What is churn rate
Understanding Customer Churn Rate
The Customer Churn Rate, also known as the rate of attrition, provides insights into customers who stop purchasing from a business or a product.
This metric is critical in all types of businesses or e-commerce, especially for companies with recurring services or those operating under paid subscriptions like SaaS models.
In the latter case, it’s also defined as the percentage of service subscribers who cancel their subscription after a certain period.
¿What is Churn Rate?
Churn Rate refers to the customer turnover rate. All websites occasionally experience the loss of customers who don’t return to buy a product or renew a service subscription.
It’s a metric you must pay close attention to if you aim to increase conversions and maintain an effective website. While it might be easier to attract new customers, it’s a much more costly process than retaining existing ones.
According to some statistics, acquiring new leads costs five times more than maintaining an existing customer. Customer churn negatively impacts a business’s finances, yet two out of three companies do not have strategies designed to prevent customer loss.
This term is also used in human resources to determine staff turnover due to voluntary departures after a certain period from their hiring, but this entry will focus on the loss of external customers.
Here, we will explain what churn rate means, some practical formulas to measure it, and effective tips to reduce it.
¿Why is Churn Rate Important?
Understanding customer turnover is essential for evaluating the effectiveness of your marketing efforts and the overall satisfaction of your customers. It’s also easier and more economical to retain existing customers than to acquire new ones. Due to the popularity of subscription business models, it’s vital for many companies to understand where, how, and why their customers might be leaving the service.
¿How to Measure Churn Rate?
When analyzing this metric, it’s important to consider the growth rate, which measures customer acquisition and should always be increasing, while aiming to keep the churn rate indicator as low as possible. This way, the real growth of the company can be gauged from the number of customers.
The formula is as follows:
Number of customers who left / Number of new customers. The result should be multiplied by 100 to estimate the final attrition percentage.
This should be estimated for exact periods for each type of customer. It can be done monthly for closer tracking, but it’s commonly determined quarterly.
Ideally, the churn rate result should be as close to 0% as possible.
There are other formulas you can calculate according to the elements you want to analyze from the customer attrition rate.
How to Decrease Churn Rate
Now that you know how to calculate churn rate, we’ll show you three useful techniques that can help prevent customer churn rate from increasing and thus favor customer retention.
1. Analyze the Causes
It’s always important to review, diagnose, and track what’s happening with our service or product that leads to a high customer churn rate.
The first step, though seemingly obvious, is often avoided because it requires thorough analysis and accepting constructive criticism from customers.
You can do this by implementing simple strategies like:
- Sending an exit survey with a maximum of two or three direct questions, as lengthy surveys might deter responses. Also, include an open-ended question box for suggestions or recommendations.
- Sending a personalized email to obtain possible unscripted responses, which work much better than mass emails, so look for good copy to attract the customer.
- Calling the customer via phone can provide more clues in the conversation about why they decided to stop using your service, and additionally, you can identify if you can implement persuasion.
Note: If you want to persuade the customer, we recommend not being invasive and fulfilling the primary objective: understanding why they left and what can be done to bring them back.
2. Provide Educational Resources
If customers feel they don’t understand your product or aren’t getting the most out of it, they might completely abandon it. Depending on your industry and products, consider providing digital resource centers, blog updates, and educational onboarding email journeys. That’s why at Dazzet, we have resources like this page with over 100 digital marketing strategies.
3. Use Co-browsing or Shared Navigation
Excellent customer service is one of the most important elements in reducing a high churn rate.
From the start, get close to the customer, providing detailed support, whether in person or over the phone.
Co-browsing is one of the best ways to give a special touch to the customer, making them feel important because they truly are!
High-quality customer service will give the customer confidence in the service, and it’s likely that whenever they have a difficulty or are not completely satisfied, they will approach the business to clear up any concerns.
The best service will save you the task of convincing customers to stay when they want to leave.
4. Ensure You Are Targeting the Right Audience
Are your marketing efforts and sales team focusing on audiences that are most likely to get the most out of your product? Consider changing your marketing strategy to focus on customer segments that are more aligned with your offering. If you are attracting customers through digital channels like PPC and Google Ads, make sure you are conducting a proper keyword study.
5. Improve User Onboarding Process
When users sign up for a free trial of a service, there’s a high dropout rate, as many people end up using it only during the free trial. This increases your churn rate for the period you are measuring.
One of the most common reasons for this is that users are not very convinced of the value your SaaS can bring to them or their business, so provide support at each stage of the funnel with clear and effective communication.
This will help mitigate abandonment after the free trial.
6. Identify Symptoms of Customers at Risk of Leaving
It’s important to be aware of certain signs that a customer may be about to leave the service. These signs include not logging in for a month and having short and infrequent durations. If these signs are detected, proactive intervention can be taken to win back the customer by providing resources and support to enhance their experience and prevent them from leaving the service. This can include personalized communication to address any issues or concerns they may have, offering special deals to encourage their engagement, and providing useful tools to improve customer experience. By taking these steps, you can increase customer retention and improve long-term customer satisfaction.
4 Things to Consider When Calculating Churn Rate
1. Differences Between B2B vs B2C
B2B and B2C companies handle customer turnover differently, mainly due to the fact that their target audiences (and their behaviors) vary:
- B2B SaaS companies often have a more specialized target audience and business model, usually with strong specifications in mind. They typically experience a relatively low churn rate due to factors like higher pricing, specialized accounting departments or services to handle B2B customer turnover, and annual subscriptions.
- The B2C world is much broader, meaning it can be harder to gain (and retain) each customer’s attention, especially with all the competition in similar markets. Typically, they experience a higher churn rate than B2B and greater competition within their industries.
2. Not All Churn is Intentional
Sometimes, churn has nothing to do with customer satisfaction with your product or service.
They might be busy with their own matters, unaware that their card has been declined. This could be due to weaknesses in your payment infrastructure causing a bad payment route, or something as trivial as the customer’s card expiring.
This is known as involuntary (passive) churn. Unlike voluntary (active) churn, customers who churn involuntarily are not looking to cancel their subscription; they would have stayed! So unless you recover them, it’s simply wasted money.
It’s very important to focus on both areas of churn if you want your business to succeed, which is what every business owner wants, right?
3. Pre-churn vs Post-churn
You also need to classify your churn strategies considering how to re-engage users based on pre-churn and post-churn events.
Ideally, you want to catch customers who are considering canceling or who are involuntarily canceling due to payment issues in a pre-churn scenario. This way, it’s easier to prevent or at least reduce the chances of them leaving.
Whether it’s providing excellent customer service and support to keep your users who are about to churn happy, or ensuring that payment acceptance is at its best for all users, make sure to address these issues before the subscription renewal date.
But, all is not lost if you’re a bit late to the game and churn has already happened. You can still try with cancellation offers or the opportunity to pause payments for those who need a little push (backwards) in the right direction. For involuntary churns, consider payment recovery options like account updaters and payment tracking, so you don’t miss out on that revenue.
4. It’s Normal for Churn Rates to Vary by Industry
It’s important to remember that everything mentioned above depends on the business and the service offered. Some businesses will have a higher churn rate than others and still be equally successful, and others will have to address customer attrition in different ways.
The “average” churn rate for SaaS businesses is around 5%, and we’d like to emphasize the word “average” a bit more. Average.
This can be compared to the education services industry, for example. The average (yes, average) churn rate for this field is just under 10%. This is because the industry is highly seasonal: customer attrition is affected by the school year. While 10% seems high, in the education industry it’s considered healthy.
That said, a high churn rate can often be a solid indicator that something needs to change.
The customer churn rate is a measurement just as important as the growth rate (growt rate); otherwise, the business may not receive the necessary revenues and profits to stay in the market.
Today, the internet provides many tools that allow you to stay in touch with your customers without being invasive and that enable you to decrease attrition.
Finally, don’t fear constructive criticism from those who are leaving, as this can provide very useful information that will help grow and improve your product or service.
Juan Esteban Yepes