How to Calculate and Reduce Customer Churn Rate
By Kit Smith on December 22nd 2016Read this article on our full site
Calculating customer churn rate and understanding the reasons for churn can help to improve your competitor intelligence, product, marketing, and sales.
Calculating customer churn rate might not be the sexiest piece of work you will do, but it will be a very important one.
Think about the effort your brand puts into winning new customers. Are you putting the same effort into retaining them? As well as increasing the number of customers you have, investigating churn rate can help to identify problems that will improve the customer experience.
Calculating customer churn rate itself simply provides a measurement that allows you to measure if your efforts to retain more customers is working. The real work is in discovering the reasons for churn and implementing the changes that will reduce the rate at which customers churn.
How to calculate customer churn rate
The first thing you need to know about calculating customer churn rate is it is not a simple science. This post suggests there are 43 different ways to do the calculation. This post starts with simple calculations and explains the associated problems, and then leads to a more accurate (and complicated) calculation.
The essence of the formula is to divide the number of churns by the number of customers. Below is a simple but fairly accurate equation way of doing this.
How to calculate revenue churn rate
To add to the complication, you can also calculate revenue churn alongside customer churn. The two are of course related but build a different picture of churn.
Customer churn rate will tell you how good you are at retaining your customers, whereas revenue churn rate tells you how good you are at retaining customer revenue. If two of your lowest paying clients churn in one month, and two of your highest value clients churn in the next month, the customer churn rate will look the same, but the revenue churn rate would be cause for alarm.
While there are many ways to calculate both numbers, don’t get lost in trying to find perfect formula. The important thing is to define the terms, decide on the most suitable formula for your organization, and use the results to build your business.
Identifying the reasons for churn
Calculating a number that you can monitor is not much good if you don’t do anything to affect it. There’s no point in data for data’s sake. So you’ll need to understand why people are churning, and then you can use the metric to understand if your efforts are reducing the number of churners.
First, monitor the reasons customers churn by asking them. Add a step to the cancellation process, have an exit interview, or simply ask in a final email. Keep a record of why customers churn, analyzing the most common reasons while tracking any changes.
Keep track of how long between the subscription to cancellation. Analyze their level of engagement during their subscription. A lack of engagement might indicate a problem with the onboarding process or a disconnect between the expectation after the sales process and the reality of user experience.
Often, a churned customer will decide to switch to a competitor. Discovering which competitors are winning business from you will provide important intelligence that can help product, sales and marketing.
How to reduce customer churn rate
Discovering why customers churn can help you accurately target any repeated issues. However, improving your knowledge and offering in certain existing areas can help to reduce customer churn rate.
Listen to your customers
Chances are your customers are already telling you what they find frustrating or aspects that could be improved. If they aren’t, ask them. There are several ways to collect the voice of the customer, and several ways that information can help the business.
Know your strengths and weaknesses
You need to know what customers perceive as your strengths and weaknesses so that you can work on the weaknesses and emphasize your strengths. Virtually every business will have areas of weakness, but by demonstrating you are working on these can be reassuring for customers, and increase optimism.
Find out why you lose out to competitors
Having information on who your lost customers switch to can be really helpful. Different departments can use the information depending on the reasons for these switches.
Product development may be altered if you are consistently losing out because of features. Sales and marketing can develop strategies that deal head-on with these concerns.
Care about your customers
Good customer service is really important for keeping your customers happy. Twitter reports good customer service can see a lift of 19% in customer satisfaction. In addition, helping customers succeed and celebrating their success can boost happiness and reduce churn.
If you’ve spent all that time effort and money on winning a new customer, losing them because your onboarding process sucks is just stupid. Find out what is poor about the customer experience and improve it. If you get this process correct, you will ensure your customers are getting the maximum benefit from your brand.
Don’t forget your customers once you’ve signed them. Give them helpful content. Message them about new features. Make sure you are providing a good experience, and that you are invested in their success.
If you are a SaaS company, monitoring software usage can provide an early warning system. When usage drops markedly, an opportunity exists to get in touch with the customer and see if you can get them engaged again, or solve any problems they are having.
Share your roadmap
This can be a difficult one as you don’t want to give away your secrets. As far as is possible, sharing your product roadmap can reassure customers that you are aware of issues and working to improve them. This might be enough to build faith that any areas of weakness will be addressed in the future.