Customer Churn: What Is It and Does It Matter?
Many new business owners focus all of their marketing efforts on getting new customers for the first time. But if your company relies on subscriptions or repeat purchases to keep the doors open, you can’t just acquire customers: you also have to keep them and prevent customer churn from affecting your bottom line. But what exactly is customer churn (also known as customer attrition), and why does it affect some companies more than others? Today, let’s explore customer churn and why it matters in detail.
Customer churn is the customers who stopped using your product or service compared to the total customers using your product or service in a given period. In many cases, customer churn calculation is a formula of “customer churn rate,” which can be expressed as a percentage.
Customer retention rate (CRR), lost customers, and the customer lifetime value (CLV) are all associated with the customer churn process.
Here’s an example:
It’s almost always best for a company’s churn rate to be 0%, though this is not practically possible. In reality, the best thing to do is mitigate churn to have a minimal impact on your profits or get a churn rate so low that it is matched or even surpassed by the number of incoming customers you have.
Churn rate matters since your customer base are not using your product or service or is quitting your brand. The higher the churn rate, the more people are leaving your company, possibly for competitors. It’s important to do everything you can to promote customer satisfaction and customer loyalty.
But while the churn rate is bad in general, let’s go over some more specific issues that a high churn rate can cause your company.
At its core, a high churn rate means that your subscription or product has major flaws that are driving people away from your brand.
This is a warning sign that, in conjunction with other things like lots of bad reviews, may signal that it’s time to use your resources and revisit some of your core products or brand identity attributes for a facelift.
More importantly, customer churn directly costs your business both time and money. Most executives know that it costs more money to get a new customer than to retain an existing customer.
The higher the churn rate, the fewer customers you have sticking around, which means the more time and money you have to spend getting new customers to achieve the same profit margins. In some cases, this may not even be possible; in a narrow niche with very few potential customers, driving people away from your brand once could be enough to spell doom for your company.
A high churn rate can also negatively affect your brand’s reputation. If people leave your company en masse, especially if they want a competitor’s product or services instead, it will make your company look subpar.
This is doubly true if the “churning” customers leave less than stellar feedback and insights on review sites like Google or Yelp.
In the long term, churn is also bad because it can reduce your potential for expansion or growth. By truncating your profits and requiring you to spend more money on customer acquisition costs, churn means you’ll have to put off any expansion or growth plans you have for later down the road.
As you can see, customer churn is never a good thing. That’s why it’s important to understand churn in detail and know how to alleviate it, which involves predictions of customer behavior and the customer journey along with an in-depth customer churn analysis.
Customer churn can plague your company for several reasons depending on what you offer and your industry’s specifics.
Many companies experience customer churn firstly because they have subpar products or marketing campaigns. This is common sense; if you put out a subpar product, don’t expect people to stick around even if your marketing is on point. You can’t be surprised when your total number of customers goes down.
The reverse is true as well. Suppose your marketing for existing customers isn’t very pointed or persuasive. In that case, they will be more likely to unsubscribe or leave your brand for a competitor when they encounter more persuasive marketing in the future.
Your brand could also suffer from customer churn because of poor customer service. This is more important in some industries than others, such as those with a face-to-face component like the foodservice industry.
For example, a restaurant with serving staff who are poorly behaved or don’t know what’s on the menu will increase customer churn by providing all their customers with a bad experience, resulting in a high revenue churn rate.
A company can have excellent staff and products, but if they don’t understand their target audience, they may still experience customer churn. You must fully understand your target audience so you know what to create and how to bring that product to your core consumers. See these classes for more about audience personas and target audience identification.
If you fail to do this, you could create a product or service that no longer appeals to their interests. Say that you run a subscription box service with makeup products for young women aged 20 and 35.
You change up your product line in the subscription boxes at the beginning of the month and experience customer churn; it might be because you added makeup products that your target audience isn’t interested in.
In addition, companies can accidentally cause customer churn for themselves by following incorrect pricing models. Pricing your products too high, such as by increasing the price of a subscription service by $5 per month, could lead to customer churn as your core audience leaves for a competitor with a lower-priced alternative.
This is just another reason why it’s important to do a lot of pricing research before changing the prices of your products.
If your company or industry follows a seasonal model, you could experience periodic customer churn. Examples include holiday-themed stores or resorts that primarily attract customers during one or two seasons out of the year. The products you sell in January or February might not translate to the spring and summer seasons.
In these niche cases, churn isn’t bad overall because you can anticipate customer churn. But you need a predictive model to plan for customer churn every year (customer churn prediction), so you don’t lose money in aggregate.
If your brand primarily gets revenue from a subscription service, that service may not have enough renewal value to keep customers after signing up for one payment cycle.
For example, if you offer a magazine for a subscription, your following issues need to be just as interesting as the first to keep people subscribed. Otherwise, voluntary churn could affect you quickly.
While there are lots of ways in which customer churn could affect your business (and lots of reasons why you might experience churn in the first place), there are also ways in which you can reduce or even eliminate customer churn. Let's take a look at some of those ways now.
Before doing anything else, examine the metrics and data you gather from customers who have already left and start adapting your business model ASAP.
Look at the data and ask yourself questions like:
By answering these questions, you’ll be able to identify the issue causing customer churn more quickly and accurately and take steps to fix it.
Once you’ve identified the problem, you can start optimizing or fixing your services and products.
Here are just a couple of examples:
The solution to customer churn is necessarily dependent on the exact problems you’re facing. Before undertaking any solution, do research and analysis; otherwise, you could waste time and money fixing a problem that doesn’t contribute to customer churn.
It may also be good to start new and double down on existing promotional renewal offers, such as marketing ads, special offers to existing or returning subscribers, and more.
One of the classic examples of this is the “special return” offer. Say that you have a subscription service for a magazine. You might offer something of value as a bonus to former subscribers who return and sign on for a period of three months, such as giving them one month’s subscription free.
This aggressive marketing can be great for drawing people back to your brand after they temporarily abandon it.
Lastly, your company may benefit from doubling down on marketing and lead cultivation for those customers most likely to make a purchase. In this way, you won’t waste a lot of time marketing to people who aren’t likely to make a purchase—you’ll focus on a few core customers instead of spreading yourself too thin.
However, this strategy is only appropriate if those core customers are enough to sustain your needed revenue margins.
In the end, customer churn has the potential to affect every business, so you must know how to identify and deal with causes of churn ASAP when they crop up. Building Blocks’ Masterclass is the best means to master the material above and ensure your customer churn never drags your business’s revenue below the black line.
Try Building Blocks today and see how it helps your business thrive.
Sources:
The Value of Keeping the Right Customers | Harvard Business Review
Churn Rate Definition | Investopedia
5 Easy Steps to Create the Right Pricing Strategy | Inc.com