It’s easier to keep your existing customers than to gain new ones - and it’s less effort to hold onto a customer who is thinking of leaving than to try to win them back after they’ve left.
But how can you know how well you’re doing at customer retention? And where can you find opportunities to reduce turnover in your customer base?
Ensure your team understands the basics of customer churn, including how it’s calculated. And that’s just what this guide will cover.
What is customer churn?
The definition of customer churn is when a customer decides not to be a customer any longer. In short, they stop buying your products or services.
Some amount of customer churn is a natural part of the business cycle, as you gain new customers and lose a few old ones for various reasons. Even the best companies lose customers from time to time, often for causes outside of their control.
But too much churn is damaging to your business. Acquiring new customers is an expensive activity, and losing lots of previously steady customers indicates potential issues with your products or customer experience.
How to calculate customer churn rate
What is customer churn rate? It’s how you calculate the amount of customer churn your business is experiencing over a set amount of time. Or in other words, it’s the rate at which your customers stop doing business with your company.
How do you calculate customer churn rate? There’s a simple formula you can use to calculate this important metric.
Determine a time frame: monthly, quarterly, or annually
Determine the # of customers you had at the beginning of the determined time frame
Determine the number of customers that churned by the end of a period of time
Divide the number of lost customers by the number of original customers
Multiply the number by 100
The formula looks like this:
(Lost Customers ÷ Total Customers at Start of Chosen Time Period) x 100 = Churn Rate
Let’s look at it in practice: Business ‘A’ has lost 100 customers over 12 months. It had 2,000 customers at the beginning of the year and ended with 1,900. Their annual churn rate is 5%.
Measuring your customer churn rate with this metric means that your business can have precise data on where your company stands today and allows you to measure your progress in the future.
Causes of customer churn
Customer churn has many different causes, but these are the most common.
Poor customer service
If your customers don’t get the service and help they need when they have a problem or a question, they will be frustrated and more likely to leave. Providing excellent customer service isn’t something that’s limited to your new customers only - your long-time ones deserve it as well.
Lack of target market understanding
Even if your company has been in business a long time, your customers’ needs will evolve and change. Customers might be looking for new features that your product doesn’t have. Staying on top of shifting customer needs and desires should be a priority and can be done by regularly soliciting customer feedback.
Lack of pricing optimization
When your customers first started using your products or services, they were willing to pay the price you were charging them. But as the market changes and competitors enter, or your prices go up after an initial new customer discount, suddenly your customers are going elsewhere - that indicates a pricing issue causing churn.
Poor product-market fit
If your churn rate is high, your products might not be a great fit for your audience. You may even be targeting the wrong audience. Create a product roadmap and gather customer feedback to align your product with customer expectations.
Lack of engagement
Some customers might purchase your subscription and not use your product much - or at all. (This is especially common in the software world.)
While you might not mind these low-engagement customers - after all, they’re providing revenue - these people are the most likely to churn. Increasing their engagement and product usage will make a difference in your churn rate.
What is a “good” churn rate?
What is a good customer churn rate? There’s no one magic number here - it depends entirely on your business and industry. But some guidelines can help you determine where you stand.
In most industries, a 2-8% churn rate is good, or at least acceptable. For SaaS businesses, the average monthly churn rate is 7.5%.
Knowing where your company stands means researching average and exceptional churn rates for your particular industry and finding out where your competitors stand as well.
Importance of customer churn
Every business will have some churn, but high churn rates have significant negative impacts on your bottom line.
Customer churn is costly
Customer churn costs you money directly - it means you no longer have revenue from that customer in the short term. If your customers are churning before you’ve recouped how much it costs to acquire them (Customer Acquisition Cost, or CAC), then you’re losing money on these buyers.
And it’s easier to sell to existing customers because they’ve seen enough appeal and value in your products to make a purchase once. Those repeat purchases lead to a higher Lifetime Customer Value (LTV), which means that each customer brings you more revenue.
Churn impacts growth
High churn rates also affect how quickly and sustainably your company can grow. Retaining and upselling your existing customers is much more cost-effective than going out and gaining new customers. Bain estimates that it costs 5 to 25 times more to get a new customer than to retain an existing one.
Retaining customers is essential not just for your revenue today but also for your growth potential. If you want to bring new services or products to market, your best chances for success are in your existing customer base. They already like what you have to offer and are likely open to trying something new without much marketing cost.
It’s challenging to grow when customers are churning rapidly. Eventually, you will likely run out of potential new customers or need to spend even more to reach them. And that additional difficulty drives up your CAC and lowers your profits.
A better understanding of target market
One side benefit of working to lower your customer churn rate is that you develop a better understanding of your target market in the process.
Diving into what makes customers purchase your product and then take their business elsewhere can uncover features your target market wants, gaps in your offerings, and opportunities in the market.
You’ll also learn what exactly your target market wants and needs from your products and how your products stack up right now (or fail to do so). With this knowledge, you can refine your products to align precisely with your audience’s wants.
Gain a competitive advantage
Understanding and analyzing what’s behind your customer churn helps you develop more effective marketing strategies and an improved customer experience.
And those improvements and analytics give your business a competitive advantage. They’ll help you know what makes your company stand out from the competition and build stronger relationships with your customers.
How to reduce customer churn
Reducing customer churn is vital if your churn rate is high for your industry or affects profitability and growth. While there’s no single solution to a high churn rate, these steps will help you pinpoint the problems in your business and solve them to lower your churn rate.
Understand the why
You can’t fix a customer churn issue without knowing why customers leave your company. Uncovering why customers churn helps you pinpoint and resolve significant issues.
Conducting a thorough customer churn analysis begins with talking to your customers. Gathering their feedback through interviews, focus groups, surveys, and other feedback mechanisms will give you an understanding of their needs and expectations and how well you’re fulfilling them.
It’s essential to focus on more than just the customers who have churned to see what they have to say, though that’s important. You should also talk to customers who have stayed loyal and see what they like and find compelling about your products or services. This information can help pinpoint what you’re doing well.
Provide proactive support
Helping new and existing customers get the most value out of your products or services makes them more likely to stay. And offering them proactive support makes that possible.
For example, you may need to revamp or create a thorough onboarding program so that customers can dive right into using all of your product features. Or you may want to develop self-service resources to help customers solve common issues or take on tasks and provide them at the appropriate time in the customer journey.
Don’t wait for customers to ask questions looking for resources. Instead, proactively use the data to enable customers to effectively use your products and services. You’ll improve the customer experience while also bolstering long-term customer loyalty.
Consider providing extra training and/or certifications for your customer service staff if you feel they could be more effective in the roles as well.
Ensure proper audience targeting
Even if you offer a top-notch product, your customers may be churning because you’re not targeting the right audience. For example, your bookkeeping software could be just what the best bookkeepers for small businesses need - but if you’re marketing instead to the small business owners they serve, your customers won’t understand the product or get enough value.
Determining who you’re currently targeting and who you should be targeting can help you close those gaps that lead to churn. Checking your most satisfied and engaged customers and comparing them to those who churn most frequently can illuminate targeting problems contributing to churn.
Customers will stay longer with businesses they feel they can trust. One way to build this trust is to communicate proactively with your customers about current issues, new features, and company news.
Keeping customers up-to-date and in the loop ensures you create a strong relationship with them. It can also encourage them to adopt new features, which increases the value they get from your product. And they can share big news about your company on their social media channels, giving you some added word-of-mouth marketing.
Know and watch for the warning signs
What are the warning signs for customers who are likely to churn? You should do a deep dive into the symptoms specific to your business so that you can identify churn risks before they decide to leave.
Low engagement tends to be an indicator of churn potential. For example, if a segment of your customers is only logging into your software product once or twice a month, it’s likely only a matter of time until they leave. Another indicator could be having an unresolved or open issue with your customer service team. Or, if you experience most of your churn around renewal time, it could be a pricing problem.
Finding the warning signs that your customers are likely to churn will help you uncover pain points in your customer experience driving customers away. It will also help you determine which customers could use a personal touch or additional resources to prevent them from churning before it’s too late.
Examples of churn rate
Benchmarking your churn rate against other companies can be a helpful exercise to determine where you stand.
Peloton: An 8% yearly churn rate. Peloton has grown quickly in the past two years thanks to customer loyalty and low churn rates - 92% of their customers stay with them after a year.
Netflix: A 2.5% monthly churn rate. Netflix has meager churn rates due to its extensive offerings and focuses on the customer experience.
Apple TV+: A 15.6% monthly churn rate. On the other hand, the Apple TV+ streaming service has a high monthly churn rate, which is not good for its prospects (especially with Netflix as a direct competitor).
Many B2C SaaS companies publish their churn rates to show how effective they are at retaining customers, so doing your own research is easy if you’re in that segment of the market.
Metrics to track along with churn
While churn is a critical metric to track for the health of your business, it’s not the only one out there. When tracked alongside your churn rate, these additional metrics will give you a fuller picture of your customer experience - why customers are leaving and what can prevent it.
Gross MRR Churn: Gross Monthly Recurring Revenue (MRR) Churn is the percent of revenue lost due to customers canceling or downgrading. This metric helps to see if you’re losing high-value customers or mostly small accounts that are churning.
Net MRR Churn: Net Monthly Recurring Revenue (MRR) Churn illustrates any overall revenue changes from your existing customers by considering new revenue from expansions or upgrades.
Revenue Growth Rate: This metric shows how much your revenue is growing month over month, and it gives you a view of how churn is affecting your company’s growth.
Net Promoter Score® (NPS®): This powerful and popular metric indicates whether people are likely to recommend your products or services to their friends or colleagues. NPS helps gauge overall customer satisfaction along with churn rate.
Customer Satisfaction Score (CSAT): This metric reveals how happy customers are with your customer service, typically based on survey responses. CSAT can help you determine whether your high churn rate is due to customer support problems.
Customer Lifetime Value (LTV): This metric shows you how much revenue customers bring during their relationship with your company. It can help you determine if a high churn rate hurts your ability to exceed your initial customer acquisition cost.
Customer churn isn’t just another metric to track - it’s an indicator of the health of your entire customer experience. And that’s why you need to monitor it and work to improve it. Your bottom line and your customers will both thank you.
Are you searching for a way to find out what your customers think so you can determine the most impactful improvements? With GetFeedback’s complete customer experience platform, you can send out customer feedback surveys and track data and progress over time, so your customers stay loyal - and profitable.