How often do you start paying for a subscription only to cancel it because the product or service doesn’t live up to what you hoped it would be? Customer “churn” like this is a vital issue for businesses relying on subscriptions and memberships.
While one person leaving isn’t cause for concern, if large numbers of customers start abandoning a business then it’s a good indication that something is wrong.
No business wants to feel like they’re hemorrhaging customers and losing just as many people as they’ve got coming in every month. Not only is it demoralizing, but it’s also a huge barrier to growth.
In this guide, we’ll cover everything you need to know about customer churn, including churn analysis, how to calculate churn rate and how to reduce churn in your business.
If you’re looking for answers fast, click the links to skip ahead to the section you want:
- What is it?
- Why does churn matter?
- How to identify customer churn
- Analysis: Causes of customer churn
- Types of customer churn
- 5 strategies to reduce churn
Simply put, customer churn is the number of customers who choose to stop using your products or services and take their business elsewhere during a given time period.
While it’s normal to lose some customers, if too many people are cancelling their subscriptions and leaving your business then it’s a sign that something is very wrong.
Beyond increasing the number of new customers you acquire, to grow your business, you need to reduce how many of them churn.
Every time you lose a customer, your business loses money. (And worse, your hard spent sales & marketing dollars earning that new customer went to waste)
In fact, it costs your business 5 times as much to attract a new customer than to retain an existing customer. What’s more, increasing customer retention by just 5% can lead to over 25% increase in profits.
If you can reduce churn, you can:
- Increase revenue
- Increase Customer Lifetime Value
- Increase referrals
Customer retention is central to growth and it affects all other areas of your business.
But the question is: How to identify customer churn?
To get on top of churn, you need to know how to identify and calculate it. Here are our tips.
To understand and identify churn in your business, you need to define your metrics for measuring what churn means to you. These metrics will vary depending on your business model and the products or services you’re offering customers.
For example, it could be the number of people who cancel their subscriptions if you operate with a subscription-based model, who closes their “accounts” or memberships with your business, or who choose not to make a repeat purchase.
If you want to reduce churn, you need to know what you’re looking for. Set clear metrics for monitoring customer churn, then use them to track customers and pick out who is most at risk of churn.
To calculate customer churn, businesses use a metric called the churn rate – sometimes called an attrition rate – that quantifies the rate at which customers stop using and paying for a product or service in a given period of time.
Churn can be calculated using a simple equation to give you a percentage. You can work out your business’ churn rate with this formula:
To find out your customer churn rate, you need to know how many customers or subscribers you started with and the number you ended up with at the end of a set period, usually a month, year or fiscal quarter.
For example, if you have 500 customers at the start of the month and you lose 50 customers during the month, your churn rate is 10%.
You can use this customer churn rate calculation to monitor your customer churn over time and see how it changes month on month.
To understand why you’re losing customers, it’s important to do some analysis. While there are a wide range of causes of churn, it can usually be attributed to these 5 categories:
One of the most basic reasons for customer churn is the price of your products or services. If your customers can find a similar product or service that they feel is better value – either it is a lower cost or offers more or better features for a similar price – they may choose to switch. If you notice your churn rate is high, you might need to rethink your pricing to reduce churn and retain more customers.
2. Product/Market Fit
If you want to reduce churn for your business, you need to take a look at who you’re marketing and selling your products to. A high customer churn rate can be a sign that you have a poor product or market fit. If you’re not targeting the right audience or tailoring your products to your target audience, your churn rate might be higher than you’d like.
3. User Experience
User experience also affects your customer churn rate. If your customers can’t use your products or services the way that they want to or they can’t get the full benefits you’re offering them, there’s a high chance they’ll choose to stop being customers and churn.
4. Customer Experience
When someone signs up as a customer with a new brand, there are many things that contribute to their customer experience. Customer experience includes your customer support team, marketing content, your account managers and more. If your business customer experience isn’t up to scratch, you’ll lose customers fast so to reduce churn, you need to improve your customer experience from the very start of your customer journey.
5. Company/Business Culture
Increasingly, customers are also choosing products and services based on brand values and the culture that different businesses and companies promote. Factors including workers’ rights, sustainability and ethical standards can all have an effect on customer churn. If you’re not hitting the mark with your company culture and your target audience is unhappy with your performance, you might find your customer churn rate rising.
Different types of churn can impact your business in different ways. Here are the ones you need to know about:
Active vs passive churn
Active churn is the result of deliberate action by your customers when they actively choose to unsubscribe or end their relationship with you.
But there is also a thing called passive churn.
Unlike active churn, passive churn is customer churn that’s caused by technical or mechanical problems like credit card failures or failure to approve a card charge. This type of churn is preventable.
To reduce passive churn, you can start by communicating billing updates directly with customers. It’s also a good idea to charge cards more than once in the event of a failed payment.
If you’re looking to reduce churn for your business, it’s important to pay attention to revenue churn as part of your churn analysis too.
Revenue churn is the amount of revenue you lose during a given period.
Unlike customer churn, this doesn’t have to mean that you’ve lost customers for good. Revenue churn simply means that your existing customer base is not generating the same amount of revenue as they were before.
This may be due to a number of different reasons, including fewer upgrades, customers downgrading their subscriptions, less repeat purchases and other revenue-related losses.
Even though you’re not losing customers from your business, revenue churn is still a clear indicator that something is going wrong and you need to work more on customer success in your business.
Another type of customer churn that can be a big headache for businesses is when customers leave and take their business to competitors.
Competition is normal and you’re always going to find some people prefer your competitors over you – it’s nothing personal.
But if you’re losing big numbers of customers to your competitors every month, you need to take a look at why your customers are choosing to leave you.
To reduce churn, analyze the causes of this type of churn and where your customers are dropping off – do you need to improve your customer service? Your onboarding process? Your user experience?
Instead of looking outwards, look inwards at what you can be doing better to reduce churn from competitor intervention.
When a customer chooses to purchase your products or services, that’s not the end of their customer journey – it’s just the beginning.
For many businesses, customer churn can be the result of poor onboarding that fails to set new users up for success with their recently purchased products or services.
To reduce churn, you need to make sure you’re doing everything possible to help your new customers use your product or service the way they want from the get-go and find the features they need easily and efficiently.
That means focusing on customer education through online learning. You could even assign a dedicated customer success manager to help your customers every step of the way.
Desired features or functionality
Some customer churn happens when customers feel like new features, services or products your business offers aren’t tailored to them.
Customers want to have a personalized experience and when what they desire isn’t delivered, they might churn.
As long as your products or services are tailored to your target audience and provide value, it’s ok if some customers churn. No company can cater to every single person.
However, to reduce this type of churn, it’s important to make sure that your customers are a good fit for the products and services you offer. It’s also important to continue to take into consideration customer feedback so it can inform the rollout of new products, features and services.
For B2B businesses, customer churn can happen because your customers go out of business or are bought out by another company.
This type of churn tends to be out of your hands – unless you’re able to still offer features that are relevant to the business in its new form.
It’s still useful to pay attention to this type of customer churn though as if it becomes more common, it might be an indication that you need to pivot your business to cater to businesses that are less at risk of closures.
If there is a gap between your brand values and your customer’s values, you might experience churn.
For example, you might prioritize sustainable or ethical production while certain customers are looking for the lowest cost options. In these cases, you could lose customers due to a mismatch of values and expectations.
With this type of churn, the important thing to remember is that you’re aiming to cater to your most loyal and valuable customers. You can’t please everyone – but you definitely want to please your top customers the most!
By now you know that customer churn is a bad thing – but can you prevent and reduce churn?
Here are 5 strategies to reduce churn and improve customer success in your organization to keep more of your customers on your side and on your books.
1. Identify your value customers
If you’re looking to reduce churn in your business, you need to start by changing your mindset.
Instead of thinking about how to stop customers from leaving the company and trying to reduce churn, think about how to maximize your profits.
Identify which pool of customers are your most profitable and valuable – and focus your efforts on these. Every company loses customers, but successful companies retain their most profitable customers and keep them as loyal customers long-term.
There are a few different metrics you can use to segment your audience and identify the most valuable pools, including:
- Average order value (AOV) – Customers who spend the most on your products and services are some of the most valuable and the ones you want to focus on retaining.
- Customer Lifetime Value (CLV) – To gauge who your most valuable customers are, try calculating the CLV for different audiences to see where you should invest your time and effort to reduce churn.
- Purchase frequency – The most important customers to retain are also the ones who make the most frequent and most valuable purchases. Purchase frequency is a good metric to use to assess where you most need to reduce churn.
When it comes to strategies to reduce churn in your business, the most profitable and valuable customers are the ones you need to direct your attention towards. These are the customers you can’t afford to lose in large amounts so concentrate your efforts on them.
2. Identify your at-risk customers
It’s important to know who your most valuable customers are – but it’s also a good idea to know who your most at-risk customers are too.
If your customers haven’t heard from you in a while or are feeling dissatisfied with your products or services, you need to know.
To reduce churn, you need to figure out who your most at-risk customers are and reach out to them.
Regular surveys and opportunities for customers to give feedback is the most effective way to keep track of your at-risk customers. Find out what their experience has been so far, how you can improve and what you need to do to retain them as customers and reduce churn.
Even if you can’t prevent them leaving your business, you can hopefully gain insights into the steps you need to take to stop other customers heading the same way.
3. Ask for customer feedback often
Any strategy to reduce churn has to include a thorough churn analysis to figure out why churn is happening in your company – and what you can do about it.
To understand your customers better, you really need to talk to them. That means asking for feedback, sending surveys and if possible, getting them on the phone or face-to-face.
Reach out to your customers to survey them, listen to their answers and learn from them. The best and only way to reduce churn is to give your customers what they want and that means getting their feedback every step of the way.
Pro tip: Whenever a customer terminates their relationship with your business, find out why using an exit survey. You can send surveys via email or SMS – just remember to keep it short and sweet to make it more likely your ex-customers will complete it.
4. Offer long-term contracts
If you want to reduce churn, you could try increasing the contract length for your products or services if you offer contracts through your business.
This customer churn prevention strategy gives customers more time to become familiar with your product and increases customer success.
On the flip side, this strategy can sometimes put potential customers off. People can be wary of locking themselves into a long-term contract with a business they haven’t used before so make sure it’s the right strategy for you.
If you can convince customers to sign up for 6 months, 1 year or even longer contracts, you can reduce churn and hopefully encourage them to become loyal customers.
5. Improve the Customer Experience
To reduce churn, you need to work on improving your customer experience. Here are 4 tips to help you:
1. Create a customer success strategy
To reduce churn, you need to focus on customer success. That means setting up a customer success strategy to make sure that you’re doing everything you can to maximize the chances of success for every single one of your customers.
Learn more: Check out our guide on what customer success can do for your business, or download our guide!
2. Offer dedicated 1-1 support
If you can offer one-to-one support to your customers, you can make sure that you catch any at-risk customers before they churn and maximize their chances of success.
An example of this is the Thinkific Plus Customer Success team who is dedicated to helping businesses grow and achieve the results they’re looking for with online learning at scale. They’re extra knowledgeable, committed and ready to cheer on every business every step of the way. This not only helps to increase their customer success, it also turns customers into loyal followers and brand advocates.
3. Customer Education Program
When someone starts using your products or services, they need to know how to get started and make the most of the amazing offerings and features you’ve laid out for them.
The easiest way to do this is through a comprehensive customer education program. Hosting your customer education program on a learning management system will allow you to provide high-quality education to new customers and walk them step-by-step through how to use your products or services – while helping existing customers find what they need, whenever they need it.
With Thinkific Plus, you can quickly and easily create a scalable online course academy for customer success programs to boost customer engagement and reduce churn.
4. Check in with your customer success team
If you’ve got a dedicated customer success team, you need to make sure that they’re on board with your customer success strategy and have fully brought into the strategies you’ve put in place to reduce churn.
Your customer success team is on the front lines in your effort to reduce churn so make sure you schedule regular check-ins with them.