What Is Customer Churn? (How To Calculate And Reduce It)
Updated 15 November 2022
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Customer churn, customer attrition or churn rate, is an important metric to evaluate the growth of a business. It helps measure the number of customers and the revenue a company loses over a period because of customer departure. Understanding the factors that affect the churn rate and learning how to prevent it can help a company retain customers. In this article, we define customer churn, outline its causes, explain why companies calculate churn rate and how to calculate it and provide tips for reducing a company's churn rate.
What Is Customer Churn?
Customer churn is the loss of customers or clients in a business because they stop using services or goods over time. It is the percentage of customers who may not make another purchase from a company. Although organisations spend money on acquiring customers during the initial years of their business, the cost of retaining these customers is less than acquiring new ones. Therefore, it is beneficial for a company to keep existing customers rather than spend on customer acquisition. Most businesses classify their churn rates into two categories:
Voluntary churn: Customers leave a business of their own accord because they might find better services from another company.
Involuntary churn: If a company changes its location or stops offering a particular service, customers may find an alternative because they cannot access the services of their usual brand.
Related: What Is A Churn Rate? (With Importance, Merits And Examples)
How To Calculate Churn Rate
Follow these steps to calculate a company's churn rate:
1. Set the period for calculating churn
Select a specific period to calculate the churn rate, such as a month, quarter or year. A company compares the total number of customers it loses or gains over this period. You can refer to the company's monthly reports and analyse customer data to decide the time frame for churn rate calculation. For example, you could calculate the previous month's churn rate and compare it to the last quarter to examine the churn rate over a period.
2. Calculate the number of customers the company lost and gained
After selecting the period, find the number of customers the business may have lost and gained. You can use the company's monthly business or customer reports to calculate the number of new customers using its services and the number of customers who left the company. For example, the business might have gained 400 new customers and lost 50 existing customers.
3. Apply the churn rate formula
You can calculate the churn rate percentage by dividing the number of lost customers by the number of customers the company acquired and multiplying it by 100.
Churn rate= (Customers lost /Customers acquired) x 100
When you use the above example, the calculation becomes:
Churn rate = (50 / 400) × 100 = 12.5%
The company lost around 12% of its existing customers over the previous month.
Related: What Is Attrition Rate And How To Calculate It
Why Is Churn Rate Important?
The churn rate is essential to determining the quality of services and the effectiveness of a company's marketing strategy. The following benefits show why understanding churn rate is important:
It allows businesses to measure customer satisfaction and examine why, where and how customers are churning. Companies can analyse their churn rates to focus on growth by investing in customer retention.
The churn rate helps a company understand whether its user experience is satisfying. For example, customers may quickly move to other brands unless software applications effectively solve problems and allow easy access to services.
Customers might churn if they feel disconnected from a brand. Many businesses try to establish a personal connection through emotional and psychological marketing strategies. The churn rate can help a company understand what unique services or experiences it can offer its users.
You can analyse a company's churn rate against its competitors to achieve a comparable rate within an industry. An ideal rate of 0% might not be feasible, but companies can try to decrease their churn to an acceptable limit to remain competitive.
The churn rate can clarify the quality of products and customer services. You can gain insight into essential customer metrics and work on the company's business strategy to improve its quality of services.
Causes Of Churn
There are various reasons for an increase in churn rate, which can apply to many customers. Here are a few common reasons responsible for churning in many businesses:
Price of goods and services
Customers might be sensitive to pricing. They might churn if they think a company's pricing is not justifiable for a product. They may look for a more cost-effective solution to their problem and choose to use a competitor.
Customers can churn when a business changes. For example, when an offline business closes its services at a particular location or an online business merges with other companies and modifies its products and services. In such cases, customers may no longer relate to the merged brand or could find alternatives due to the closure.
Businesses typically face the constant task of offering better products and executing more effective marketing strategies than their competitors. Such companies might focus on competitor analysis or give customers a unique product feature or benefit to retain them. Improving overall customer experience becomes essential to attract existing and new customers.
Uncertain brand value
Companies can align their mission with brand value. Whether offering an eco-friendly alternative or focusing on technological innovation to improve consumer convenience, a company can try to clarify its brand's value to the customer. To reduce the churn rate, ensure your target audience can relate to the brand value and core offering.
Unsatisfying products or features
Customers might look for a new experience when purchasing or accessing new products or services. Customers might churn if a company cannot provide the features or functions they want. You can gather user feedback regularly and upgrade services accordingly to satisfy them.
Related: 8 Customer Support Skills (Advantages And Ways To Improve)
How To Reduce Churn Rate
When you reduce a company's churn rate, you can increase its customers' lifetime value. Lifetime value is the average amount a customer might spend purchasing products and services during their lifetime association with the business. You can follow these tips to reduce a company's churn rate:
1. Analyse why customers might churn
Study the company's latest customer reports to analyse why customers might leave its products or services. For example, you can refer to customer complaints about a product or see what competitors are doing better to attract customers. Consider surveying or asking for customer feedback and invest in resolving the problems affecting the churn rate. You can also try to focus on satisfying the most profitable customers by offering discounts and promotions or connecting with them through customer service and asking for suggestions to improve the company's offerings.
Related: What Is MAU? (Its Importance And How To Calculate It)
2. Design a customer roadmap
Set up an onboarding roadmap to help customers easily navigate products and services. A detailed roadmap can make customers feel valued and encourage them to choose to use the company's services. You can do this by:
Sending a welcome email to new customers explaining all the benefits the company offers them
Providing a guide to help understand a product's features and how to use them
Informing customers whenever the company launches a new product or feature
Asking for customer feedback
Offering customers discounts and offers on special occasions
Connecting with customers frequently through newsletters or customer meet-ups to discuss their experience with the brand
Related: What Are User Onboarding Tools? (With Benefits And Examples)
3. Customise your services
Give customers a reason to prefer the company's services over competitor offerings. For example, you could offer consumers loyalty programmes, promo codes or discounts based on their purchase size and how frequently they visit the store or website. When determining when to provide incentives, consider whether a customer is approaching the end of their subscription period. You can increase retention by rewarding loyal customers with extra benefits or customer success managers for valuable users.
4. Provide excellent customer service
Address customer problems across various platforms. For example, empower customer service representatives to solve customer queries quickly. Visit social media pages or forums where customers might leave a review on a product or service. Examine those reviews, look for problems customers face and target users who might give low ratings. You can build robust communication with users by establishing the company's presence on social media sites and community forums. Excellent customer service can distinguish a company from its competition in the market.
Related: How To Manage Customer Relationships: A Complete Guide
5. Monitor churn rate metrics
Define what causes an increase in churn rate for the company. It might be uninstalling an app, not purchasing a product from the website, cancelling a subscription or returning products after using them for a few days. You can use customer relationship management tools to monitor user interaction with the business. Once you have set your metrics, focus on target customers and gather their feedback to improve services. You can also compare the churn metrics of similar businesses to understand which features or new functions customers might prefer in a product.
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