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. [caption id="attachment_1701" align="alignnone" width="1366"] Churn Rate Calculation[/caption] [emaillocker]
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.
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
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.
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 its full potential. As per Hubspot’s 2018 State of Inbound report, “generating traffic and leads” turned 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.
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.
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.” [caption id="attachment_1702" align="alignnone" width="600"] Patrick’s Research[/caption] 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.
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. [caption id="attachment_1703" align="alignnone" width="953"] Solution Devised[/caption] 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.
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, 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.
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.
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.
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]
Hamzah specializes in tech-based marketing and writes about marketing hacks targeted at marketers looking to enhance their businesses. He has an academic background in International Business, from which he draws his ambition as a market analyst. Hamzah is also an avid football fan, and that’s what you’d find him engrossed in, in his free time.