What Is Customer Churn, and How Do You Prevent It?
What is Customer Churn?
Customer churn or customer attrition is the percentage of customers that have stopped using your organization’s product or service during a specific time frame.
You can calculate the attrition rate by dividing the number of customers you lost during the period – say, a month – by the number of customers you had at the beginning of that period.
Customer Churn Formula
The formula for Customer Churn Rate: (Number of Lost Customers ÷ Total Customers at the start of Time Period) x 100.
For instance, let us say you start your month with 1000 customers and end with 900 customers. Your churn rate is 10% because you lost 10% of your customers.
This kind of churn rate is a cause for concern. Typically, accepted churn rates are 5 – 7% annually for a product delivered as a service. Any other licensing model should be in the 2-3% range.
Customer churn is an important metric that every organization should measure, as revenues are the lifeline of any business, and customers are the ones who provide it.
Customer churn is a giant business killer. Even small increases in churn can cause a significant cut in revenues.
Retaining a customer is the single most crucial thing that every organization should focus on for the following reasons:
- It costs up to 7x more to acquire a new customer than to retain an old one
- The probability of selling to an existing customer is 60-70%, while the probability of selling to a new prospect is only 5% to 20%
- Increasing customer retention by 5% increases profits by 25-95%
- 65% of a company’s business comes from existing customers
- Loyal customers spend 67% more than new ones
- Existing customers are 50% more likely to try new products and spend 31% more than new customers
- 82% of companies agree that customer retention is cheaper than acquisition
There are multiple reasons why customer churn happens. Let us look at them in detail.
What Are the Top Reasons for Customer Churn?
- Price is the number one reason why customers churn. More so, when the customers don’t see value in the investments, they make
- Customers churn because your product or service does not make their lives easier. Your offerings don’t meet their expectations or fall short of the promised features. They stop finding any more value in using your product or service.
- Your service is not up to the mark. Customers want everything now and here and do not like going through a complex ticketing system or inadequate customer support. Some people complain, and others quietly move on to your competitors.
- Customers find your product tough to use. For every small thing, they are dependent on your customer support to implement. Adoption is cumbersome and this causes them to leave.
- Customers rely on your offering to do their business. If your product has bugs, glitches, or downtime, it is difficult for them to sustain their business. Every product will have some technical debt, and if that causes issues in running their business, it is natural for them to churn.
- Customers often churn because your competition is undercutting you on price or offering better value than your offerings.
- Sometimes, internal policy decisions and global contracts signed with another vendor might churn your customers. Sometimes, the customers may feel that they no longer need your product. You cannot do much here to stop the churn
- Sometimes, the customers may feel that they are not the most valued customer of your organization. They may not get priority in service or support delivery and may not have access to senior leadership. This is one of the prominent reasons for customer churn.
- The customers may find it challenging to do business with you. It isn’t easy to upgrade the product versions, apply patches on your installation, return or reorder your products, or request a service. The natural consequence is churn
- Sometimes, the customer may just not be a right fit. It happens with every business, as every company cannot be a part of your target segment. It should be fine to let such customers churn
- Your customers’ payment method has expired, causing delinquent churn. This is the most common churn for SaaS offerings, where people make recurring payments
- There is a lack of access to senior leadership. When customers feel that they are the most valued customers of your organization, then they will look for a vendor who can provide that access.
- There are hundreds of variables in the customer journey – changing needs, confusion about new features, and product updates can lead your customers away. If you stop helping your customers in their lifecycle, you risk losing them.
How to Reduce Customer Churn?
There are multiple ways in which customer churn can be reduced. Some of them are:
- Optimize your pricing based on the value you provide. This would allow you to match your pricing to your customer’s willingness to pay. Create a pricing strategy based on the absolute value you provide your customers while keeping in mind what your competitors are offering.
- Continuously talk to your customers and understand how they use your product or service. Ask if it helps them do their jobs more quickly and what else they would require. Based on this, figure out what needs to be part of your product and keep your customers informed about your product roadmap. Besides, help them see the value by traveling with them on their journey from onboarding to realizing benefits from your offering. This would help avoid customers churning due to a lack of features and adoption
- If you find a bug in your product or your site gets hacked, be upfront and keep the customers in the loop with regular updates. Let your customers know what is going on with the fix and keep them updated with the resolution; your customers will be less likely to churn.
- Talk to your customers who are churning as to why they are leaving. See if you can identify themes and repeating issues that may be contributing to customers leaving. Knowing why they are going can help your team to be proactive about it
- When it comes to customer support and customer service, be proactive about it and ensure that you do everything for the customer. It would help if you treated your customer support as a true profit center, and it should not be an afterthought. Look at this statement – we are available 24×7 on call, email, and messaging apps to address any need you may have. Would this not make your customers very comfortable working with you?
- Look at the entire customer journey and identify challenges faced by the customers. Do away with them. Do they have problems while onboarding? Do they have difficulties administering the system? Do they have issues finding the features offered by you? Do they have problems reaching you for queries? Do they need continuous training to use your offering? Do they find it helpful to run their business? What do they like and dislike about what you are offering? Finding answers to these questions will allow you to proactively address the customer’s needs and prevent them from churning.
- You should ask your customers the right question to ensure product-market fit. It comes down to understanding what your customers need and what problems they are trying to solve with your offering. If your offering does not satisfy their needs, you should step back instead of spending time selling and implementing, eventually resulting in churn. The best way to avoid this is by tweaking your messaging that reflects the problems you are solving instead of your product features.
- Delinquent churn is easily preventable by simply contacting your customers in advance, as you know the payment instrument is about to expire.
- Consider having an executive sponsor assigned to every customer account, more so in a B2B high-value sale environment. This way, your customers will have access to the senior leadership and feel valued by you.
- Do an exit interview with the customers who have churned from you. There might be other reasons for leaving – they don’t perceive your brand as a leader in the space, they had a negative interaction with your customer support, they didn’t get help when they needed it the most, and the like. This would allow you to prevent such things from happening in the future and with other customers.
Also read our article on Customer Perception
Besides these, do a competitor analysis and figure out what you like about them and what you don’t like. Address both of your likes and dislikes as a part of your offerings.
You would experience customer churn as a business, but it should be under manageable levels. After all, you shouldn’t lose customers for reasons like features, functionality, technology, or price.