Customer churn: how to calculate, measure and prevent losing your customers
June 12, 2024
Marketing
Business
None of us like losing customers. Customer churn or attrition is a problem in every industry, and the average churn rate can be surprisingly high for many of the businesses. For some industries, churn rates can be as high as 40-50%!
Keeping your current customers happy is easier and cheaper than trying to get new ones. Think about it: getting new customers can be expensive and tricky. You have to spend more money on getting their attention and convincing them to buy from you. Plus, sometimes it takes a lot of time and effort to turn a potential customer into someone who actually buys from you.
But when you focus on keeping your existing customers happy, it's a win-win situation. Not only does it cost less, but it's also simpler. You already know these customers like your service or product. So, putting effort into making them happy and satisfied can help you keep them around for longer. This way, you're saving money and building a loyal group of customers who keep coming back for more.
Especially in current times of economic uncertainty, all of us are more cautious of where we spend our money, and more often than not we turn more to the brands we trust when we make purchase decisions.
It’s really important to deliver a superior brand value and experience that makes your existing customers trust your company’s products, services and people enough to keep engaging with you.
But here’s the thing: How do you know if you’re going to lose customers? And how do you take action before they say goodbye for the good?
The cool part is, there are behavioral design and service design tricks that will help you keep them around, even if they’re not as engaged as before or are losing interest. In this guide, we’ll talk about:
the signs that will help you understand when customers could leave,
the moments that matter to different customer personas as they go through the journey of using your product or service and where they potentially could have disappointing experiences
predict who might leave next
and stopping those almost-gone customers from leaving for good.
What is customer churn?
Customer churn, also known as customer attrition is an important metric that helps you understand the level of growth in your business. It happens when someone chooses to stop using what you offer - whether it’s your products or services. In effect, it’s when someone ceases to be a customer.
Customer churn is measured using something called ‘customer churn rate’. It tells us about the number of people who stopped being customers during a set period of time, such as a year, a month, or a financial quarter.
How to calculate churn rate?
Before you calculate the customer churn rate, determine these three things:
Figure out a time period for which you want to calculate your churn-rate (eg: monthly, quarterly, yearly, etc)
The number of customers you had at the start of the time-period
The number of customers you had at the end of the time-period
Here’s the formula to calculate the customer churn rate:
Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period) x 100
For example, a coaching business has lost 40 clients over a monthly period. It had 400 customers at the beginning of the month and ended with 360. Using the churn rate formula, we can calculate churn at 10% monthly for this business.
By using a churn rate formula like this, you can measure the progress of your company over the months, quarters and the years. You can also express your churn rate in terms of revenue if it makes sense to do so, helping you to calculate the average revenue cost of losing customers.
Personally, I love the revenue churn rate formula as an entrepreneur working in the service-based industry. It helps me get a more powerful insight on how much marketing, design or sales revenue I lost from a given time-period in customer churn as compared to what $$$ I spend on new customer acquisition costs.
Calculate your monthly, quarterly, annual churn-rate
When you calculate churn rate, it’s important to be clear about when you consider somebody to have churned. Some sales cycles are longer than others.
For example, in some industries, such as interior designing or wedding photography, it’s typical for customers to go for long periods without purchasing because of the nature of the service, not because they’re under-engaged or at risk of churn. But for others, like monthly business consulting or digital marketing, there’s a shorter sales cycle as it's more about regular ongoing work that brings in recurring revenue.
So, when you're calculating how many customers are leaving, make sure it matches how your clients usually engage with your service. This way, you won't end up reaching out too early or getting the churn numbers wrong. It's about understanding your client's rhythm to keep your business strategies effective.
Why does your churn rate matter?
Understanding why customers stop using your service is crucial for any business. While some level of customer churn is expected in any business, especially over time, a high churn rate can lead to several problems that affect your business's growth and reputation.
Firstly, high customer churn can make it easier for your competitors to grab a larger share of the market you've worked hard to build. This means your business might not grow as you envisioned, as customers are leaving faster than you can bring in new ones. Additionally, a high churn rate can tarnish your brand image. When customers leave dissatisfied, they might share their negative experiences through word-of-mouth, which can deter potential new customers from joining in.
There are various reasons why customers stop using a service:
Customer Service and Support Blind Spots: Sometimes, your support team might not know the critical insights into what your customers truly need or why they face challenges across different stages of using your product or service. This can leave customers feeling undervalued or unattended.
Expectation vs. Experience: There can be a mismatch between what customers expect based on your marketing promises and what they actually experience during the onboarding or after-sales stage. This disparity can lead to disappointment and dissatisfaction.
Resistance to Change: In certain industries like coaching or consulting, customers might struggle with adapting to change or committing to improvement. Using behavioral design to guide them through these growth phases can work wonders in retaining them.
Understanding Your Audience: Gaps in understanding your target market and its needs might lead to incorrect assumptions. If your service doesn't align with their mental models or desires, customers might leave.
Quality and Value Perception: If your service quality declines over time or if the price doesn't match the perceived value, customers may feel they're not getting their money's worth.
Evolving Market and Changing Needs: Sometimes, the market changes, or your audience's needs evolve, and if your service doesn't adapt accordingly, customers might seek alternatives.
Seasonal or One-Time Needs: If your service is only useful for a specific time or a one-off situation, customers might leave once that time is over. Make sure you're ready to adapt or find ways to stay relevant beyond just that season or one-time need.
Competition's Better Offers: Sometimes, other businesses might have better deals or services than yours because they’re more in touch with what the customers want. If customers see a sweeter deal or better product/service elsewhere, they might choose to switch to that competitor.
Unappealing Renewal Offers: When it's time for customers to renew their service with you, if your renewal offers aren't exciting or valuable enough, they might decide it's time to explore other options. Ensure your renewal offers are enticing and provide added value to keep customers coming back for more.
By understanding why customers churn and taking proactive steps to address these reasons, entrepreneurs can reduce churn rates, retain more customers, strengthen their brand reputation, and ensure sustainable growth for their service-based businesses.
How to measure and analyse your churn-rate?
Sometimes, you need to understand the factors that will help you predict customer behavior and spot patterns in why clients would be leaving. This helps you tailor your services to better fit your customers' needs and preferences, reducing the chances of them choosing to go elsewhere.
Key Experience Measurement Throughout the Customer Journey:
Track and measure every step of your customer's journey—from when they first realize they need your service until their need is met. It's crucial to pay attention to the experiences your customers have at each stage. This involves handling touchpoints well, ensuring quick issue resolution, and delivering service in the way your customers prefer.
Operational and Experience Insights:
Pay attention to both operational facts (like reduced purchases or service ticket response rates) and customer experience cues (like a drop in visits or a lower Net Promoter Score after shopping). These hints can predict if a customer might leave.
Conversation Analytics:
Listen closely to what customers are saying, whether it's on the phone, email, or social media. Sometimes, they hint at why they might leave. Analyzing these conversations can give you valuable insights into the emotions, intentions, and reasons for churn before customers decide to leave.
Competition Analysis:
To reduce customer loss, study your competitors. Check out their:
Pricing: Compare your prices with theirs.
Innovations & New Products: See what new stuff they're offering.
Brand Exposure & Share of Voice: Analyze how much attention they're getting.
Customer Engagement: Look at how they interact with their customers.
Product Ease of Use: Assess how user-friendly their products/services are.
Upgrade & Renewal Offers: Check what offers they give for renewals.
Sales Tactics & Customer Support: Observe how they sell and support customers.
Customer Segment Analysis:
Dig deep into understanding different customer groups. Research not only who your customers are now but who they might become in the future. Think about:
Industries: Which industries do your customers work in?
Customer Longevity: How long do they stick around as customers?
Pricing Tiers: Do they prefer certain price levels?
Product Feature Usage: What features of your service do they use the most?
Strategies to Lower Churn Rate for Service-Based Entrepreneurs
Here are 7 strategies that service-based entrepreneurs can create a more customer-centric approach, effectively reducing churn and building stronger, lasting relationships with their clients.
Analyze churn to improve your customer service team:
Churn, or when customers leave your service, can teach us a lot. It's like a window into understanding why they left and how we can stop others from leaving for the same reasons.
Tracking Churn and Retention: Start by keeping tabs on how many customers are leaving and how many stick around. Tools like HubSpot's Customer Service Metrics Calculator can help with this.
Learning from Churn Instances: When a customer leaves, take it as a chance to learn. Check how your customer service team handled things. Was there something they could have done better? Did the product not meet the competition? Finding these answers helps fix issues.
Improving Customer Experience: Look into challenges customers face while using your service. Maybe there's something that's hard to understand or a part that doesn't work well. By working with your product and development teams, you can fix these troubles.
Spotting Good Performers: Not all customers leave for the same reasons. Some might have been unhappy with how a specific team member handled their problem. By looking closely at each case, you might find your star performers and areas that need improvement in your team.
Revamp your onboarding plan for new customers:
First impressions count! When someone starts using your service, you want to make sure they feel welcomed and understand how to use it.
Friendly Welcome: Send a nice email welcoming new customers. Make them feel good about choosing your service.
Personalised Guidance: Offer one-on-one sessions to explain how everything works. Show them around so they feel confident using your service.
Teach Through Content: Create helpful guides on your blog or videos showing how to make the most out of your service. Make learning easy and fun for your new users.
Ask for Feedback: After onboarding, ask new customers how their experience was. Did they understand everything? Is there something they'd like to learn more about? Their feedback helps improve the onboarding process.
Invest in more training for support and sales reps:
Your sales and support teams are like ambassadors for your service. Making sure they know their stuff can make a huge difference.
Sales Team's Pitch: Train your sales team well so they can explain your service's value clearly. If customers understand how good it is, they're more likely to stay.
Super Support: Equipping your support team with the right tools and knowledge to solve problems quickly keeps customers happy. Happy customers tend to stick around.
Continuous Learning: Learning doesn't stop after training. Offer ongoing support and additional training to keep everyone sharp and ready to assist customers efficiently.
Ask for feedback at key moments — and respond promptly:
Customers sometimes have concerns or complaints. Catching these early and dealing with them fast can prevent them from leaving.
Identify Churn Triggers at moments that matter: Figure out moments where customers might start feeling unhappy. It could be after a certain action or a specific time. Ask for feedback during these moments to catch issues early.
Be Quick to Respond: If customers have complaints or issues, address them promptly. Show that you care about fixing things and value their feedback.
Turn Negative into Positive: Sometimes, unhappy customers leave negative reviews. Respond to these reviews politely and try to solve the problem. It shows you're proactive in fixing issues, which impresses other customers too.
Communicate proactively with customers:
Staying in touch and being helpful even when things are fine builds a strong bond with your customers.
Share Useful Stuff: Regularly send interesting or helpful content. It could be tips related to your service or things your customers might enjoy. It keeps you on their radar in a positive way.
Connect on Social Media: Engage with your customers on social platforms. Respond to their comments, share their stories, and let them know you're there and interested in what they have to say.
Stay Transparent: If there are problems with your service, let customers know early. Being open about issues shows you value their trust and are honest about solving problems.
Offer exclusive perks to existing customers:
Sometimes, a little extra makes a big difference in keeping customers happy.
Special Treats: Surprise your loyal customers with something special. It could be a personalized gift or a chance to have a one-on-one chat with your team.
CEO's Touch: If your business is small, having the CEO reach out to customers shows that their opinion matters. It's a personal touch that can leave a lasting impression.
Tailored Rewards: Instead of a generic reward program, customize perks based on individual preferences. This makes customers feel seen and appreciated.
Leverage feedback from free trial customers:
Even if customers don't buy your service after a trial, their feedback is valuable in improving it.
Ask the Right Questions: Reach out to those who tried your service but didn't buy it. They might be more honest in sharing why they didn't proceed.
Uncover barriers & limitations: Their feedback can uncover barriers or limitations that deter potential customers from converting helps in understanding the reasons for disengagement or lack of interest. It sheds light on the service's strengths and weaknesses from the perspective of potential customers, allowing businesses to refine offerings and enhance their value proposition.
Learn and Improve: Use their feedback to fix any issues or confusion that might have stopped them from becoming paying customers. It's a chance to make your service better for others
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