CHURN RATE FORMULA

“In life and in business, relationships take effort. Cultivating loyalty requires time and attention.” Wise words from Alignmint’s CEO, Ali Cudby. If you want to keep your loyal customers on board, you need to uphold your end of the bargain by knowing what inspires customers to stay for the long-term and, conversely, what causes customers to leave. 

In addition, monitoring customer churn serves as an integral benchmark in sales forecasting and future budgeting decisions, as it can indicate the profitability of existing customers and identify where revenue can be channeled from in the future. In this article we’ll discuss how customer churn works and explain how to successfully calculate and interpret customer churn rates to accelerate toward long-term customer success. Alright enough chit chat, let’s get to the good stuff.

What is Customer Churn and Why is it Important?

So, you wanna know more about customer churn? You’ve come to the right place. Customer churn is defined as the number of your customers who no longer conduct business with your company over a period of time. IE: customers who have stopped buying your products or using your services. It is also important to note that there are other terms used to describe customer churn. Customer churn is also often referred to as “customer turnover” or “customer attrition.” 

Here at Alignmint Growth Strategies, we choose to use the term “customer churn,” but all of these terms can be used interchangeably. On the flip side of things, when a customer stays with a business, it’s commonly referred to as “customer retention,” and over time retention evolves into “customer loyalty.” In short, your customers love you and want to stick around.

The reality is, fully understanding customer churn involves many moving parts and it can be disastrous if it’s not properly monitored. The reality is, churn has a huge impact on both your short and long-term goals. Here are a few examples of the repercussions of negative customer churn:

  • Higher customer acquisition costs (CAC)
  • Lower customer lifetime value (LTV)
  • Damaged company reputation
  • Demotivated employees
  • Reduced revenue

Companies most often examine their monthly churn rate  and annual churn rate to get holistic insight into the big picture of their customer retention. So, why is churn important? Put simply, by analyzing your customer churn rates, you are able to identify if your customer retention is getting better or worse over time. Properly assessing your customer churn gives you answers to the following questions: 

  • Which customers are churning?
  • Why are these customers churning?
  • What expectations are not being met?
  • What improvements do you need to make to your products or services?

The answers to these questions can significantly impact the decisions you make when determining which steps you need to take to grow your company. 

The Good Side of Churn

As shocking as it might sound, there is a “good side” of customer churn. Before you dive into full churn analysis and formulas, it is important for you to understand the difference between helpful churn and bad churn. The easiest way to define bad churn is when a right-fit customer – someone who should like your products and services leaves or unsubscribes because they are unsatisfied and unhappy. On the opposite side, “good churn” is when a bad-fit customer chooses to stop purchasing your product or service. This is considered to be “good churn” because when a bad-fit customer leaves, it ultimately ends up benefiting your business. Let’s take a look at some examples of behaviors that indicate that a customer might not be the right fit for your organization.

  • They make unreasonable demands and take up too much of your team’s time.
  • Their needs do not align with your company’s objectives or growth goals.

What is Customer Churn Analysis?

Alright, now that we’ve covered why monitoring churn is important, let’s discuss how to conduct a proper churn analysis. A  churn prediction analysis is a process that evaluates a company’s customer losses. In the end, you want to do more than simply retain customers, you also want their business to increase in value over time. To achieve this, companies should find different ways to engage their customers, such as:

  • Build customer rapport so that you extend your relationships with more people/divisions inside the company.
  • Create authentic upsells and cross-sells that increase the value of your product or service
  • Encourage customer referrals, testimonials and partnership by serving their needs, not just “selling them stuff”

Churn analysis is a critical process because it helps companies understand why customers are leaving so the cause of the customer’s dissatisfaction can be quickly remedied. With this insight, companies are able to design targeted activities to combat dissatisfaction before it even happens.

How Do You Perform a Churn Analysis?

Now let’s get into the all-important churn analysis calculation. To perform an accurate churn analysis, you must use a customer churn formula. To begin using this formula is relatively simple once you select a period of time you want to measure by. Then identify the following values:

  • Number of customers at the beginning of the time period (X)
  • Number of customers churned over the same time period (Y)

After finding this information, use the formula below to determine your customer churn rate as a percentage – in this case, the percentage is represented by the letter Z.

(Y/X) x 100 = Z

Here’s an example of how this formula works in practice: If a company had 1000 active customers at the start of the year and lost 100 customers by the end of the year, then their churn rate that month would be 10%.

This formula is simple and can be used to evaluate your churn rates across any time period, making it a valuable asset to your customer churn data set

Now that we’ve discussed how to analyze your churn rate, let’s take a deeper look into customer churn and discuss which factors increase churn risk, and explore different ways to prevent customer churn. 

Factors that Increase Churn Risk

Now that we have covered how churn works, let’s discuss the factors that increase the risk of your customer’s churning. The key to reducing unwanted churn is to maintain healthy relationships with existing customers. When the interactions between you and your customers are genuine and cultivated strategically, customers engage for the long term and become highly profitable.  

To better understand your customer churn and prevent churn from negatively impacting your business, it’s important to identify why your lucrative loyal customers are churning. This will reveal how to reduce negative churn or even prevent it from happening in the first place. Here are a few key factors that run the risk of negatively impacting your churn rates:

Frequent Errors, Big and Small – Ultimately, customers churn when they no longer trust you to help them succeed or you’re no longer fulfilling the promise you made. Although some customers churn because of a large error, most of the time, customers churn based on a number of small factors and preventable mistakes. Product bugs, bad customer experience, billing mistakes, all of these factors add up over time and can easily ruin a good customer relationship.

Lackluster Customer Support – No matter how tech-savvy or informed your customers are, they will encounter problems from time to time. Even the smallest problems can quickly develop into serious issues if they consistently interrupt your customer’s processes and prevent them from conducting business as usual. When problems arise, the last thing your customers want is more problems. Right-size your approach so customers can quickly get the help they need, the way they need it. The specifics will differ from industry to industry and between customer tiers. Poor customer service leads to dissatisfied customers which then leads to high churn—but there are multiple ways you can go about fixing customer service issues. If a dedicated customer service team is not an affordable option for your business, set clear expectations around when support will be available and make sure you stick to it. At Alignmint our MINT Method process to guide companies to a right-sized approach for customer support as part of an overarching customer experience strategy. When the customer experience is aligned, customers feel valued and you reduce the risk of customer churn.

You’re Attracting “Bad-fit” Customers – As we previously mentioned, losing bad-fit customers is not necessarily a bad thing. But attracting them is. Sure, getting an influx of new customers seems great at the beginning, but if you can’t serve customers well (or if they expect more than you can reasonably deliver) you can end up spending more money to acquire them than they ultimately spend with you. Attracting bad-fit customers is a huge drain on a company’s resources and is an overall bad investment. Even worse, when your company is inundated with too many bad-fit customers it can cause your focus to be misaligned – to meet the demands of bad-fit customers, resources are improperly diverted from customers with success potential, thus eliminating the possibility of bolstering a potentially long-term (lucrative loyal) customer relationship. Therefore, you should be extremely targeted with your messaging upfront and only pursue customers who properly align with your company’s goals and truly will benefit from your product or service. It’s crucial to help prospects understand how your product might help them by asking the right questions at the beginning to ensure that your product or service is actually a good fit and will meet that potential customer’s needs.

Poor Onboarding Procedures – Customers will quickly drop your solution when they have trouble implementing your services or products into their workflow. Preemptively creating an extensive and informative onboarding procedure is an excellent way to stop this from happening. Your actual onboarding process is only part of the customer education process—the handoff from sales to customer success, the customer success teams themselves, and any self-service education resources are also vital components. To curb churn, you should place an emphasis on customer activation as well as customer acquisition. You want to prove that your product or service can actively assist your customers in reaching their goals. Having a tried-and-true onboarding process that smoothly settles your customers into their new accounts reduces churn significantly.

How Do You Reduce Customer Churn?

As we mentioned previously, some customer churn is actually a good thing – so long as you’re losing the right customers. If you lose customers who don’t benefit your business then you’re better off without them! However, you need to make a conscious effort to ensure that you are meeting the needs of those good-fit customers. Successfully evaluating and reducing your customer churn requires a significant amount of self-reflection. When evaluating your company’s churn, you must be prepared to ask yourself difficult questions like:

  • Is my team and product (or service) successfully meeting customers’ expectations and delivering on our promises?
  • Is there a disconnect between what my customers are receiving and what my product is offering?
  • Does my company’s current customer experience build lasting relationships and foster trust?

After honestly answering these questions, begin to put yourself in the shoes of your customers and identify areas that need improvement. 

To prevent your good-fit customers from churning, you must be honest with yourself and really dive deep into questions like this. When creating a plan to curb churn in your business you must be completely transparent. There is no room to hide behind excuses, you must make a conscious effort to mend any gaps between expectations and realities in your customer’s experience if you are going to truly develop a better overall customer experience and increase customer satisfaction. The simple truth is, loyal customers are vastly preferable to casual ones, and analyzing your churn allows you to identify what needs to be done to keep these customers around.

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. 

Your outcome? 

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.

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