HOW DOES NETFLIX CALCULATE CHURN?

Every company needs to think about their churn rate. As a company that has made churn reduction strategies an artform, an overview of how Netflix calculates churn is a helpful example that has lessons for every company. 

A company’s churn rate measures the percentage of customers who stop doing business with you over a given period. That means it’s a good proxy for the way customers experience your company’s products and services. If customers are leaving, it’s important to understand why. Similarly, it’s useful to be clear about the reasons customers stay with your company. Both sides of the equation yield valuable insights. Healthy companies have a good churn rate, which means a low churn rate.

Why Is It Important To Calculate Churn Rate?

There are a couple of reasons why customer churn is an important metric for companies to track. First of all, it’s expensive to lose customers. It costs money to acquire a new customer. If a company wins a new customer, and they leave before those costs are recouped, then the company has served them at a loss. It’s in the company’s best financial interest to extend a customer’s relationship. 

Another reason why companies do – and should – track churn is due to marketplace reputation. Negative word of mouth is another cost to a company. If a customer leaves because they’re unhappy, they tend to tell lots of people about their bad experience. When people hear that negative word of mouth, they can become less inclined to buy from the company they heard bad things about. 

The importance of customer churn is especially true for companies that work on a subscription basis. Whether those companies are business-to-business (B2B) or business-to-consumer (B2C), the longer a customer is satisfied paying for a subscription, the better. In other words, when companies prevent churn and boost retention, it indicates customers will stay longer, spend more, and be less inclined to bad-mouth the company.

How Does Netflix Look At Customer Churn?

Rather than talk in generalities, let’s focus on Netflix as a churn rate example. 

Netflix sells streaming entertainment subscriptions to about 208 million paying subscribers. As such, Netflix customer satisfaction is vitally important to each user’s decision to keep paying for their subscription, month after month. If customers stop enjoying the programming Netflix offers, or have a poor customer experience with the company, they may quit Netflix. They may even go to the competition. 

Netflix’s churn rate is also remarkably low, and they track that metric closely, and have tracked Netflix customer churn rate over time. This article, written by the former CPO of Netflix, shows how the churn rate for Netflix has gone down over time.Early on, monthly customer churn for Netflix was 10%. 

  • By 2005 their retention had improved, and Netflix had a monthly cancellation rate of 4.5%. 
  • As of 2019, the date of the article, the monthly churn rate for Netflix customers was under 2%. 

This means Netflix is doing a lot of things right to keep their customers.

How Does Netflix Retain Its Customers?

To prevent churn and boost retention, Netflix employs several strategies. What’s interesting is that understanding customer cancellations is not all about evaluating quantitative data. The company spent a lot of time talking directly to customers to learn what was motivating their behavior.

They investigated the issues that led to customers leaving. They asked questions like: 

  • Why do members call or email Netflix with questions or complaints? 
  • What links do they click on when they visit the help pages? 
  • Where do customers get confused? 

These questions enabled Netflix to see customer issues as stories from real people, rather than simply “data.” They identified new members as the group with the biggest area for opportunity to grow. Then they sat down with groups of those customers and learned even more. Eventually, they came up with specific behaviors that were proxy markers for high levels of engagement. 

The process wasn’t simple, but once they identified the proxy markers for Netflix customer satisfaction, they were able to implement actionable, measurable, and objective ways to improve retention. The value of learning directly from customers and acting in alignment with their needs beat the returns of using something like a rewards loyalty program, which Netflix does not offer.   

How Can You Learn From Netflix?

There are a few good takeaways from the Netflix example:

  1. Prioritize churn reduction strategies as an avenue for growth.
    Netflix made customer retention a priority and took churn from 10% to less than 2%. That took dedication to addressing the issue, which paid off in numerous ways for the company.
  2. Look for nuances between key customer groups.
    By identifying new users as those with the greatest opportunity for growth, Netflix reduced churn and improved the lifetime value of their customers.
  3. See customers as people, and not just numbers.
    Netflix crunched a lot of numbers to learn about churn, but ultimately their solutions were based on hearing real stories from real customers. The more companies make customers feel seen, heard, and valued, the better they will align their solutions to the people they serve. 

When it comes to converting customer churn to retention and growth, Maya Angelou’s famous quote is a great guide:

“People will forget what you said. People will forget what you did. But people will never forget how you made them feel.”

Does your customer experience make people feel seen, heard, and valued? At Alignmint Growth Strategies, we created an easy way for companies to calculate your company’s churn as a proxy for customer satisfaction. It’s part of a white paper, called The Churn Virus, that walks through the cost of customer churn for a company. In The Churn Virus you can find a dynamic churn rate calculator to see exactly how customer turnover is impacting your company.

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 implement a churn rate formula that deploys 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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