Many businesses spend all their energy focusing on acquiring new customers, ignoring the impact that customer churn can have. This can be a silent assassin without noticeable symptoms. Many businesses don’t properly take notice of client retention until they experience a slow or stop in new client acquisition. At this period, it can become glaringly obvious that customers are leaking out the bottom of the bucket at a rate of knots.
Understanding your customer churn rate is an important metric to monitor as it can uncover and identify major issues before your business experiences a cardiac arrest. We’re not trying to harbour fear here, but consider yourself lucky if you haven’t had this experience yet, and start tracking this metric before things explode (touch wood they don’t!).
In this article, you’ll learn actionable ways you can measure your retention rate and put in place initiatives to both increase and improve this rate.
What is Churn?
The churn rate is the percentage of subscribers to a service who discontinue their subscriptions to the service within a given time period. For a company to expand its clientele, its growth rate, as measured by the number of new customers, must exceed its churn rate (source). This can include not only lost revenue but also marketing costs related with replacing the lost customers.
Think of your business like a bucket. The more holes you have in the bucket, the faster water is going to flow out of it. These holes can include anything from clunky processes, unsatisfactory service, poor systems, below par employees, inexperience, inadequate training and more. The more holes your business has in it, and the larger they are, the more serious this situation can be and if you don’t get on top of this quick smart you could end up with an empty bucket…
The water in the bucket generally consists of your customers, stakeholders, team members, leads and anyone that helps you generate more water (revenue) into that bucket. Churn basically measures the rate that water leave your bucket.
Why is Churn Bad?
Generally speaking, churn is the big bad wolf of business. Subscription businesses, in particular, suffer immensely from churn (think Netflix, gyms, Audible, meal delivery and anything else that bills on a regular basis).
Of course every business would like to avoid any sort of churn, however, this is both unrealistic and practically impossible for a business that is growing. Often times, the causes of churn can be due to a number of factors:
The service isn’t right for them
The service didn’t meet their expectation (a marketing or sales issue?)
Attrition to competitors
Loss of interest or engagement
When do you know churn is hurting your business?
The larger any business gets, the larger the pool of potentially dissatisfied customers can be. The more customers that a business acquires, and the faster the rate of acquisition can lead to a proportional effect on the retention rate.
Importantly, businesses that don’t investigate and honestly review their churn rates (maybe they’re not even monitoring it?!) generally are heading down the dangerous path of it costing more and more money just to stand still… This saying is commonly referred to as “running fast to stand still” and is a killer of excitement and good times in any businesses.
At this point, every business arrives at a pivotal fork in the road. The key question becomes…
“how much time do we spend trying to resolve the attrition issue and how much of our time do we dedicate to trying to re-fill the leaky bucket?”
This is a tough one and doesn’t have a basic answer. Of course both aspects are important, however continually filling a leaky bucket without any plan to reduce the size of the holes is an extraordinarily expensive and resource heavy initiative (I feel exhausted even writing this!).
Don’t freak out… we experienced this same issue at Be Media early 2017 and it’s not something to be ashamed of. There comes a point in any businesses growth where you need to truly look at your service delivery and ask some tough questions like:
Which customers are truly benefiting from our service in the long term?
Are there any customers that are causing a total drain and we need to fire?
What marketing and sales initiatives are leading to the good customers and which ones are bringing in the shockers?
How are we communicating our service and is it both accurate and clear?
How can we develop a more sustainable and long term solution for our clients so they don’t consider or even think of leaving?
How do we communicate with our clients effectively to keep them engaged and truly aware of all the work and value we are adding to them?
The good thing is, these crises nearly always lead to significant business improvement and initiatives so don’t freak out as you read this, ok!
Our “crises” of 2017 completely revolutionised our business and saw us listed as the only digital marketing company in Australia to make the Australian Financial Reviews Top 100 Most Innovative Companies in Australia list in 2018!
How to measure churn
A basic formula to start with is understanding how many customers left, compared to how many you started with.
This percentage can then work as a benchmark for your current position. If you have a unique business it may be hard to find appropriate benchmarks to compare yourself against, however, you now will have at least your own internal benchmark to track and monitor, which is a pivotal and powerful moment. It’s very hard to improve when you don’t know where you are starting!
How do I use this data?
So you realise that monitoring you churn rate is important, you’ve started tracking this figure – now what?
Using cohorts is a great way to get started. This is a group of people with something in common, and you use this data to figure out how long the average customer will stick around.
Tracking Churn provides many business opportunities:
Pinpoint which audience and target markets you should go after
Find out what active segments are worth spending money on to retain
Identify where to invest your research and development to improve internal processes
Recognize how many new customers are needed each month to maintain your customer size and how many are needed to actually grow your business
Develop performance benchmarks
And Voila! Now you have the essential guide to both monitor, manage, and improve your customer retention rate and are well ahead of most of your industry peers!
Now… Up, up, up and away!