Churn, or customer churn, is also known as “customer attrition”. This is when customers stop doing business with a certain company, and it may be due to a number of reasons. These include a lack of products or services that the customer needs, bad customer service, or better prices, products, services, or deals from competitors. Churn is a very important metric as it shows why customers may be unhappy and gives the business an opportunity to correct it, increase customer retention, and boost revenue.
What is churn?
Churn is calculated as the number of customers that stop using a company’s products or services within a defined time frame. This number is usually reflected as a percentage and the higher the churn rate, the more customers the company is losing. Churn is different depending on what type of product or service a business sells. Subscription services, for example, will identify churn as customers canceling their subscription, or not renewing once their membership period expires. Businesses selling products will usually experience churn as customers not making repeat purchases.
The goal of any business when fixing churn should be to lower the rate to as close to zero as possible. Generally, any churn rate below 5% is considered good, though some business types and industries may experience higher churn than others.
Passive churn vs active churn
There are two types of customer churn: passive and active.
Passive churn is when a customer churns, but they did not take active steps to do so. For example, if a customer’s credit card is expired, and they stop paying a subscription, they will no longer receive the subscription service. They did not actively cancel their subscription; they ‘dropped off’ due to a failed payment. Another example of passive churn is a customer who didn’t come back to buy again even though they wanted to – they simply didn’t have time. In cases like these, companies can be proactive about reaching out to customers, and watching out for potential payment errors before they occur so as not to lose these customers who are happy with the company already.
Active churn is when a customer churns on purpose; they took the necessary steps to cancel their custom, or stop spending money at the company. This can be because of several reasons, such as dissatisfaction with the product or service, a better price at competitors, or simply that they don’t have use for the product anymore. For example, a customer may stop buying baby clothes at a web store because their baby has outgrown the products offered. Or they may not buy again because they thought the product quality was poor.
How to calculate churn rate
To calculate churn, use this simple equation: lost customers within a certain time period divided by total customers at the start of that time period, multiplied by 100.
For example, if 10 customers left your business in January and you had 100 customers at the start of January, your calculation would look like this:
(10 100) x 100
In this case, your churn rate would be 10%. This rate is considered high for small to medium-sized businesses.
Why is churn rate important?
Losing customers is part of running a business; sometimes, there’s no way to know why those customers have left. However, knowing your churn rate will show you why certain groups of customers leave, and help you identify why this is happening so that you can fix or even reverse it.
It costs more to acquire new customers than to keep the ones you have. When it comes to business operational expenses, the time and money spent on acquiring new customers are always higher than the cost of convincing your current customers to keep doing business with you. This is one of the reasons that churn rate is important.
Your churn rate is an indicator of how many customers you’re losing, and lost customers mean lost revenue. Though a few customers will stop doing business with you regardless of what you do, you need to understand how many customers are churning, and why they’re churning, in order to stop a wave of customers from leaving. Businesses that ignore their churn rate, and their reasons for churn, are more likely to repeat their mistakes and will experience a higher churn month over month.
What is a good churn rate?
Generally speaking, lower churn is always better. Comparatively, when calculating churn for your business, keep an eye on the rate of churn month over month (i.e., as each month passes), as well as year over year, (i.e., comparing the figures of this year to the same time last year). This will help give a clearer view of your business’s churn rate.
A good churn rate for small to medium-sized businesses is considered to be between 3% to 5% every month. This depends on a business’s size, the industry it operates in as well as external factors. For example, if there is a high rate of inflation, a luxury goods seller may experience higher churn because its products have become unaffordable.
What are the benchmark churn rates by industry?
Churn rates are totally different for different industries – this may seem obvious considering consumers have different styles and tastes, different income levels, and they spend differently at certain times of the year, like the holiday season.
To understand your business’s health, it’s a good idea to look at the benchmarks for the industry you operate in, as well as your business’s size. Here are some of the most common benchmarks according to industry (but note that these change regularly):
Small to medium-sized businesses (SMBs) that are just starting out will usually have a churn rate of about 3-5%. As they start to grow, it’s expected that the rate will increase, going up to about 7% monthly. This is because many SMBs experience what’s known as product-market-fit early on, which means that their target group of customers buy or sign up, and recommend the business to others at a higher rate when a business is just starting out. This rate does decrease the longer a company is in business.
Computer software and IT service providers have a regular churn rate of between 11-14%. This may seem unusual considering the effects of the pandemic, which forced many customers to go online and many businesses to take a “digital first” approach. However, there is a fairly high rate of competition in this industry.
Financial services have a churn rate of about 19%, while telecommunications has an even higher churn rate of 31%.
The industry with the highest churn is wholesale, with a rate of 56%. This is due to several factors, including heavy pricing competition and supply chain interruptions.
What is churn prediction?
Churn prediction is a way of forecasting which customers are likely to stop doing business with you based on their behavior. This offers you a way to be more proactive, engaging with customers who are likely to leave and offering them a great deal or value-added services to encourage them to stay. This is also a great way for you to know where to focus your marketing efforts since churn trends will help you identify where the majority of your customers’ pain points lie.
5 strategies & tactics to prevent churn
There are various methods to prevent churn, as well as tools and technologies you can use to help you do it.
- First, understand why churn is happening. It’s impossible to reverse churn if you don’t know why it’s occurring. One of the best ways to do this is by talking to your customer, so you can gain insights into why they no longer want to do business with you. Start by creating an online survey to get feedback directly from your customer. There are a number of free tools you can use to do it, and they usually take very little time to set up. Another great way to understand why customers churn is by listening to support calls. This can be done using your customer management system (CMS).
- Identify your at-risk customers with a churn prediction model. There are a number of online technologies currently available to help you identify at-risk customers. These will show you which customers are dissatisfied with your service, unhappy with your pricing, or simply don’t feel connected to your brand. Once you have this information, you’ll be able to group those customers according to reasons they may leave your business, and target your marketing efforts in such a way that they’re less likely to churn.
- Offer value-adds and discounts. Customers who don’t feel like their time, money, or business is valued are more likely to churn. One of the simplest ways to stop this from happening is by offering them an incentive to stay. This is so simple to do but be sure that you’re correctly evaluating whether the cost of the customer outweighs the cost of the incentive.
- Give your customers better service. Customers who don’t feel supported will stop doing business with you, but this is easier to fix than you think. Use your customer management system (CMS) to help you manage your customers’ calls, emails, and social media inquiries in one place, add tags to these so you know where the trends are, and then address them. A good CMS will also help you identify if you have enough support staff to deal with customer queries.
- Showcase what you do better than competitors. When your customers consider whether they should stay with you or move over to your competitor, they’re likely to look at where you fall short. Do it yourself before your customers have a chance to, so you can address these shortcomings before they result in churn. There are a number of competitive intelligence tools available online that can show you how you compare to your competitors.
Keeping the customers you have is cheaper than finding new customers. With a few simple tools, tricks, and technologies that provide insights into your customers, competitors, and the state of the market, you can do a better job of reducing your churn rate.