When thinking about success, it’s great to highlight all the victories you’ve won. But it can be hard to gauge true, accurate success when failures are left out of the picture.
When a business thinks about failure, more than likely, they’re thinking about customer churn rate—the percentage of customers that stop using or subscribing to a product or service in a specific time frame. Customer churn is one of the most critical metrics for a growing company to understand, evaluate, and take action to combat. Although customer churn is often seen as a measure of failure rather than success, when the data is used intelligently, the information you can receive from customer churn can be indispensable to your business. Observing when and why customers leave can lead to actionable insights that feed into consistent processes to fix churn and create a valuable customer experience.
In this ultimate guide, let’s explore what is customer churn and why churn is a big deal.
What is Customer Churn and Why Can it Happen?
Customer churn occurs when an individual or company stops buying your products and services. Put simply, you had a customer, and now you don’t.
Although this is the straightforward answer, the reality of customer churn is bigger and more serious. Churn can make all aspects of running a business more difficult, including negatively impacting your short- and long-term goals. Byproducts of customer churn can be:
- Missed financial targets
- Higher customer acquisition costs (CAC)
- Lower customer lifetime value (LTV)
- Negative word of mouth
- Disengaged employees
Keeping your customers is imperative for any company that wants to grow. (That should be all companies!) To better understand your customer churn and prevent churn from negatively impacting your business, it’s important to identify why your customers are churning. This will reveal how to reduce churn or even stop it from happening in the first place.
As we continue to talk about customer churn it’s also important to note the phrase also has some sister lingo. Customer churn can also be referred to as “customer turnover” or “customer attrition.” Here at Alignmint Growth Strategies, we tend to stick to the term “customer churn,” but all of these terms can be used interchangeably.
When talking about the opposite of churn, when a customer stays with a business it’s commonly referred to as “customer retention,” and retention over time becomes “customer loyalty.”
Why Do Customers Churn?
There can be many reasons customers churn. Customers churn on your company because they may no longer like your product, or they don’t feel like they’re getting enough value for their money. What it all boils down to is, they may not feel valued as a customer.
Poor customer experience that leads to churn is likely to happen when customers don’t feel appreciated as people. It doesn’t matter what you sell or who you’re selling to, if you don’t show appreciation and respect for your customers, it’s going to lead down a bad road. In fact, many companies can offer great products and services but do not offer a great experience to their customers, which in turn leads them to losing potential customers and revenue.
Having a positive customer experience isn’t just an added bonus for companies. A survey by PWC found that 73% of customers “point to experiences as an important factor in their purchase decision, behind price and product quality.”
Can you imagine that? This statistic shows that improving your customer experience can help you keep customers, even in the face of high prices or intense competition.
Ultimately, customers chun when they no longer trust you to help them succeed or you’re no longer fulfilling the promise you made to them. Although some customers churn because of a large error, most of the time, they chun based on a number of small factors and preventable mistakes. This is what we call “avoidable churn.”
Of course, sometimes churn is inevitable. Companies can go out of business because those customers (even loyal customers) simply stop needing the products and services being sold. Think Blockbuster Video and their unwillingness to shift to a streaming world. That kind of unavoidable churn isn’t our focus here.
Instead, when we talk about churn here, we’re going to address avoidable customer churn, the kind of churn that happens due to internal communication issues at your company.
Why is Customer Churn Important to Look At?
Customer churn is an important metric to keep track of because lost customers end up being lost revenue. If a company loses enough customers over a period of time, it can have a critical impact on their bottom line. Another reason it’s important to improve customer retention and decrease customer churn is because it’s typically more expensive to find new clients and customers than to keep existing ones. In fact, a study by Frederick Reichheld of Bain & Company showed that increasing customer retention rates by 5% can increase profits by as much as 95%. There’s a direct financial impact when companies reduce customer churn.
Not only are companies that lose customers losing revenue, but they also negatively impact a vital business ratio: Lifetime Value-to-Cost of Customer Acquisition (LTV:CAC). In other words, the customer’s financial contribution vs. the money the company spent to earn the customer goes down.
Anytime a customer is lost, a company has to work to win another one to stay in the same place they were at—meaning that marketing, sales, and customer success teams have to work harder for the company to simply hold its ground.
When customer churn is reduced, it means that every new customer helps your company grow bigger and bigger. Instead of losing ground or just keeping afloat, each customer stays longer and contributes more revenue. A company gets to jump up to the next level. This is true for all businesses, especially in businesses with subscriptions or recurring revenue, such as software as a service companies.
To understand how customer churn is impacting your company, you have to measure it. While customer churn is an important metric for all companies, there are often many companies that just wish to minimize their churn. Instead of leaning into the learning opportunities that come from losing customers, they tend to make excuses and then ignore that it happened.
Although evaluating your company’s churn rate with tools such as a churn rate calculator or a formula can be a great start for understanding churn, the magic happens when companies design and implement consistent processes for customer experience and keep track of the results. For instance, here at Alignmint, we help companies create playbooks to deliver the step-by-step processes so that team members are armed with tools they need to deliver the ideal customer experience.
It’s kind of like going to the gym or training for a long-distance run. Signing up for a membership or for a marathon doesn’t get you in shape. Nor does one killer workout. You hit your marathon goals by creating a training plan, showing up for the daily workouts, and checking your progress against the plan.
What is Churn Rate?
Customer churn rate is the percentage of your customers who stop buying products, services, or doing business with your company in a defined period of time. Churn rate can be examined over months, quarters, or even years; however, the specific time frame isn’t what is particularly important. The real significance of churn rate is understanding whether you’re doing better or worse over time. Are you improving your customer retention? Or are you losing customers, like a leaking bucket? The answers to these questions can significantly impact the best steps you can take to grow your company.
In most cases, churn is viewed as problematic for companies. But all churn isn’t bad. It’s important to differentiate between bad churn and good churn. Bad churn is the kind of churn that is most often discussed – the kind that occurs when customers become unhappy and leave.
On occasion, there is also “good churn.” For instance, a customer may be a poor fit for your products or services. Perhaps they want your product to do something that is out of line with your company’s growth goals, or maybe they make unreasonable demands and take up too much of your team’s time. Some customers are so unpleasant to work with that they cause your good employees to leave your company. These situations happen more often than you think. In some instances, it’s better to lose a customer like this than keep them.
In that same line of thought, you might think that having a 0% churn rate is the ultimate goal, but it’s not quite that straightforward.
We initially defined churn in terms of customers who leave, or “logo churn.” But companies can also evaluate churn from the perspective of revenue. When companies do this, they can get into situations where they can have more than 100% retention by upselling or cross-selling customers. To reduce confusion, we look at revenue churn by examining Retention Retention vs. churn rate.
Although the topic of net retention rate is interesting and important, we’ll stay focused on churn here by diving deeper into the financial impacts of churn and understanding the formula for customer churn.
How Do You Perform a Churn Analysis?
To perform a churn analysis start with a customer churn formula. To find a company’s churn rate, all you have to do is choose: 1) a period of time you want to measure by, and 2) 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 making these choices and identifications, use the formula below to determine your customer churn rate as a percentage (Z).
(Y/X) x 100 = Z
Here’s an example: If a company had 200 existing customers at the start of the month and lost 10 customers by the end of the month, then their churn rate that month would be 5%.
This formula is simple and can be used across any time period—whether it’s a day, month, or even year. Going beyond the simplicity of logo churn analysis, we get into the more intricate—and more interesting—evaluation of revenue retention. Let’s take a deeper look into customer churn analysis and how it can help make their customer increasingly valuable.
What is Customer Churn Analysis?
For the purpose of reducing turnover and improving customer value, companies perform customer churn prediction analysis, the evaluation of a company’s customer losses. Ultimately, companies want to make customers increasingly valuable. To achieve this, companies should find different ways to engage their customers, such as:
- Extending customer tenure
- Adding upsells and cross-sells that improve the amount of money a customers spend over time
- Encouraging positive word of mouth so that customers make referrals (this is an indirect, but highly impactful way to improve a customer’s overall value to a company)
These activities that reduce churn and improve a current customer’s value don’t happen in a silo. Companies that have consistent churn analysis discover the best ways to grow. Churn analysis is important because it helps companies understand and pinpoint why customers are leaving so they can take action to remedy the cause. With this level of understanding, companies can design and activate the right activities to combat churn and dissatisfaction before it even happens.
Interested in how these analyses are performed? Let’s take a look at a customer churn example analysis below.
A Customer Churn Analysis Example
Let’s walk through a case study that demonstrates the negative impact of churn for companies. This case study examines a software-as-a-service (SaaS) company, as churn is particularly problematic for companies that are based around subscriptions and renewals. We’ve already said that churn is challenging for all companies, so why “especially problematic” in SaaS?
When customers pay on a renewal basis, the cost of customer acquisition can be high to the point that those customers remain unprofitable during the entire first year of subscription. In fact, in many cases, customers don’t…become profitable until deep into the second or even third year due to the costs of acquiring and onboarding customers. When that’s the case, if a customer churns at the end of the first year, the business has served that customer at a significant loss.
For these reasons, let’s look at a customer churn example.
For illustration purposes, we’ll be talking about a hypothetical company, Tech Union. Tech Union is a cutting edge software company. Although this company is hypothetical, the example is built from an amalgamation of clients Alignmint has worked with in the past. For the sake of the case study, we’ll make the following assumptions about the company:
- The company’s product is viable
- The company can successfully attract new customers and has a market that scales
- They have product-market fit alignment
In this example, we’ll look at the annual impact of churn by using a churn rate calculator that evaluates both revenue growth and CAC over a single year.
The inputs for the calculation are:
- Tech.Union’s current revenue is $200K
- They aspire to grow to $100 Million
- Their annual churn rate is 12%
- The company’s goal is to exit in 9 years
- For each chart, the inputs are evaluated three ways:
- Using the company’s current 12% churn rate
- Assuming zero churn, or 100% Net Revenue Retention (NRR)
- Projecting what could happen if the company could hit 120% NRR, the benchmark for high-growth SaaS companies on a path to exit.
When evaluated with a churn rate calculator, the outcomes for Tech.Union after one year look as follows:
So what can we learn from these charts?
In all cases, revenue is growing. The sales and marketing teams for Buy.Tech are adding to the top of the funnel and attracting new customers. However, the cost to add these customers is drastically different.
In combination, these show the stark differences in the percentage of revenue growth and the cost of customer acquisition. Taken together, the lesson of these charts is that the more you churn, the less revenue you earn – and the higher your cost of customer acquisition. In fact, Buy.Tech is not even hitting break even on a new customer until deep into Year 2 of the relationship, so if they churn at the end of Year 1 that customer has been served at a significant loss.
Bottom line, you’re growing less, and your cost to acquire customers is higher. Churn IS the leaky bucket. [BOLD]
And yet, this is merely one key takeaway from the story of Tech.Union.
In our whitepaper, The Churn Virus (© 2021, Alignmint Growth Strategies), we go beyond annualized churn to look through a wider lens and evaluate the multi-year impact of revenue churn. The Churn Virus takes that step and looks at net revenue retention (NRR), to demonstrate how upsells, downsells and customer turnover further impact the financial trajectory of a company over time. This is where the story becomes even more telling. Finally, The Churn Virus calculates the impact of customer churn on a company’s valuation at the point of exit.
Obviously, customer churn negatively affects financial performance. The extent of that impact, which The Churn Virus reveals, is a stark example of the corrosive long-term impact of losing customers. Address The Churn Virus now, download the white paper. Not only will you get the white paper so you can see the impact of churn for Tech.Union, but you’ll also get access to dynamic calculators so you see how churn impacts your company, using your financials.
How to Reduce Customer Churn?
In this discussion, we’ve mostly been referring to avoidable churn. Most avoidable churn is connected directly to a customer’s trust in you. When evaluating your company’s churn, ask yourself the following questions:
- Can customers trust your team to deliver on its promises?
- Is your company creating barriers to trust in communication, product delivery, or other gaps between what customers purchased and what they get in reality?
- Does the experience of working with your company build trust, or block it?
To prevent customer churn in your business, start by taking a look at your answers to these questions. Be intentional — discover any gaps between expectations and realities in your customer’s experience with your company to see a true picture of where your company is currently at and to each for a better overall customer experience.
After honestly answering these questions, begin to put yourself in the shoes of your customers and identify areas that need improvement. Here at Alignmint Growth Strategies, we often find businesses look to their customer-facing teams as the only place to prevent churn, when in reality, it’s much, much more complex. Customer experience is a cross-functional discipline that stretches to a number of departments, including sales, marketing and more.
“Customer experience is not a department. It’s a philosophy for engagement across all departments,” says Alignmint’s CEO, ALi Cudby, in this article from Phil Britt in CMS Wire. “It’s the role of company leadership to articulate and prioritize a company-wide initiative for CX. 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.”
Companies can begin chun management and start seeing better outcomes once they understand the drivers of their customer’s decisions. Here are a few more steps to follow when reducing customer churn:
- Align all departments for a consistent customer experience.
- Clarify the characteristics of lazy, limited and lucrative loyalty inside your customer base, including what builds and deters long-term loyalty.
- Design a customer experience to enhance customer loyalty and eliminate blockers.
- Build playbooks with specific guidelines so that every member of your team knows which steps to take to successfully deliver your company’s unique customer experience.
With these four steps in hand, backed by tracking and metrics for ongoing evaluation, you can prevent customer churn and achieve next-level growth for your company.
“When you build your customer experience to cultivate long-term loyalty, you build a relationship that develops bonds between the company and customer over time,” said Ali Cudby, CEO of Alignmint Growth Strategies. “The more lucrative loyals feel seen, heard, and valued, the more their loyalty is reinforced. It’s a virtuous cycle.”
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.