The simple guide to customer churn (and how to reduce it)
Nothing lasts forever; that’s the saying, right?
It’s certainly the case when it comes to business. Products reach end of life, bandwagons pass and, unfortunately, customers move on.
This isn’t necessarily a bad thing in business. If something doesn’t last forever, that’s usually because it has been replaced by the latest and greatest, and if things change, it’s because the market and audience is evolving.
It’s the businesses owners who are aware of this that thrive and grow consistently successful enterprises.
Today, we’re going to look at customer churn. You’ve probably heard this phrase but might wonder what it means beyond the obvious definition of ‘lost customers’.
Consider this your simple guide to customer churn and a helping hand when it comes to reducing it in your business.
So, what is customer churn?
Put simply, customer churn is the number of customers who stop using your product or service within a certain time frame.
Churn is typically expressed as a percentage and should be on every stakeholder’s mind within any business – no matter how successful you are now, or how large your pipeline.
How do you calculate customer churn?
To calculate your churn rate, you need to divide the number of customers you lose within a period (say, your fiscal year) by the number of customers you had at the start of that time period.
You started the year with 300 customers and ended it with 274. That means you lost 26 customers during that period, and if we divide them by the total you started with, we find that your churn rate was 9%.
You can also calculate churn rate by the value of recurring business you’ve lost, or the percentage of recurring customer value lost. Basically, choose whichever method is the most illustrative in your mind and for your company.
As you might suspect, it’s best to keep your churn rate as close to 0% as possible, but there’s a bit of a caveat to that.
Why you’ll never reach a 0% churn rate
As noted, your churn rate should be top of your mind at all times, but you need to accept that you’ll never eradicate it completely.
The biggest, most successful businesses in the world lose customers. iPhone users switch to Android; long-term Ford customers decide to try out an Audi; Starbucks regulars decide to try out independent operators instead.
Customers move on. Once you accept this, you can set an acceptable churn rate and treat it like the redline on a car rev counter; any time it heads into that zone, you know you’re in trouble and need to take action.
How to reduce customer churn
So, how does one go about reducing churn?
Here are three simple, tried-and-tested methods.
- Focus on continually delighting your best customers
Who are your most profitable and seemingly loyal customers? Identify them and pool your resources so that the weight of your attention is focused on them.
This doesn’t mean ignoring the rest, but the 80/20 rule definitely applies when it comes to spending more time on profitable customers than offering incentives to customers who are likely to churn.
- Find out why customers are leaving
Analyzing your churn as it happens is a key step to reducing it.
Find out why customers leave. Surveys and one-to-one ‘exit interviews’ will provide insight that is gold dust.
Take those learnings, look for trends among leavers and make changes.
- Build in some form of loyalty program
Modern customer bases thrive on loyalty. The more reason you give them to return, the more likely you are to reduce your overall churn rate.
Loyalty can come in the form of additional perks within your product, discounts or access to exclusive content. Have a think about how you can build a mini club to drive loyalty and keep people wedded to your brand.
We hope you’ve found this article insightful. Customer churn is a hefty topic and one we’ll delve back into another time, but you should now be armed with the base knowledge to secure as much of your customer base for as long as possible.
Buy. Enhance. Grow. Aspire Software’s mission is to acquire and grow vertical software businesses that provide mission-critical solutions in their respective niche or market. Our team of entrepreneurs and business builders have an unwavering commitment to developing our brands and expanding into new markets thanks to its decentralized management strategy and indefinite hold period.
For more information please contact us here.