issues. While these customers might not voice their dissatisfaction, their departure signals a need for improved subscription management systems and proactive customer engagement.  

How to calculate churn

Calculating churn is a fundamental step in gauging the health of your customer base. The formula is straightforward:  

Churn rate = (Number of churned customers/Total number of customers at the start of the period) x 100  

This formula provides a percentage that represents the proportion of customers who have ended their relationship with your business during a specific timeframe. To illustrate, if you started with 500 customers and 25 of them churned, the churn rate would be: 25/500 × 100 = 5, meaning a 5% churn rate. 

Why customer churn matters 

Churn tells a story about your customer journey beyond the numbers, and often shows how well your company is doing at keeping its customers happy. Let’s look into why churn matters and how it can give us down-to-earth insights into the health of our business. 

Churn means lost revenue 

Simply put, fewer customers translate to less revenue. A high churn rate indicates a leakage in your revenue stream. Each customer who churns represents a missed opportunity for sustained income. The financial impact extends beyond the immediate loss to the potential for recurring transactions and the cumulative value a loyal customer brings over time. 

Harder to get investor interest 

When making investment decisions, investors look for both current success and a promise of sustained growth into the future. Your churn rate serves as a test for this potential, with a high churn rate raising red flags for a lack of long-term viability. When looking for investment, a high churn rate goes beyond an internal assessment metric to become a determining factor for external stakeholders. 

High churn points to customer dissatisfaction

A consistently high churn rate can be a noticeable sign of customer dissatisfaction. It is important to recognise the root causes in order to implement effective solutions. 

It might be that you are misunderstanding your audience, providing poor customer service, or that there is a misalignment of expectations between the product and the customer. Churn becomes a feedback loop, reflecting the need for continuous improvement and adaptation to meet customer needs. 

More costly to get new customers than keep an existing one

Acquiring new customers is costly. Marketing expenses, outreach efforts, and the resources you have to invest into onboarding can quickly add up. Retaining existing customers is usually a more cost-effective strategy than focusing solely on gaining new ones.  

Recognising that it is more financially effective to retain customers highlights the value of preserving the relationship with your existing customers and the significance of making churn reduction a business imperative. 

What is a good churn rate? 

Determining what a ‘good’ churn rate is depends on several factors, such as industry, business age, and customer type. Understanding what constitutes a tolerable churn rate requires you to think through various factors, including your customer acquisition cost, the lifetime value of a customer, and industry comparisons. 

Per Hubspot, SaaS (Software as a Service) companies focusing on smaller businesses may anticipate a monthly churn rate of 3-5%, while those serving enterprises could experience a remarkably low 1% churn. New SaaS ventures can reach sky-high churn rates of up to 15% in their initial twelve months on the market.  

In practice, this means that if, for example, you are a rapidly scaling startup, you might accept a higher churn rate initially as you are still finding product-market fit and focusing on marketing and expansion. Meanwhile, a mature business may prioritise minimal churn and prefer to focus on retaining loyalty among their existing customer base. As a company, you should consider regularly revisiting your benchmarks as your business develops.  

Strategies to prevent churn 

Retaining customers requires continuous effort and smart strategising. We will walk you through some vital actions you can take to prevent churn and improve customer loyalty.  

Customer research – unveiling insights for improvement

To strengthen your customer relationships, it is necessary to do a deep dive into your customers’ experience with your company and your product. Carrying out thorough customer research through surveys, calls, and continuous follow-up will reveal valuable insights that will help you understand the reasons behind churn.  

You can also consider utilising Net Promoter Scores (NPS) to discern trends among your customer base. Using NPS surveys can help you identify customers who are potential churn risks, as lowered scores point to customer dissatisfaction.  

Proactively addressing customer concerns based on research can both prevent churn and take your business closer to customer-centric excellence. 

Educate customers to nurture long-term engagement

Empower your customers with the knowledge they need to get the maximum value they can from your products. Be a guiding presence throughout their journey, from onboarding to long-term, ongoing usage.

Proactive engagement, including updates on new features and functionalities, can give your customers a sense that your company is always in a state of continual improvement and relevance to their needs. 

Reward loyal customers  

Acknowledging and rewarding loyalty can be a powerful strategy to stop customers from going over to your competitors. You can develop incentive programs that encourage repeat business, whether that is through exclusive offers, discounts, or personalised perks.  

By recognising and celebrating customer loyalty, you improve retention and create brand advocates that will expand your positive reputation. 

Provide good support 

Exceptional customer support is a key part of the battle against churn. Responsive, empathetic assistance builds trust and loyalty. Establish robust support channels, ensuring prompt resolution of queries and concerns.  

By consistently delivering a superior support experience, you help retain existing customers and lay a foundation for positive word-of-mouth, which helps create brand ambassadors who can drive new customers to your business.  

Stop involuntary churn 

Involuntary churn can silently reduce your customer base, so taking charge and acting proactively to prevent it is important. You can do this by reviewing your billing and payment process. Ensure you send timely billing reminders to customers and inform them of any updates they need to make to their payment information. 

Taking a proactive approach prevents involuntary churn and highlights your commitment to transparency and customer well-being. By thinking ahead and addressing potential issues, you create a seamless customer experience that minimises disruptions and reinforces long-term relationships. 

Safeguarding success, boosting revenue

As a customer retention metric, churn is a mirror that reflects the strength of your customer relationships. By implementing strategies that resonate with your unique business dynamics, you light a path towards preserving and elevating your customer base, and help take your business towards a future of sustained growth and heightened revenue. 

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