“When customers feel seen, heard, and valued, they get invested in their relationship with your company.” – Ali Cudby CEO of Alignmint Growth Strategies.
If you want your business to succeed and grow, you need to have a complete understanding of how to maintain your customer’s loyalty. Calculating your churn rate is a big part of this. Customer churn is a natural part of the business process, but if you leave it unchecked, then you miss out on critical information. Monitoring customer churn allows you to observe how and why your customers are leaving. In addition, calculating your churn rate and analyzing that data provides insight into the profitability of existing customers and allows you to identify which customers are loyal to your brand.
In this blog, we’ll explain how to successfully calculate your annual customer churn rate so you can maintain successful customer retention.
What is Customer Churn?
In the simplest terms, customer churn is the number of customers who choose to no longer work with or buy from your company. Some businesses use the terms “customer turnover” or “customer attrition,” but it all means the same thing—your customers are leaving. Sadly, when a customer churns it means that something has caused them to completely terminate their relationship with your business. Here are just a few examples of reasons why customers churn:
- Your customer had one too many bad experiences with your customer success team
- Your product or service was no longer meeting that customer’s needs
- Your customer thought you were charging them too much
- Issues with your product or service remain unresolved
- Your customer was not loyal to your brand
Truthfully, there are endless reasons as to why your customers might churn but it all comes back to one concept—value. If your customer does not feel valued or does not see the value in your services then they will leave. Period. This is what we call “avoidable churn” which means that you can keep these customers if you address their concerns and take measures to avoid future issues.
If you want your business to thrive and want to avoid losing your loyal customers then you must:
- Be responsive to customers: This can be as simple as sending a check-up email after a customer makes a purchase or optimizing your customer experience resources.
- Continuously improve your product or service: You need to identify common issues and complaints and act on them, fast. Your customers want to be heard and they want to have the best experience possible. Streamlining your customer response time or quickly fixing a product bug can make all the difference when it comes to avoidable customer churn. You can’t deny, poor customer experience leads to reduced revenue and lost loyal customers.
If you fail to improve your processes and don’t make your customers feel valued then you’ll begin to experience the consequences of negative customer churn:
- Higher customer acquisition costs (CAC)
- Lower customer lifetime value (LTV)
- Damaged company reputation
- Demotivated employees
- Reduced revenue
Good Customer Churn
It might surprise you, but not all customer churn is the same. In fact, some customer churn can actually improve business. Let’s break it down. When it comes to customer churn, you don’t want to lose good customers, right? But what about bad customers? I.e.: customers whose goals or needs do not align with your company’s mission. Losing bad-fit customers can actually be beneficial for your business. If you’re unable to serve customers effectively—or if they expect more than you can deliver—you’ll end up spending more money to acquire them than they ultimately spend with you. So when these customers leave, it allows you to spend more time and resources on good-fit customers who are more likely to become loyal to your brand.
Unavoidable Customer Churn
Let’s face the facts, sometimes churn is inevitable. When companies face inevitable customer churn they often go out of business, simply because customers stop needing the products or services being provided. For example, Borders failed to properly transition and invest in digital-forward products and instead invested in DVDs and CDs while their competitors focused on creating new technology— like the Barnes & Noble Nook e-reader – that met customers’ new demands. This decision meant Borders could not keep up with their customer’s digital reading demands. If your business cannot adapt to the ever-changing needs and preferences of the modern customer, then you might face some unavoidable churn.
Churn Rate vs Retention Rate
What’s the difference between customer churn rates and retention rates? Retention rate is the percentage of customers that return to do business at your company. Your retention rate is different from your churn rate because it’s calculating the number of customers who keep coming back to do business, rather than calculating the customers who have stopped doing business with you. It is critical for you to monitor both of these rates because your churn rate directly informs your retention rate – a high churn rate means a lower retention rate. For example, if your annual retention rate is 80%, then your churn rate for that same year will be 20%. But what is a good churn rate? A good churn rate differs by industry and the type of customer you serve. In Software-as-a-Service, for example, a good annual churn rate is lower than 10%. For online retail, however, the annual churn rate is closer to 25%.
How Do You Calculate Retention Rate?
The customer retention rate formula is the inverse of the customer churn rate calculation.
You calculate retention rate by calculating churn rate and subtracting the churn rate percentage from 100%. Read on to learn how to calculate your annual churn rate.
What Does Annual Churn Rate Mean?
Your annual customer churn rate is the percentage of customers who stopped doing business with your company in the past year. You can also calculate your monthly churn rate or quarterly churn rate. When it comes to analyzing your churn rates, you can choose to calculate whichever time period best suits your needs so long as you use numbers for the same timeframe consistently. By calculating your churn rate, you are able to fully understand whether your customer retention is improving or getting worse over time.
Why Calculating Your Annual Churn Rate Is Important
Now that we’ve discussed the different kinds of churn, let’s dive into why calculating your annual churn rate is so critical. Calculating and analyzing your annual customer churn rate is vital because it allows you to gain direct insight into the survivability and profitability of your business on a yearly basis. You can’t stop negative customer churn if you don’t know what is causing customers to churn in the first place. By properly assessing your annual customer churn you learn:
- Which customers are churning
- What is causing these customers to churn
- What expectations are you failing to meet
- Which improvements you need to make to your products or services
The information discovered while calculating your annual churn rate determines which steps you need to take to grow your company.
How Do You Calculate Annualized Churn?
Here is a quick overview of the customer churn formula for annual churn. Finding your company’s churn rate is fairly simple, all you have to do is identify the following values:
Number of customers present at the beginning of the year (X)
Number of customers churned by the end of the year (Y)
After finding these numbers, use the formula below to determine the percentage of your annual customer churn rate.
(Y/X) x 100 = Annual Customer Churn
Annual Churn Example
If a company had 300 existing customers at the start of the year and lost 30 customers by the end of the year, then their annual churn rate would be 10%. (30/300) x 100 = 10%
Note: You can also use this formula to calculate your monthly or quarterly churn rates. All you have to do is add your monthly or quarterly numbers into the X and Y values.
Now that we’ve discussed how to properly calculate annual churn, let’s take a deeper look into the factors that influence customer loyalty… and in turn your churn rate.
Five Factors that Impact Customer Loyalty
In her book, Keep Your Customers the CEO of Alignmint Growth Strategies, Ali Cudby, identifies the top five factors that directly impact customer loyalty and improve retention. In this section, we’ll briefly describe each of these factors and their importance in curbing unwanted customer churn. For the full scoop check out the Keep Your Customers book.
- Prioritizing Emotional Connection With Customers – When customers feel seen, heard, and valued, they get invested in their relationship with your company. You need a clear process for consistent action to make emotional connection a viable and profitable reality. Taking the time to connect with your customers on an emotional level makes them feel more valued by your company and encourages them to become loyal to your brand.
- Create a Process with Clear Goals – Creating clearly articulated goals is a critical part of cultivating loyalty. In addition to helping you clarify priorities, specific goals help you explain your priorities to your team. Your entire team needs to be on the same page to optimize customer loyalty.
- Break Your Goals Into Measurable Steps – Breaking down your goals into bite-sized pieces leads to measurable steps that begin with your current reality and end with your objective being met. Without a clear objective, your team won’t be able to deliver on their promises which can quickly result in poor customer service and increase customer churn.
- Apply Tracking and Metrics – You can’t measure your success without data. Once you have your data tools in place, you then need to analyze your data so you can grow and improve your business practices and enhance the loyalty of your customers.
- Celebrate – Take some time to recognize key moments with customers and employees. Celebration is a great way to give people a sense of your company’s values. The more people feel connected to your company, the more they will be inclined toward loyalty.
All of these factors allow you to build your customer experience to cultivate long-term loyalty, which effectively prevents customer churn. According to Alignmint’s CEO Ali Cudby, “It’s the role of company leadership to articulate and prioritize a company-wide initiative for customer experience. This approach must put customers at the center of the initiative. Anything less asks customers to care about your company’s structure, conflicts and culture.”
Design Your Company’s Path to Next-level Growth, With Alignmint Growth Strategies
Your company may have great product-market fit, a well-designed product, and sales/marketing teams that bring in new customers. But when those wins are met with a churn problem, it becomes impossible to grow and meet revenue targets.
Successful churn reduction strategies align your company to boost customer lifetime value…a.k.a. retention.
At Alignmint Growth Strategies, we deploy churn reduction strategies so that you hit your revenue targets and maintain momentum.
Customers spend more, stay longer, and refer like crazy. Employees feel connected to your vision and confident they can be successful in their work. And leaders focus on progress and growth.
Discover the churn rate reduction strategies that work best for your company by making an appointment with Alignmint Growth Strategies. Connect with us today.