Without customers, there’s no business. To keep a healthy revenue stream flowing requires organizations to really understand their customers—what makes them tick, what attracts them to your company, their communication expectations and preferences, and so on. When companies can accomplish this, they can make their customers feel seen, heard, and valued.
The reality, though, is that retaining customers doesn’t happen by accident; it takes discipline. Today, customers have access to virtually endless information online, and they’re able to easily compare their options. As a result, customers can be empowered, but fickle. When customers perceive “greener grass” with a competitor’s product or service offerings, they bounce—this is customer churn in a nutshell.
Unless customers feel seen, heard, and valued—then, they become content, happy even. And when you can consistently make your customers feel seen, heard, and valued, you can start converting happy customers into loyal ones.
What’s the difference? Happy customers are content, but loyal customers actively recommend others to do business with you—a highly-lucrative conversion. In this blog post, we’ll break down all things churn rate, including:
- A churn rate definition and churn rate formula examples
- How to prevent customer churn by understanding why fickle customers leave, and why loyal customers stay
Churn Rate Definition
A simple way to define churn rate—also known as attrition rate—is the rate at which customers stop doing business with an entity, and it’s expressed as a percentage. There are many different reasons why customers churn and many factors that impact churn rate. Not all of them are personal, or have anything to do with your business whatsoever.
We’ll come back to the reasons they leave. First, though, let’s address a few more basics of customer churn.
How Often Is Churn Rate Calculated?
Churn is commonly calculated on a month-to-month, quarterly, or annual basis. Since the same data is at the heart of each calculation, it’s easy (and wise) to consider multiple timeframes. This just helps provide balance: monthly churn rate provides enough granularity to respond to trends in a timely fashion, while quarterly or annual churn rate fills in the “big picture” view for context.
Fortunately, there are online churn rate calculator to make these calculations much easier. With a few simple inputs, Alignmint’s dynamic Churn Virus calculator shows you three potential revenue streams: 1) your revenue growth with your current churn rate, 2) with 100% revenue retention and 3) your path with 120% net revenue retention.
What Is Revenue Churn Rate?
Revenue churn rate is another way to quantify customer churn. Rather than providing insight into the number or percentage of customers who churn, revenue churn rate quantifies the total revenue lost (with the customers).
The simplest way to calculate revenue churn rate is by applying the gross revenue retention (GRR) formula. Gross revenue retention (GRR) includes the recurring revenue from your existing customers including downgrades and cancellations. The only difference between GRR and net revenue retention (NRR) (see below) is that GRR doesn’t include business expansion through upgrades and cross-sells. Rather, it indicates how a company is doing in retaining revenues from its customers. It will always be less than 100%, and will be equal to or less than the NRR.
Churn Rate Formula
The easiest way to calculate churn rate is to divide the number of customers who stopped doing business with the organization by the total number of customers (measured at the beginning of the month or year), and then multiply that number by 100. For example, if 600 of your 5,000 customers left—that would be a rate of 12%. Is that a good churn rate, though? It depends on your industry, client base, and more.
While this method of calculating churn rate is quick and straightforward, it does also come with a downside. Since GRR doesn’t capture expansion, it provides a less-complete picture of the company’s overall churn vs. retention.
Calculating Net Revenue Retention (NRR)
Net Revenue Retention (NRR) calculates the percentage of recurring revenue that comes from retaining existing customers over a given time period (often monthly or annually). It accounts for income related to upgrades, cross-sells, downgrades, and cancellations, providing invaluable context for the NRR.
Here’s the formula:
To calculate net revenue retention, 4 different values are needed:
- Monthly recurring revenue of the last month (A)
- Revenue generated through upgrades and cross-sells (B)
- Revenue lost through downgrades (C)
- Revenue lost through churn (D)
The formula for putting these components together to calculate NRR, then, is
NRR = (A + B – C – D) / A
In other words, you’ll add together A and B, and then subtract C and D.
Calculating Predictive Churn Rate
This churn rate formula is meant to provide more actionable insights, and is especially useful in industries with a particularly-high cost of customer acquisition (CAC). When organizations are able to predict when customers are at a decent risk of churning, problematic situations can be mitigated.
Companies that engage in predictive churn rate calculation and churn rate analysis typically make use of sophisticated tools, which may leverage artificial intelligence (AI) and machine learning (ML) to perform complex analyses.
What Is a Good Annual Churn Rate?
“In the tech sector, especially for software-as-a-service, the best practice companies aim for a churn rate of 5% or less. If your customer churn rate is 10% or above, that’s considered a relatively high churn rate—you should be assessing your customer experience.
What’s really important is that growth rate exceeds churn rate—by as wide a margin as possible. So, while sales and marketing work to attract new customers (and drive up the growth rate), the company must also be taking care of existing customers (to drive down the churn rate).
What Is the Inverse of Churn Rate?
The inverse, or opposite, of churn rate is commonly known as retention rate. Customer retention is measured as the percentage of a company’s existing customer base that stays (does not leave) over a particular time period (on a monthly, quarterly, or annual basis).
To calculate retention rate, start with the number of customers you have at the end of the month, quarter, or year; then, subtract the number of new customers acquired. Then, you can either divide that number by the number of customers you had at the beginning of the month, quarter, or year, and then multiply by 100—or simply subtract your churn rate from 100%. Either way, you should get to the same answer.
Slowing Customer Churn
Because the reasons for customer churn vary so greatly from one industry to the next—or even within a single industry—it’s important to get expert guidance to make sure you’re taking the right steps to prevent churn. The first step to slowing customer churn is to understand the reasons customers leave.
Fickle Customers (Why Are They Leaving?)
As mentioned earlier, customers have access to more information about companies and their offerings than ever before. Because there are more companies competing for their business, it becomes especially important to take proactive steps to prevent customers churning to a competitor offering a lower price. This makes it increasingly important for companies to take the right steps to prevent customers from bouncing to a lower-priced competitor.
In addition to budget or price-point considerations, other common reasons customers might churn, defecting to a competitor, include:
- Value: What kind of return are customers seeing from their investment with your company? If you and your competitors had identical pricing, who gives customers the most bang for their buck? In other words, the value proposition is as important as the price point.
- Trust: It’s really difficult to build trust—especially in a business context. Customers are both savvy and suspicious, simply telling them they can trust you isn’t enough. Trust is extremely valuable in reducing churn. Once a customer trusts a brand, retention becomes much easier. As UnderArmour founder Kevin A. Plank has said, “Brands are all about trust. That trust is built in drops and lost in buckets.” Doing the little things, consistently, builds trust—and you have to be careful to avoid those lapses that empty the proverbial bucket.
- Politics or personnel: While this isn’t an incredibly common reason for customer churn, politics touches everything. In this context, “politics” might refer to the fallout from something like poor press. Again, this doesn’t typically account for much churn—but it can (and does) happen. Similarly, the individual personnel who work with a customer might change—an account executive leaves, for example—and the customer might simply feel they don’t “click” with their new touchpoint. It could be that the previous account exec built immense value by providing above-and-beyond customer service.
- Feeling taken for granted or neglected: Like any relationship, the spark has to be maintained. If no value (or relationship) has been built, when it comes time to renew, it’s a toss-up whether they’ll be coming back. Companies need to design and implement consistent processes to ensure that every customer gets the VIP treatment.
- Mistakes: Mistakes happen, from minor billing mistakes to major service interruptions. It’s natural. Customers have varying levels of forgiveness, and how a company responds to a mistake is a big trust-builder (or killer). It’s not unheard of for an organization to make a significant mistake, but to be so accountable and responsive in responding to that mistake, that trust is ultimately built (rather than broken). Mistakes don’t cause churn, but dealing with mistakes poorly certainly does.
- Changing needs: Some customers churn simply because their business has grown, or pivoted, or otherwise changed in a significant-enough way that your offerings simply don’t fit their business anymore. It happens.
- Involuntary or unavoidable churn: There are a number of reasons customers may be lost due to no intentional act on the customer’s part—perhaps outdated payment information or server/system errors cause a payment to fail. Or maybe the customer’s needs change, and your services simply don’t meet them—meaning they couldn’t stick with you if they wanted to, anyway. An additional source of churn that you can’t really do anything about is unavoidable churn, which might result from an event like a company simply going out of business.
What Can Be Done To Reduce Churn?
To reduce customer churn, companies need to think hard about how they’re delivering on their value propositions to customers. This may involve educating them as to how they might derive more value from your product or service offerings, while also educating yourself as much as possible about the factors driving churn. It’s also important to keep in mind that not all customers drive a lot of revenue, and some churn is perfectly natural.
- Educate the customer about your product or service: Do customers understand the value you provide, and are they taking full advantage of your offerings for the best experience? Take a consultative approach—sell by serving to help them see how they can get more ROI. Here, it’s crucial to take a consultative approach. Don’t lecture; instead, build value with a strong emphasis on what’s in it for them. Simply help them see where they can get more bang for their buck.
- Educate yourself about your customers: Once you know churn rates and the reasons behind them, it’s up to you to do something to prevent churn in the future. The best way to reduce customer churn is to create and implement clear, consistent processes for customer experience that are grounded in your unique customers and their needs. These processes must be baked into employee interaction across sales, customer success/support and any customer-facing groups inside your organization. Embedding these processes takes intention, training and reinforcement over time. But that effort pays dividends. By cultivating customers who feel seen, heard, and valued your company will enjoy longer-term, more lucrative relationships.
In Keep Your Customers, Ali Cudby (CEO of Alignmint Growth Strategies), succinctly sums up the importance of engagement and understanding: “the better you know your customers, the more you can engage in ways that motivate deeper levels of engagement.” So, the more willing you are to take a deep dive into the sometimes-uncomfortable territory of understanding why your customers leave, the better positioned you’ll be to prevent/mitigate future churn. And you’ll start to recognize red flags that may signal future flight-risks, helping you curb future defections.
The reality is, once you’ve lost a customer, not only is it tough to win them back, it’s also likely that other customers may be considering leaving for the same or very similar reasons.
Growth Doesn’t Have to Be Hard
For years, a statistic has gained a lot of traction, suggesting that it costs around 5 times as much (if not more) to create a new customer than to retain an existing customer relationship. And according to Bain & Company research, “by increasing retention by as little as 5 percent, profits can be boosted by as much as 95 percent.”
When you can minimize churn and keep a solid base of loyal, returning customers, everything becomes a little easy—and considerably more lucrative.
It takes well-cultivated data, optimized processes, and impactful training to create the kind of customer experience that curbs customer churn and converts average customers into loyal company advocates. Organizations need both heart and smart, we like to say, to balance practical analysis with human understanding.
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…aka 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.