Why and how to measure churn rate

Why and how to measure churn rate

Opinion ·

The cornerstone of a successful business is a healthy flow of new customers. It is the one crucial ingredient with the power to make or break a business. When customers gradually start to drop out and the churn rate increases, you should start searching for potential causes and quickly design solutions. Businesses should do everything in their power to avoid a high churn rate.

At its core, customer churn rate is a simple concept. It refers to the percentage of customers who abandon your brand over time. The more customers abandon, the lower will your retention rate go. And as you might already know, customer retention is a fundamental driving force of your business. Being able to keep your existing customers is key to saving costs related to customer acquisition and increasing revenue from repeat purchases.

Brands should work on the metrics to drive revenue growth and improve customer retention while reducing the customer churn rate. The first step is to understand the factors determining your churn rate and identify measurement methods. Let us show you how!

What is the churn rate?

The normal business cycle of losing and gaining clients is known as customer churn.

The rate at which consumers abandon doing business with a company during a predetermined period is known as the churn rate. It is also referred to as the attrition rate. For product companies, if a customer stops purchasing a similar or new product from the company, then that's known as customer attrition.

Every business endures churn, regardless of the caliber of its goods or customer support—the more clients who cease making purchases from your company, the greater your churn rate. The more clients you keep, the lower your turnover rate is. Businesses should aim for a lower churn rate.

Why is it important to measure the churn rate?

An excellent approach to assessing your company's health is to look at the rate of customer attrition or churn rate. In fact, it is a foolproof technique to monitor general client happiness. Churn measurement is so crucial that most SaaS companies frequently use it as their initial key performance indicator (KPI).

A proper churn rate analysis allows businesses to learn how many clients are leaving the business, where in the sales funnel it is more common, and the main causes of their abandonment. Analyzing if your client retention strategy is effective starts with measuring the churn rate.

When a company loses a customer, the revenue that the customer brings to the brand is lost. Therefore, to acquire new customers and make up for lost ones, additional costs will incur, such as marketing and sales expenses. It is one of the reasons why it is crucial to understand and measure the client churn rate.

Companies can also use this data to calculate their customer lifetime value (LTV) and evaluate how much they spend on gaining new clients, i.e. customer acquisition cost (CAC). Businesses can identify whether they are overspending on customer acquisition by looking at their LTV-to-CAC ratio. For instance, if a business discovers that its LTV-to-CAC ratio is an unfavorable 1:1, it probably needs to improve one or both metrics to maintain operations and profitability.

Here are some reasons why brands should continuously monitor their churn rate:

1. Determine the product-market fit

According to entrepreneur and investor Marc Andreesen, product-market fit refers to identifying a good market with a product that can fulfill that market.

You need a strong product-market fit to build a successful business. Product-market fit depicts a situation in which a company's target customers purchase, use, and promote the company's product in sufficient numbers to sustain the product's growth and profitability.

If you observe significant churn rates, it may indicate that you haven't yet identified your target audience or that your offering is poor. Thus, to fix the problem, you should be able to pinpoint where and why your consumers are abandoning your business.

2. Increase Customer Lifetime Value (LTV)

The customer turnover rate directly affects your customer's lifetime value (LTV). A high customer lifetime value suggests that customers frequently purchase from you. They are pleased with the service and quality and are brand loyalists and advocates; therefore, they will help market your product better and lead to more revenue generation.

3. Improve customer retention rate

Even though it's not always simple, retaining a current customer costs significantly less than finding a new one. Typical customer acquisition costs are five times higher than average customer retention costs. It means you can save yourself thousands of dollars annually by lowering your churn rate by even 1%.

How to measure the churn rate?

The formula for calculating the churn rate is:

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For example, imagine your company had 250 consumers at the beginning of the month but lost 10 by the end. Then to calculate the attrition rate: divide 10 by 250, and the solution is 0.04. The resulting 4% monthly churn rate is obtained by multiplying 0.04 by 100.

One of the most crucial ways to calculate the churn rate is first to determine a period, such as whether it should be done monthly, quarterly, or annually. You will need to know the exact figures: the number of customers you had at the beginning of the selected period and the portion you lost.

If the math seems intimidating, here's a way to simplify the calculation. Follow these five easy steps:

  1. Choose a time frame, such as monthly, yearly, or quarterly.
  2. Find out how many customers you had at the start of the period.
  3. Find out how many customers left your brand towards the end of the period.
  4. Divide the number of lost customers by the total number of customers you had before the churn.
  5. Multiply that sum by 100.

For example, let's consider your retail brand had 500 customers at the beginning of the previous quarter. Now, let's say you lost 50 customers during the period. This would imply that your quarter's customer churn rate is the 50 lost (churned) customers divided by the total number of 500 former clients. Since 50 divided by 500 is 0.10, your customer churn rate would be 10 percent.

Now that you have understood a churn rate and the importance of customer churn, let's look at actionable practices that can help you decrease your customer churn rate.

How to reduce the churn rate: 8 foolproof strategies

Brands can lose up to $1.6 trillion per year due to high levels of customer churn. In fact, according to a study conducted by PWC, 32% of customers would abandon a business after just one negative experience.

If your churn rate is high, there are several ways to reduce customer churn. These strategies are foolproof and tested across industries to minimize the churn rate.

1. Figure out why churn occurs

First things first, understand the root of the problem. Although it may seem apparent, you must figure out why your customers are leaving. Interacting with the customer is the simplest way to accomplish this.

The best course of action is to call your customers. By doing so, you may show that you care while also quickly learning what went wrong. 68% of customers renounce a business because it doesn't value them. Reach out and make them feel valued.

Always request feedback and conduct surveys when a customer leaves in the middle of the customer journey to identify the pain point, and even after a successful purchase, to determine what is working in your favor. Brands can provide their customers with incentives for filling out surveys and work on the major complaint areas to show their consumers that they are heard.

In fact, customer interaction does miracles for churn analysis. You must aggressively use all available channels, including live chat, email, the website, and social media.

2. Periodically monitor your churn rates.

Customer churn will occur despite your best efforts. But, when it happens, take advantage of the situation to investigate what caused the client to go and what you can do to stop another customer from leaving for the same reason in the future.

Monitoring your churn and retention rates is an essential first step. Churn data can be used to examine the performance of certain customer care representatives or managers, compare your offering to rivals, or pinpoint problems in the customer experience that your product and development teams can address.

3. Educate your customers.

Today's customers are significantly different from the last decade's. Customers are now much more aware of their choices, empowered, and believe in self-service. Your customers also want to be educated about your brand and its offerings.

As a brand, you should ensure high-quality instructional or support materials to boost retention and decrease churn. Provide free webinars, training sessions, video tutorials, and product demonstrations – whatever it takes to reassure and advise your customers.

In other words, you need to provide them with tools that allow them to enjoy their product uninterruptedly throughout the entire customer journey. By doing this, you'll show off the full potential of your goods and services and ensure that clients have a smooth onboarding process.

4. Redesign your onboarding process.

Creating a comprehensive and effortless onboarding process can stop customer churn as soon as they become customers.

For instance, utilize a welcome email for new clients and provide personalized 1:1 and online client onboarding. A seamless and hassle-free onboarding process goes a long way in earning customer trust and preventing attrition.

5. Engage with customers actively.

Ensure you consistently engage with your customers and have a conversation wherever possible. For instance, ask them for feedback if you have identified customers who are just one-time purchasers or have abandoned their cart midway into the sales funnel. Try re-engaging them with informational content, personalized marketing and recommendations, promotional discounts, and other perks.

Get your end-users opinion as soon as they achieve a milestone while using your product or service. To improve the relationship, identify the critical times that make or break a satisfied customer and solicit feedback there. In some cases, customer feedback can shape unfavorable customer evaluations. Here you should react quickly and effectively.

You can also communicate with your customers proactively. Develop a relationship with your clients by being proactive in your communication with them, so they see you as a reliable partner. Provide personalized recommendations based on their browsing history and past purchasing order, interact with them on social media, and get in touch with them if there are any product-related problems so they know they can rely on you.

6. Train your support staff.

According to a Forrester Research survey, 69% of respondents stated they like to purchase more frequently at businesses that offer reliable customer service. You must have an informed and dedicated staff to accomplish reliable customer service.

To prevent customers from feeling swindled, customer service representatives should emphasize the genuine value of your good or service. To guarantee client pleasure, customer support staff members should be fully prepared to handle any issue that comes their way.

A brand can significantly reduce customer churn by investing in the support staff's procedures and resources.

7. Treat your existing customers well to prevent future churn.

You can treat your present clients to stop future churn. You can implement a rewards program. You can occasionally choose personalized touch points like a face-to-face coffee date or a trip to their office.

If your company is small, the CEO can also personally check in with current clients to see how they're doing. Additionally, this is a fantastic chance to obtain feedback. A busy consumer might not participate in a survey, but if the CEO inquires about their feedback, they could be more inclined to do so.

8. Target the right customer groups.

No matter how sophisticated your retention strategies are, they can all fail if you are targeting the wrong group of customers.

If your first contact with a consumer is all about "free" and "cheap," you can risk losing your customers who aren't interested in the value you offer. The majority of these freeloaders are prone to dispersing. Instead, target people who see the long-term value of things and perceive a benefit in spending money on high-quality items.

Now that we have established you can’t afford to lose your customers, try to become a keeper. You need to make your customers clearly see why your brand benefits them and why it is better to stick with you instead of leaving.

You can look at churn rate examples across industries to understand what leading brands are doing. For instance, the popular music streaming service Spotify is renowned for its vast music catalog and individualized recommendations. They have a reported churn rate of vvvv, much lower than its competitors.

Try to be proactive in preventing client churn by fostering an environment that would enable users to readily recognize and take advantage of the benefits your products provide.

It is crucial to realize that in most cases, the main reasons for churn have nothing to do with the brand's products or services but poor customer service.

Maintaining clients is not a magic trick. It all comes down to understanding the causes of churn and taking appropriate action. Improve your customer service standards, involve your consumers in developing your products, and ensure that they understand the benefits of sticking with you rather than going elsewhere.

How Layerise can help you reduce churn?

With Layerise’s state-of-the-art solution, brands can significantly reduce their churn rate. With Layerise, you can optimize your marketing efforts and customize the customer experience. Additionally, you can contact your consumers directly via email, phone number, or chat to keep them happy and encourage them to keep purchasing from you.

For your customers, Layerise also offers the most smooth onboarding process. They simply need to scan the QR code and access all the customer support and educational information. Throughout the registration process, it enables the brand to gather essential information about its consumers. Layerise automatically customizes the experience for your customers based on the information the customer gives.

Layerise allows you to create automatic marketing campaigns tailored to your target demographic using the data you gathered throughout the onboarding process. You can personalize and relevance your send-outs to increase conversions and reduce churn.

Layerise provides you with tools for educating and assisting customers. With Layerise, you can design product-specific Assistants that are brand-safe for your consumers to use for troubleshooting, assembly instructions, or product onboarding information. It has never been simpler to create logical, clever, and useful guides.

Book a free demo with us today to learn more!

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