Losing customers or churn rate is a nightmare for every business owner or manager. It's not able to retain 100% of customers. However, this rate can skyrocket as high as 30% in some industries.
But what is the customer churn and churn rate? What are the types of customer churn? Why do customers get churned? Moreover, why is customer churn rate an important business metric? This detailed blog post on customer churn will navigate all these questions. Let's explore!
What is Customer Churn and Churn Rate?
In simple terms, customer churn is a measure of the proportion of customers or products that move out of a group over a particular period of time is called customer churn. Customer churn is a crucial factor determining the steady-state level of buyers a business will support.
It's important to understand and analyze the key reasons that make customers leave a particular business. Companies can build stronger, lasting relationships with their clientele by monitoring, addressing, and customer churn, ultimately fostering repeat purchases, business stability, and long-term success.
Customer churn is measured by customer churn rate. Basically, the customer churn rate is the calculated percentage of people who avoid doing any kind of deal with an organization over a specific period of time.
Customer churn rates may be high or low. When we say a company has a high churn rate, it basically means that the company is losing too many existing customers.
The opposite happens with a company with a low churn rate. A low churn rate explains that the company has managed to retain most of its customers. In a nutshell, the lower the churn rate, the better the business runs.
Types of Customer Churn
There are 4 major types of customer churn that are important for the growth of a business, especially if it is a SaaS brand. Let's study them in detail.
1. Monthly Recurring Revenue(MRR) Churn
The MRR or monthly recurring revenue churn can be defined as the sum of all the canceled contracts over a certain period of time. MRR basically measures the recurring revenue and predictions of the subscription business.
There is a basic formula to calculate MRR:
(MRR Churn = Lost MRR / MRR over the previous period). For example, if someone had a 35000-dollar MRR in January, but he/she lost 500-dollar of the total MRR in February, then the calculation will look like:
500/35000 = 0.014, which means the MRR Churn rate is 1.4 percent.
2. Subscriber churn
Also termed logo churn, subscriber churn refers to the genuine number of customers that abandon a business. Many times, we have seen people opting out of a business deal due to some reasons, and that is what subscriber churn basically is.
To calculate subscriber churn, there is a mathematical formula that goes like:
(Subscriber churn rate = (Subscribers at the beginning of a period – Subscribers at the end of that period) / Subscribers at the beginning of the period). For example, if someone had 200 subscribers and 10 of them opted out, then the calculation will be:
Subscriber churn rate = (200-190) / 200
Subscriber churn rate = 5%
3. Gross MRR Churn
The next type of Churn is the Gross MRR churn, which measures the total revenue lost from canceled or downgraded contracts. It can be measured quarterly, monthly etc. It can be calculated using the formula:
(Gross MRR Churn = (MRR Churn + Contraction MRR) / Total MRR at the start of the period). For example, if someone had 50000-dollar MRR and he/she lost 500 dollars due to canceled subscriptions and 1500 dollars due to downgraded subscriptions, then the gross MRR churn will be:
1500+500 = 2000
2000/5000 = 0.04, that means the gross MRR churn rate is 4 percent.
4. Net MRR Churn
Net MRR churn measures the total amount of MRR lost due to canceled subscriptions, however, taking into account other factors like additional revenue from upgrades and modifications from existing customers. To calculate net MRR churn, we use the formula:
(Net MRR Churn = (MRR Churn + Contraction MRR – Expansion MRR)/MRR at the start of the billing period). For example, if a man had an MRR of 5000 dollars and he lost 50 dollars each from MRR churn and MRR contractions but gained an expansion MRR of 75 dollars, then the net MRR churn will be:
(50+50-75) / 5000, i. e. 0.005. So, the net MRR churn rate comes out as 0.5 percent.
Reasons for Customer Churn
There are a few reasons that lead to customer churn. Knowing them is quite necessary for businesses. Let's explore them.
1. Poor Customer Support
Many times, customers encounter small to big issues regarding a product or service. They demand real people to help with their problems instead of bots or AI-generated statements. If a company fails to provide adequate customer support, the customers are likely to stop purchasing anything from that brand. This leads to customer churn.
2. Unable To Fix Bugs
If a customer encounters bugs frequently, it irritates him/her. On reporting the issue, if no solution is provided, this will lead to a high churn rate. No customer wants to do business with a company that can't take care of disturbing bugs in its products.
3. Wrong Target Market
Many people often subscribe to a company without completely understanding what it sells. When they realize later that they don't need the company’s product or service, they simply unsubscribe and leave. This, too, leads to customer churn.
4. Failure of Outcome
Customers don't buy products because they look promising or attractive. Instead, what makes them stay is when the products show the expected results. If a company's products don't show the results they claim, customers will become unwilling to buy more. This will result in customer churn ultimately.
5. Worthy Competitors
The market is really big, and no one can be the sole bull. When customers think that they have another company that can sell them better products, they change their priority. So, companies have to put a lot of effort into making the customers have faith in them; otherwise, customers will go to other doors.
Why Should Businesses Understand and Track Customer Churn Rate?
Customer Churn rate has a direct impact on revenue and serves as a valuable metric for assessing the performance of a product or service. Companies that prioritize their customers tend to be 60% more profitable than those that do not.
A substantial churn rate signals that the company needs to address issues affecting customer satisfaction. Let's explore the reasons why businesses should comprehend and monitor customer churn rates.
1. Identifying Problems
The churn rate serves as an indicator of potential problems within a business. A sudden increase in Churn might signal issues with product quality, ecommerce customer service, or other aspects of the customer experience. Information pertaining to customer churn rate is valuable in pinpointing potential issues.
A significant churn rate may signify challenges in pricing, service, product quality, or other facets of the overall customer experience. Churn rate will help in the segmentation of customers and decide the main area on which the company needs to work.
2. Customer Lifetime Value (CLV)
The churn rate is closely tied to the CLV of a customer. Businesses need to comprehend how long customers stay with them and how much they contribute over their entire relationship. This understanding is vital for effective resource allocation and e-commerce marketing strategies. The connection between churn rate and Customer Lifetime Value (CLV) can be illustrated through the following equation:
Customer Lifetime = 1 / Churn Rate. In practical terms, if the monthly churn rate is 2%, it implies that customers are anticipated to remain with the company for an average duration of 50 months, which is equivalent to slightly over 4 years.
3. Product and Service Improvement
Churn analysis provides insights into customer preferences and dissatisfaction. This information is invaluable for making informed decisions about product and service improvements, ensuring they align with customer expectations. Based on findings from our CX Trends Report, 60% of consumers have made a purchase decision solely influenced by the anticipated level of service from a brand.
4. Revenue Impact
High customer churn directly affects revenue. By quantifying the financial impact of lost customers, businesses can prioritize efforts and resources to retain existing customers and acquire new ones more efficiently.
A high revenue churn rate suggests that a company is losing a substantial portion of its income because of customer turnover. This can have adverse effects on the company's financial stability and long-term profitability.
5. Competitive Benchmarking
Comparing churn rates with industry benchmarks and competitors helps businesses assess their market position. Businesses need to identify and select key competitors within their industry. Comparing churn rates with direct competitors allows for a more targeted analysis, as companies with similar target markets and offerings can provide more relevant insights.
Ensure that the metrics used for calculating churn rates are consistent across the industry and competitors. This alignment is crucial for a fair and accurate comparison.
6. Customer Satisfaction Insights
Churn data can reveal patterns related to customer satisfaction. Analyzing the reasons behind Churn allows businesses to address specific pain points and enhance overall customer satisfaction.
Over 50% of the participants (almost 54%) in the survey expressed the opinion that companies should improve their efforts in delivering a positive customer experience and ensuring customer satisfaction.
7. Resource Optimization
A key component of corporate strategy is resource optimisation, particularly when it comes to determining and resolving issues that cause customer attrition. To effectively allocate resources, companies need to delve into various aspects of their operations and customer interactions.
By focusing on areas critical to customer satisfaction, companies can optimize their efforts and investments.
8. Predictive Analytics
Churn data can be used for predictive analytics, helping businesses anticipate and mitigate potential issues before they lead to customer loss. This proactive approach allows for strategic planning to retain customers.
Utilizing machine learning algorithms, businesses can build predictive models that take into account various features and variables associated with customer behavior. Subsequently, these models are able to forecast the likelihood of a customer leaving in the future.
How to Calculate Customer Churn Rate?
We understand the significance of the churn rate for a company, and obtaining this information requires a specific formula. Here's the recommended approach:
1. Customer Churn Rate
The churn rate is a valuable metric for examining customer attrition over various time periods, be it a year, a month, or even a day. If you are calculating the churn rate for the year 2024. The company needs the initial and the final number of customers of that respective period.
The information required to calculate the customer churn rate:
- Lost Customers= Customers at the start of the period - Customers at the end of the period.
- For example, a company had 3500 customers at the start of a month, and by the end became 1500, then Lost Customers = 3500-1500= 2000
Let,
- Customers at the start of the period = A
- Customers at the end of the Period= B
The formula for calculating the churn rate is
Churn Rate= [(A-B) / A] × 100
Let's take the above example further:
A= 3500
B= 1500
Churn Rate= [(A-B) / A] × 100
= [ (3500-1500) / ] × 100
= [ 2000 / 3500 ] × 100
= 57.14%
Here, the churn rate is 57.14%, according to the given information.
2. Gross Revenue Churn Rate
The customer spending is not uniform; not all customers are equally contributing to the revenue generation. The gross revenue churn rate offers valuable insights into the impact of customer churn on overall profits.
Let,
- Churned revenue in a period= A
- Monthly recurring revenue in the previous time period= B
Gross revenue churn rate= (A / B) × 100
For example,
Churned revenue in a period= $10, 000
Monthly recurring revenue in the previous time period= $200
Gross revenue churn rate= (A / B) × 100
= (200 / 10000) × 100
= 2%
Here, the Gross revenue churn rate is 2%
3. Adjusted Churn Rate
A business that is scaling at a significant rate will experience both positive customer growth and churn rate simultaneously. In order to get a more clear picture of the data, the fast pacing company has to use a more complex formula.
Let,
A= Number of customers at the start of the period
B= Number of customers at the end of the period
C= Number of churned customers during that period
Adjusted churn rate= { C / [ (A +B) / 2] } × 100
4. Seasonal Churn Rate
Many businesses are dependent upon a specific peak business season. Few businesses are more profitable during summer, and few are in winter. Businesses that are highly active in certain time periods of the year need a specific formula.
Let,
- A= Total number of customers during busy period
- B= Churn rate during busy period
- C= Total number of customers during slow period
- D= Churn rate during slow period
Seasonal churn rate = {[(A x B) + (C x D)] / (A + C)} x 100
Examples of Customer Churn Rate
The rate of customer churn differs across various businesses and industries. To provide a clearer understanding of how this metric impacts different organizations, let's look at some examples of churn rates.
1. E-commerce Churn Rate
E-commerce Churn Rate refers to the rate at which customers stop purchasing from an ecommerce site over a specific period of time. The typical customer turnover rate in the eCommerce sector hovers at approximately 70-80%, as reported by Omniconvert. This sector demands more focus on improving products and more accessible customer services.
2. SaaS (Software as a Service) Churn Rate
SaaS churn rate measures the percentage of subscribers or customers who cancel their subscription to a software service within a given period. Based on recent surveys, SaaS companies experience a median annual logo churn rate of 13%.
Netflix experienced a substantial loss in subscribers as a consequence of implementing stricter measures against account sharing, resulting in a notable decrease in overall revenue. The company's choice to discontinue the practice of account sharing had a significant effect on subscriber numbers, leading to a decline in income. SaaS companies must consistently update their service protection measures to prevent any potential revenue leakage.
3. Logistics Churn Rate
In the logistics industry, churn rate may refer to the percentage of customers who switch to a different logistics provider or cease using logistics services altogether. The logistics industry typically experiences a 40% average churn rate.
Consequently, it is crucial for logistics companies to prioritize the establishment and maintenance of strong customer relationships as a strategy for minimizing Churn.
For example, In a recent audit in Beijing uncovered discrepancies in Cosco's financial records, potentially undermining the trust of its customers. These concerns related to financial accuracy and transparency might have contributed to a diminishing level of confidence among customers, ultimately resulting in a reduction of the customer base.
4. Telecommunications Industry Churn Rates
The telecommunications churn rate indicates the percentage of customers who terminate their contracts or switch to another telecom provider. The telecommunications sector experiences an average churn rate of around 30% to 35%.
One crucial example is Verizon Communications. It has experienced a notable increase in its customer base, especially in the wireless sector. In the last quarter of 2023, the company witnessed significant growth in its wireless customer numbers. This upswing can be attributed to enhanced performance in areas where the C-Band technology has been implemented. Additionally, Verizon is progressing ahead of its projected timeline to attain a subscriber base ranging between 4 to 5 million by the conclusion of 2025.
5 Ways to Reduce Customer Churn
Below listed are 5 ways to reduce customer churn.
1. Improve Customer Service
Maintaining a high standard of customer service is essential to keeping clients. Businesses must ensure that their support team is well-trained, responsive, and empathetic. Furthermore, they should focus on addressing customer issues promptly and efficiently. By exceeding customer expectations, they create a positive experience that boosts loyalty and repeat customer rates.
2. Customer Feedback and Surveys
Businesses must actively seek feedback from customers through surveys or direct communication. The focus must be on understanding their needs, concerns, and satisfaction levels. By examining this data, they can find areas for development and better customise their goods and services to match the needs of their clientele.
3. Competitive Pricing
Businesses must regularly assess their pricing strategy to ensure it remains competitive within the market. If the prices are significantly higher than competitors without added value, customers may be inclined to switch. Consider offering promotions or loyalty discounts to reward long-term customers and maintain a competitive edge.
4. Personalized Communication
Developing personalized communication strategies makes the customers feel valued. Businesses can use customer data to send targeted messages, offers, or content that aligns with their preferences and behaviors. Personalization enhances the customer experience, fostering a stronger connection between your brand and the customer.
5. Offer Incentives
Businesses may provide incentives to encourage customer loyalty. This could include discounts, exclusive access to new products or features, or a rewards program. Offering tangible benefits shows customers that their continued business is appreciated, making them less likely to explore alternatives.
Conclusion
Customer churn, the phenomenon where customers discontinue using a service, poses a significant challenge for businesses. It not only impacts revenue but also reflects on customer satisfaction. To reduce Churn, businesses must focus on customer satisfaction and engagement. Providing exceptional customer service, addressing concerns promptly, and enhancing product value are some of the key strategies to reduce customer churn rates.
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FAQs: Customer Churn
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