WHAT IS CUSTOMER CHURN AND WHY IS IT IMPORTANT?

In any company the question, “what is customer churn and why is it important” should be front and center across every department. The value is two-fold: 1) every employee needs to understand their role in reducing customer churn and 2) companies must analyze their unique churn numbers so they can find ways to improve customer retention.

Let’s start with the basics, by understanding how you define a churned customer.

What Is Customer Churn?

Customer churn occurs when someone stops purchasing your products and services. In other words, you had a customer and now you don’t. Clearly, keeping your customer is good for any business that wants to grow, so it’s important to identify why customers churn and how to prevent that from happening. 

NOTE: The phrase “customer churn” has some sister lingo that’s good to know. Sometimes customer churn is referred to as “customer turnover” or “attrition.”  On the flip side, when customers stay with a company it’s called “customer retention” or even “customer loyalty.” At Alignmint Growth Strategies, we tend to use the term “customer churn,” but sometimes pepper in those other phrases to keep it interesting–but they all mean the same thing. 

OK, back to understanding customer churn…

Why Do Customers Churn?

Customers churn for several reasons. Sometimes customers leave because they don’t like your product. Sometimes they don’t feel like they get sufficient value for their money. Sometimes they don’t feel valued as customers; in other words, they don’t like the customer experience. 

A customer experience that leads to churn is more likely when customers don’t feel appreciated as people. No matter what you sell, whether it’s business-to-business (B2B) or business-to-consumer (B2C), you sell to people. In fact, companies can have inferior products and services, but better customer retention simply from delivering a superior customer experience. (You can find more on that HERE and HERE.) 

aving a good customer experience isn’t just a fluffy “nice to have” for companies. A PWC survey discovered that 73% of customers, “point to experience as an important factor in their purchasing decisions, behind price and product quality. Essentially, improving your customer experience can help you keep customers, even in the face of factors like higher prices.

Not all churn is bad, though. Sometimes there’s “good churn.” For example, you might have a customer who is a poor fit for your products and services. Maybe they make unreasonable demands and take up too much of your team’s time. Maybe they want your product to do something that’s out of alignment with your company’s growth goals. Or perhaps they’re so unpleasant that it’s causing employees to quit. These situations happen all too often, and it can be better for a company to lose a customer like that than keep them. 

At Alignmint, we recently worked with a client who pivoted their business to serve customers in a specific industry. Some of their early, high-dollar customers were in a different industry and had unique needs that wouldn’t be supported as well going forward. One way we helped our client was by clearly framing the company’s path forward, so those customers could make an informed decision for their future needs. As companies evolve, strategic decisions for growth may mean making difficult choices for legacy customers. That’s “good churn.”

When companies evaluate their customer churn, it can be inefficient to look at every individual customer’s reason for leaving. To get a more holistic view of retention, companies often analyze their churn rate. 

What is Churn Rate and Why Is It Important?

A churn rate is the percentage of your customers who stop doing business with your company over a defined period of time. You can look at churn rate by month, quarter, year—the amount of time isn’t what’s significant. The real importance of churn rate is knowing whether you’re doing better or worse over time (or not). Are you improving retention? Or are more customers leaving as a percentage of your customer base? 

You might think that having a 0% churn rate—or 100% customer retention is the goal. In some ways, it’s not as straightforward as you might imagine. The example above is one way companies can have “good churn.” 

Evaluating churn rate can also get complicated when companies look at churn from the perspective of revenue, and not simply number of customers. Once you start looking at the overall number of dollars a customer contributes, you can get into situations where you can have more than 100% retention. While that’s a common occurrence, it’s more accurately evaluated as part of “net retention rate” vs a churn rate. 

In fact, a company’s net retention rate is a key factor for hitting growth goals—especially in investor-backed companies that want to exit or IPO. Alignmint does a deep dive into the impact of churn and the importance of the retention rate in our white paper The Churn Virus. If you’re looking for more details on the financial impact of churn, including a churn rate calculator, we invite you to download a copy of The Churn Virus. 

While the topic of net retention rate is fascinating (and a vitally important part of any company’s path to growth) let’s stay focused on churn. Specifically, let’s conclude by understanding churn analysis.

What Is Churn Analysis?

Churn analysis is the evaluation of a company’s customer losses, for the purposes of reducing turnover and improving long-term customer value. Ultimately, companies want (or should want) to make customers more valuable. To achieve this goal, companies can find different levers to pull:

  • Extend customer tenure.
  • Add upsells and cross-sells to improve the amount of money a customer spends over time.
  • Inspire positive word of mouth so customers make referrals. This is an indirect, but high-impact way to improve a customer’s overall value to a company.

The activities that reduce churn and/or improve lifetime value don’t happen in a vacuum. Companies discover the best ways to grow with consistent churn analysis. 

Churn analysis is important because it helps companies understand why customers are leaving. With that understanding, companies can design and activate the right processes to combat customer dissatisfaction and prevent churn before it starts. 

Want help understanding your company’s churn rate, analyzing customer churn or developing processes to prevent churn? That’s what we do at Alignmint Growth Strategies. Dig into the financial impact of churn by downloading The Churn Virus or schedule some time to talk with our retention experts. With Alignmint, you get the know-how to grow. 

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