What is Churn, How to Calculate it, and How to Prevent it in 3 Ways
One negative experience. That’s all it takes for a loyal customer to turn their back on you and patronize the competition.
39% of customers who reported bad customer experiences stopped using a business for two years, according to Zendesk. In fact, bad customer experience is the reason 67% of customers will stop doing business with you.
This terrible but very real phenomenon is known as churn. If you don’t work to prevent it, you’ll continue losing customers year after year. And It’s 5–25x more expensive to acquire a new customer than retain existing ones, according to the Harvard Business Review.
That’s why you have to do everything possible to reduce your churn rate and satisfy your customers. We’ll show you how in today’s post, but first, let’s define customer churn rate.
What is Customer Churn Rate?
Churn can slowly kill your business if you don’t understand it and reduce it.
Churn, attrition, and churn rate all mean the same thing:
An existing customer (whether a regular buyer, subscriber, user, or what have you) stops using your products and services and starts buying or using someone else’s.
No business is safe from customer churn. It’s part and parcel of doing business in the first place. If you’re unaware of your churn rate then you’re doing yourself, your business, your employees, and your customers a grave disservice.
If you want to keep more loyal customers, the first thing you need to figure out is how many of them you’re losing in a month, quarter, or year.
How do You Perform a Churn Rate Calculation?
Calculating customer churn rate is the first step toward understanding how to reduce it.
Conducting a churn rate calculation is fairly simple:
- Identify the number of customers you lost last quarter.
- Divide that number by how many customers you started with last quarter.
The percentage you end up with is your churn rate.
If you started last quarter with 1,000 customers and lost 100 of them by the end of that quarter, your churn rate would be 10%.
As straightforward as this formula is, it’s not the only way of calculating churn rates (and in many ways, it’s obsolete to other methods).
What’s another Churn Rate Formula?
These 2 formulas will help you calculate customer churn.
There are many ways to calculate churn rates and the simplest methods are not always the most effective.
The churn formula we provided earlier is known as “customer-based” churn. That formula is especially useful if your business charges roughly the same amount for all your subscribers.
However, if you have varying price points for your services, or different products and services your customer can purchase, then the formula you should use for that calculation is called the “revenue-based” churn rate.
Here are 2 ways of calculating revenue-based churn rates:
1. Gross Revenue Churn Rate
The formula for calculating gross revenue churn is very similar to customer churn:
- Identify the total amount of revenue lost during a specified period of time (a month, quarter, or year).
- Divide that number by how much revenue you started with in that specified period of time.
The resulting percentage is your gross revenue churn.
If you started Q1 with $50,000 in total revenue and by the end of Q1 you lost $5,000, your gross revenue churn rate would be 10%.
2. Net Revenue Churn Rate
Net revenue churn is probably the most important rate of churn you can measure. Here’s how to calculate it:
- Identify revenue lost during a specified period of time (a month, quarter, or year).
- Identify revenue gained from existing customers during that time period (from higher subscription rates, upsells, etc.).
- Subtract revenue lost from revenue gained and divide that number by total revenue at the beginning of the specified time period.
The percentage calculated is your net revenue churn rate.
Let’s say you started Q1 with $50,000 in total revenue. During that period, you lost $5,000 in revenue but gained $3,000 from existing customers. Your net revenue churn rate would be 4%.
How Do You Reduce Churn?
Reducing customer churn rates requires specific strategies but it’s not as hard as you think.
If you’ve been playing along while reading this post and discovered you have a higher churn rate than you should have, we’ll show you a few proven ways to retain loyal customers and stop them from turning to your competitors.
Create a Better Customer Onboarding Process
The moment you bring customers into your fold, they should feel confident in using your products to achieve their goals.
One way to achieve this is through customer onboarding tutorials, where you educate customers immediately on how to effectively use the product.
A similar strategy is known as “ customer success,” where you help customers become more productive with your product over time.
Onboarding tutorials is one method for achieving customer success, while customer success involves creating FAQs, knowledge bases, and other content to continually aid your customers in squeezing the most value out of your products.
Doing this early and often makes sure you don’t leave customers struggling or confused and helps build a culture of competency around your products long-term (think technology evangelists like Apple users).
Listen to Customer Complaints
According to a study from Conversocial, “If confronted with unanswered customer complaints on a company’s social media site, 88.3% of respondents said they’d be either somewhat less likely or far less likely to buy from that brand.”
If customers complain in-store, you would immediately respond, right? That same attitude has to be brought online and especially on social media. Because as bad as a customer complaint may be, it can be turned around.
According to Maritz research, ⅓ of the 1,298 US consumers surveyed received a response on social media from the company they complained about and 83% of them said they liked or loved hearing from the company. That’s the power of listening and responding to customer complaints.
Give Customers a Reason to Stay
While you should double-down on your loyal customers and “ promoters,” there are ways to show some love to customers who are close to leaving you for a competitor.
- Offer customers access to a loyalty program with many benefits.
- Provide a discounted renewal rate for customers close to leaving.
- Create special promotions or contests to re-engage customers.
Send Customers Renewal and Dunning Emails
To oversimplify, there are two types of customer churn.
- Voluntary — When a customer asks you to cancel their account
- Involuntary — When a customers credit card expires and their subscription expires
Both kinds of churn can be expensive, and in many cases, voluntary churn might be something you can’t avoid. But there are so many different ways to address involuntary churn that are pretty simple. If you don’t have a system of automation handling renewals and dunning emails, there are a lot of great resources out there you can look into.
At CloudApp, we use a service called Recurly for our subscription management that handles making sure credit card numbers are updated, as well as handling some parts of our renewal and dunning process. We also use an email service called Customer.io that helps us send a sequence of triggered emails to the account holders reminding them to update their card. Customer.io actually has a great list of example emails here that you can check out.
One More Way to Reduce Churn: Improve the Customer Experience Through Visual Communication
Communicate your thoughts visually with CloudApp.
91% of buyers prefer visual and interactive content rather than traditional formats like text-based content.
So the more you communicate visually with your customers, the better they’ll understand what you’re saying and the more enjoyable customer experience they’ll have. That’s why we built CloudApp.
We help customer support teams:
Learn more about CloudApp for Customer Support here.
Originally published at https://www.getcloudapp.com.