The ability of a company to assess its performance and profitability in a given period is closely tied to the customer churn rate. Customer churn reveals much about the success that a brand has achieved. Also, this rate helps to see at which point success is likely to increase or dissipate.
The churn rate should always be used to diagnose issues and potential difficulties with retention to improve in the future. This article will define the customer churn rate, reveal why it is so important, and provide strategies to reduce customer churn.
What Is Churn Rate?
Churn rate, or customer turnover or churn, is a metric used to track the percentage of customers who discontinue using a product or service.
In marketing, churn rate is the opposite of customer retention, as it shows the number of customers who leave a company as opposed to the percentage of customers who remain with it.
The churn rate is a calculation that can also be applied to the employees at a company. The employee churn would indicate how many employees have left the company in a given period.
A company’s churn rate provides valuable insights into its overall performance and ability to sustain customer retention.
Key Takeaways
Churn rate is a term for the metric used to determine the percentage of customers who stopped doing business with a company;
The importance of churn rate can be seen in its ability to point toward different areas which may need improvement;
Offering various incentives can be an effective strategy for boosting customer retention. It will motivate new customers to stay with a company longer than they usually might.
How to Define Churn Rate?
The churn rate may be defined as the percentage of customers who terminate their relationship with a company in a given time. The churn rate metric is most used in companies operating on a subscription-based business model, such as telecommunications companies. Here, customers can easily switch mobile providers, and the ability of the provider to retain customers is an important index.
Calculating your company’s churn rate is a straightforward process. Simply divide the number of customers who left by the total number of customers at the beginning of the period, and multiply the result by 100 to obtain the churn rate percentage.
For example, if a company had 2000 customers at the start of the month and 1600 at the end, you would divide 400 by 2000. This gives us the figure of 0.2, which, when multiplied by 100, equals a 20% churn rate.
However, there are also two different forms of revenue churn. These are the gross revenue churn and the net revenue churn.
1. Gross revenue churn
The gross revenue churn is also known as the gross monthly recurring revenue (MRR). Gross revenue churn measures the amount of money lost over a specific period as a result of client cancellations or downgrades. It is calculated with the following formula:
MRR = (Initial revenue – revenue at the end of the period) / initial revenue
2. Net revenue churn
The net revenue churn is also known as the net monthly recurring revenue (Net MRR). Net revenue churn uses the same churn rate calculated for gross revenue churn, but it is mitigated by the revenue from new customers in a given period. The formula for calculating net revenue churn is as follows:
Net MRR = (Initial revenue – revenue lost – revenue gained from new clients / initial revenue
Why Is Churn Rate Important?
The importance of customer churn in marketing is self-evident. The ability to track how many customers have stopped interacting with your business can help you deduce how to use your revenue better and make sure that new customers stay with your company.
Benefits for business improvement
A company may learn where to make business improvements and why customers are leaving by analyzing its customer churn.
Compared to the price of keeping existing consumers, getting new ones costs substantially more.
This means that customer churn is essential to keeping a business profitable. Churn rate can point towards areas that need to be improved, such as customer service, customer satisfaction, or other areas that produce lost customers.
Predictive analytics
Tracking the churn rate allows businesses to anticipate future trends and potential revenue shortfalls. By understanding when and why customers leave, companies can develop predictive models to prevent churn and stabilize their customer base.
Customer lifetime value (CLV)
Monitoring the churn rate helps in accurately calculating customer lifetime value, a critical metric for assessing the long-term value of a customer. Reducing churn directly increases the CLV, making marketing and customer acquisition efforts more profitable.
Effective Strategies to Reduce Churn Rate
Although all businesses wish to reduce customer churn to 0%, it is a difficult task, especially for larger organizations. However, some steps can be taken to reduce customer churn, regardless of company size or industry.
1. Prioritize the best customers
Businesses should concentrate on the most profitable clients who are on the verge of leaving rather than diverting time and resources to keep all of their customers. This can be whether it be a call, an email, or a larger promotional package.
When planning your customer re-engagement strategy, take into account the possible answers the customer may give. Thus, you will be able to prepare the potential answers and provide a better ready-made solution.
2. Offer incentives to improve retention
When it comes to demonstrating to your current clients how much you value them, a promotion, discount, or loyalty program can go a long way. Think about what the customers want.
If you anticipate that a customer will cancel after understanding that your product or service isn’t exactly what they were searching for, use incentives to get them to stay on board. It will give you time to develop a feature or approach that will help them achieve their goals.
3. Enhance customer support
Providing exceptional customer support can significantly reduce churn. Ensure that your support team is well-trained, responsive, and capable of resolving issues promptly. Happy customers who feel supported are more likely to stay loyal.
4. Collect and act on customer feedback
Regularly collect feedback from your customers to understand their needs and pain points. Use surveys, feedback forms, and direct communication to gather insights. Act on this feedback to improve your products or services and show customers that you value their opinions.
5. Build strong customer relationships
Focus on building strong, long-term relationships with your customers. Regular communication, personalized interactions, and showing genuine interest in their success can foster loyalty. Customers who feel valued and connected to your brand are less likely to churn.
Related Terms
Looking to reduce customer churn and enhance business growth? Explore these related terms to optimize your strategies:
Additional Tips & Tricks
- The annual churn rate is a common statistic to track when measuring annual churn trends. Your annual churn rate will show how different challenges impact turnover each year;
- Customer retention will depend on a variety of business-specific factors. What constitutes good customer retention in one industry may not be considered so good in another. That is why you should not overly compare your retention rate to the biggest companies;
- There is such a term as involuntary churn. It usually happens when a company stops offering a service to a customer because they haven’t paid.
The Bottom Line
Churn rate, or customer churn, refers to a metric in marketing and business that helps companies track business performance and customer retention efforts. Customer churn is especially valuable for companies with a subscription-based business model.
From this article, you know what churn rate is, why it is important, and strategies for the reduction of customer churn. Now you can start tracking customer churn rate and apply this index to your regular marketing approach.
Churn Rate FAQs
To calculate your monthly customer churn, you need to divide the number of customers who left your company by the total number of customers at the start of the month and multiply by 100. Your monthly churn rate should ideally be lower than the monthly churn rate for the previous one. Yet changes during certain periods of the year need to be expected.
Retention can sometimes be fickle and difficult to maintain. In general, it is a good idea to implement a retention strategy. Organizations develop and implement retention strategies to lower churn, avoid customer attrition, boost retention, and promote customer engagement.
Different churn rates may be considered good in different industries. Still, an acceptable annual churn rate for startups is around 10% to 15% in their first year. Their monthly churn rate should be no more than 3% to 5%.
A negative churn is also known as the net negative revenue churn or negative revenue churn (churned MRR). It occurs when additional revenue from existing customers (expanding MRR) exceeds the amount of money you lost from cancellations and downgrades.
