What is Customer Churn & What Does It Mean for Your Company

“Churn” is a term that gets used a lot in Account Management and Customer Success conversations. Many Account Managers and Customer Success Managers take churn very seriously (and many are compensated based on churn rates).

The churn rate directly shows the percentage of lost customers in any given period of time – and can be a major source of stress for companies. However, measuring and understanding churn can also give you some insight into how to improve your business and what you may be doing wrong. There’s a lot more to churn than meets the eye, and understanding it could help your business grow faster.

Here’s a quick primer for those of you who want to learn more about churn, and how to prevent it.

What is Customer Churn

Customer churn is the rate at which customers stop doing business with a company within a specific time period. This is one of the most important metrics to track as an organization because it provides insight into how well a company is performing over time. In most cases, B2B businesses stand to lose a very large amount of annual revenues with each lost customer, especially when the cost of acquiring another customer is considered.

It doesn’t matter what type of business you run; customer retention is an important part of sustainable growth. Some industries have churn rates as high as 15%, while others sit closer to 2-3%. Every customer lost takes measurable value away from your company, which is why your churn rate is a vital metric to keep your eyes on. You can’t hope to continue growing your business if you’re unable to retain the majority of the customer you already have.

Explore the complete, step-by-step guide to lowering your customer churn here.

How Customer Churn Is Measured

Usually, churn is measured as the number of lost customers over a set period of time compared to how many you had at the start of the period. The time period is up to you, based on what makes the most sense for your specific business. If you have a monthly buying cycle, you may choose to measure your churn monthly or in 3-month intervals.

For example, a business that started Q3 with 2,000 customers and lost 32 throughout the quarter is said to have a quarterly churn rate of 1.6%. Churn does not take into account how many customers you gained throughout that same quarter, as it’s only a metric used to find out the rate at which you’re losing customers. Your churn rate won’t tell you everything, but you can use it to make sure you’re regulating customer loss as much as possible. Lower churn rates usually lead directly to higher profits.

What is Customer Churn, Really?

The real truth about customer churn is that your business has failed a customer. When your customers switch from your company to your competitor, it’s because you are not providing them with the value they’re looking for from a vendor. You may hear excuses such as price competition, incorrect product usage, issues with performance, or defects in the product. But, in most cases, these are not the underlying issues that drive the buyers away. All of these types of issues can usually be solved through communication, which hints that something else is missing. Some of these other aspects your customer may be looking for includes:

1. End Outcomes vs. Product or Service Results

Even if your product is working exactly as it should be, it may not be getting the customer what they really want. If you do not truly understand what the customer wants to get out of using your product or service, you may know if it is truly working as it should. It’s even worse if your product or service isn’t being used properly or if it’s not working well.

The problem is that you may be tempted to believe the outcomes they want are the same thing as the solutions your product or service provides. This is generally not the case. While your customer may be looking for a product to fix a problem they have, that solution is not the end goal they are looking for. Instead, they have goals and outcomes that are important to them as a company. If your product or service isn’t helping them reach those outcomes, they are likely to look for other options.

As a company, it is essential to understand what is actually important to your customer's company. If you do not understand your customers enough, you may not be prepared to supply them with the outcomes they really need.

2. Lack of Trust

People don’t buy from companies; they buy from people. If you want a successful buyer-seller relationship with your customers, there must be a human-to-human element that builds up a strong sense of trust over time. In many cases, there is a lack of useful interaction between buyers and sellers after that sale has been completed. 

B2B sellers can often forget that their customers may want a lot closer of a relationship. However, with that said, not all clients are the same. Some may be okay with limited interactions, but others may want more regular and personal interactions so they can build a greater sense of trust and investment in the seller.

If you as the seller don’t pay attention to how you’re treating the customer and the level of service you’re providing, you may be creating a relationship that lacks trust. Customers who feel neglected, betrayed, or lied to by sellers are very likely to churn.

3. Relevance to the Customer’s Needs

Most of your competitors may be able to supply a similar product or service as you, so the way you have to compete is with other areas of value you offer your customers. 

B2B buyers are looking for sellers who can help them build their business and become stronger players in their own industries. If you can offer useful and relevant information or services that extend beyond the initial sale, you will put yourself in a better position to foster customer loyalty.

If you cannot develop a deeper understanding of your customers, their industries, and their evolving needs over time, you risk becoming irrelevant to them. Customers are less likely to find value in a company that is only interested in selling without trying to understand the client’s needs and stay relevant in changing environments. 

Understanding your customers on a deeper level helps you give better support and advice on how they can use your products or services to meet their needs.

Some Churn is Normal – But That Doesn’t Mean It’s Good

Despite its obvious negative effect on your profits, some level of customer churn is inevitable. There will always be somebody with a reason to choose another company instead of yours. As a company, you cannot be all things to all people. If you try, you may end up losing more money and driving away more customers.

This is not a statement meant to encourage you to ignore your churn rate. But, the truth is you will have to learn to accept that some churn is absolutely normal for a business. It’s your job to see how you can get your churn rate as low as possible without spending more on customer retention than you would have on new customer acquisition.

Customer retention is not free. It’s vital to focus efforts and resources on customer retention, but only to an extent that it leaves you with an acceptable amount of churn. “Acceptable” should be the lowest level of churn possible in order to sustain your growing business. Churn may be normal, but it’s not a good thing. Keeping your churn rate as low as possible may help you to get a competitive edge in your industry, especially in SaaS or other subscription-based businesses. 

The Bottom Line

Customer churn does not necessarily mean your business is failing as a whole. But, it is a sign that you are failing to provide the value that some of your customers are looking for. Instead of ignoring this strong signal from your customers, adjust your view of customer churn and take action to prevent the loss of customers whenever possible.

With KAM software like Kapta, it’s easier than ever to keep track of your customer's satisfaction level so you can deal with churn proactively rather than reactively. With features like account health scores, at just a glance you can gauge satisfaction levels, manage risk, and flag accounts that need more attention and are at a higher risk of churning. For more information, reach out to us today. 

Christine is a content specialist for Kapta. She graduated from Radford University with a BBA in Management, concentrating in Entrepreneurship.