Customer attrition is also known as customer churn turnover and describes the loss of clients or customers for a business. Most businesses would identify a customer/ client as churned when there is no purchase or interaction between the two in a particular time-frame. Customer attrition is a critical metric as it provides the company with information that is vital to its growth and profit. Customer retention is known to be more cost-effective than customer acquisition as it saves companies from the hassle of working sales leads, conducting meetings, and finally selling the products/ services. Additionally, customer retention is also known to be more effective in terms of earning more revenue, as existing clients/ customers find it easier to trust and remain loyal to the brand.
Customer churn is when clients/ customers terminate business with a particular company. This termination can be in various forms for various business natures, such as subscription cancellation, account closure, contract non-renewal, and customer/client shift to competitors, among others. However, the initial step before calculating the churn rate should be figuring out what a company defines as attrition. Every company can have individual factors that it may classify as attrition. Once this is decided, the company now needs to decide on a churn rate calculation type.
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Churn Rate Calculation for Marketers/ Beginners/ Companies
Client Churn Rate can be measured in different ways, and company employees are advised to choose the method that best suits the company. Companies generally choose a churn rate calculation method from the below-mentioned alternatives.
- Total number of clients/ customers lost during a stipulated timeframe
- Percentage of clients/ customers lost during a stipulated timeframe
- Recurring business value lost
- Percentage of recurring business value lost
According to a simple churn rate calculation example by Stich, the number of customers lost in the last quarter, divided by the number of customers a company started with in the last quarter, provides the churn value. This value multiplied by 100 provides the churn rate percentage. To simplify this, the example included a company starting its last quarter with 100 customers and the loss of three over the course of the same quarter, which results in a churn rate of 3% for the company.
Another example to demonstrate the remaining two methods of calculating recurring business value lost and its percentage is as follows.
Suppose a company has its monthly recurring revenue (MRR) valued at $500,000, and at the end of a month, it is at $450,000. The company also manages to bring in $70,000 from its existing clients/ customers in the same month through upgrades. The churn rate, in such a case, is calculated by subtracting the MRR at the beginning of the month from the MRR at the end of the month and dividing the result by the initial MRR. (In this case, the additional $70,000 is also subtracted.)
(($500,000 – $450,000) – $70,000) / $500,000
=
($50,000 – $70,000) / $500,000
=
-$20,000 / $500,000
=
-0.04
Percentage of recurring business value lost = -4%
As per the calculation, the churn rate is negative, which means that the company made more money despite the $50,000 loss in MRR. This condition is known as a negative churn.
Importance of Churn Rate Calculation/ Why does churn rate calculation matter?
Losing clients/ customers is normal and is expected by every company. The need for churn rate calculation arises to deal with the losses that the company experiences efficiently. It is important simply because acquiring new clients is more expensive than retaining existing clients. The company’s salesforce does not need to spend valuable time and money to convince existing clients to choose that company over competitors as the client has already made that decision.
The primary goal for any company’s product or service is growth. Growth occurs with new customers being added to the business through marketing and sales. However, when customers opt-out and leave a company, growth is counteracted, and this may sometimes also result in contraction. Most businesses tend to focus more on acquisitions than on customer retention, but a business must minimize churn to be successful. If the churn rate is not kept in check, a business will not even come close to reaching itotential.
As per Hubspot’s 2018 State of Inbound report, “generating traffic and leads” ts full purned out to be a severe marketing challenge for 61% of the respondents, and this fact has remained consistent over the three years before this report as well. Where a 5% churn rate may not seem too daunting at first sight, especially when compared to the larger sum of revenue that a company generates, even a mere churn rate drop 0.3% can add tremendously to company benefits.
How to Reduce Churn/ Reduce Churn with these Simple Guidelines
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Focus on Most Valuable Clients
- For numerous businesses, problems of churn can be solved by offering incentives to a pool of existing clients/ customers that are on the brink of churning, in an effort to keep them on board. In contrast to this, Sunil Gupta, the Edward W. Carter Professor of Business Administration at Harvard Business School, says that this strategy is lacking.
- Gupta says, “If I offer an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for me? The traditional method is focused on reducing churn, but we contend the goal should be maximizing profits, rather than only reducing churn.” Instead of focusing on all customers that are likely to terminate business, companies must focus on the most profitable customers.
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Actively Communicate with Clients in Customer Attrition
- Reach out to clients before they approach the company for any queries or complaints. This portrays the message that the company is invested in helping the clients make the most of the company’s products/ services.
- The clients must be approached by a method that isn’t simply a feedback tool but instead guides the clients to efficient usage of the product/ service. This enables clients to understand the full-fledged functioning of the product and implicates a sense of interest depicted by the company.
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Provide Reasons to Stick Around
- To keep clients/ customers interested in the company, discounts, promo codes loyalty programs, and other such deals positively impact overall business growth. This can go a long way as customers are made aware of the importance of their business to the company.
- When the deal is made available to the customer is of utmost importance. This requires a closer look at each individual customer’s timeline. If the customer is nearing the end of their subscription and renewal is doubtful, sending in a promotional offer with discount rates or membership extensions can work as a factor that makes them stay longer.
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Request for Feedback
- Customers tend to churn when they encounter a problem with the product/ service and are subject to poor customer service. Finding the root cause of the problem takes time, and solving that issue further consumes even more time. This emphasizes the need to collect feedback from clients often and well in advance.
- According to individual business requirements, surveys can be created and sent to clients via email to maintain a continuous feedback loop. Asking for feedback suggests that a company is focused on improving its processes. Another method for quick fixes of problems is a live chat. This enables users to get solutions in no time and improves customer satisfaction.
How to Effectively Deal with Churn
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Let a Few Customers Churn
- A concept that a few business owners do not find easy to digest, but in certain cases, companies have to let go of clients/ customers. This does not impart the meaning that companies need to ignore churn rates or expect clients to be satisfied with below par services and products. It simply means that a business must know when to let a client go. This is especially needed in cases where the client asks for a deal that does more harm than good to a business.
- In the case of a profiled group of clients/ customers that are likely to take up the services of competitors, businesses immediately resort to sending emails with incentives to these customers. Ideally, before this step is taken, businesses need to think about whether the incentive is affordable and whether the customers that are about to leave are worth that loss.
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Identify Why Customers Churn, Come up with Solutions
- After all of the calculations required to find out churn rates, businesses need to find the reasons behind the loss of clients/ customers. Many businesses do not pay heed to this as they refrain from asking serious questions and admitting that they are faltering on many fronts.
- Identify the most common reasons for abandonment and work on them to reduce churn rates in the future. At the very minimum, this will prevent clients from terminating a business transaction for the same reasons in the future.
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Retain a Competitive Edge
- Customer demands change with time and technological advancements. Market conditions are extremely dynamic, and businesses need to keep up with market trends, technological developments, and new product entries to position themselves securely to avoid disruption by the ‘next big thing.’ Currently, churn rates are often reduced through new technology such as Big Data and machine learning, which provide better insights into customer preferences.
- Every company aims to be the best at what it does, and, for this, it needs to get the better of what other companies in the market are doing. This is possible through a thorough study of client/ customer data and innovating new processes to aid the study’s findings.
Bingo Card Creator Notes an 8% Decrease in Churn
Bingo Card Creator, by Patrick McKenzie, a software developer, and marketer, allows elementary school teachers to use a list of words to aid classroom learning. According to McKenzie, 40–60% of users that sign up for a SaaS trial for free will use it just once and never come back. Many even forget that they had signed up for the application, whereas many realize it just wasn’t a good fit.
Many times, however, users are unaware of the benefits that the software provides. McKenzie has claimed that this kind of abandonment can be reduced by enhancing the software and increasing communication with users.
Patrick’s Research
The study reveals that there is a decline of around 5% between teachers visiting the dashboard and creating a list of words, along with more substantial drops between “Create List,” “Customize,” and “Schedule Print.”
Image as seen on Website
The entire process is meant to take up just a few seconds; however, users preconceive a longer process time with complex steps and end up quitting in the initial steps itself.
Solution Devised
To increase the number of users who complete the customize step, Patrick included a progress indicator and gave users the option to skip stages without changing the default settings, which further sped up the process.
Image as seen on Website
The small changes and efforts that Patrick made to the software were awarded an 8% (from 82% to 90%) increase in the users completing the customization step.
The reason behind the Decrease in Churn
When customers use software for the first time, they are not completely sure of how to use it and what features it may comprise. An optimized onboarding process, which demonstrates how to use the software and make use of its features, results in more customers using it for a long time. The Bingo Card Creator reached this point with the addition of the progress bar, which made it clear to users as to how close they were to completing the entire process.
Newsday Utilized Incentives to Reduce Churn
Newsday, a large US publisher, needed to reduce customer churn and maximize its return on investment in retention campaigns. Newsday selected Mather Economics for this task of customer churn rate reduction.
Mather Economics’ Approach (Customer Attrition)
According to customer type, Mather Economics estimated churn risk by dividing them into three segments. Three retention campaigns were set up and tested. These included a charger that cost $18, a gift card that cost $12, and a greeting card that cost $1. The representative test groups were put to the test in each churn-risk segment, with customer behavior being tracked and reported weekly.
Test Campaigns Results
The campaigns were successful in reducing churn in each of the risk segments; however, only the group that was most at risk of churn recorded a significant reduction from all three incentive types at 120 days post-application. The campaign also demonstrated that the high-churn customers responded most favorably to the gift cards and the greeting cards. The charger was found to be effective across all segments but was not worth the extra expenditure.
The overall churn levels were consistent with projections from models of churn-risk that Mather Economics has developed, and these test groups demonstrated the most cost-efficient methods of lowering churn, group-wise. The reduction in churn among all risk groups, through all the three incentives, was averaging at 10%. This test demonstrates that significant and lasting retention gains can be achieved with cost-effective solutions, in this case, incentives.
Terminate Churn in its Tracks
Customer churn is an important measurement criterion for any business to evaluate. Although churn may not be the most positive of ways to look at a business, it provides businesses with the reality of its customer retention. It is difficult for a business to measure success if it does not take into account the inevitable failures that any and every business faces.
While every business strives for each customer to be retained, this is very distant from reality and market dynamics. This is where customer churn comes into the picture. Even the largest of businesses find customer attrition to be a hurdle that seems impossible to clear, however, unearthing and solving the reasons for churn and, sometimes, encouraging through incentives are needed to reduce churn rate.[/emaillocker]
