Customer churn is an essential metric to track for any organization in any industry. It not only gives you insight as to when and why customers are leaving your organization, but it also helps inform future decisions you’ll make for your business. In this guide, we will cover every aspect of churn from what exactly it is, how to track it, how to reduce it, and how to manage churn.
What is Customer Churn and What Does It Mean?
Churn is a term that you have certainly heard in conversations revolving around account management and customer success, and many AMs and CS managers are compensated based on these rates.
The churn rate is one of the most important metrics to track in any business model as it can offer valuable insights into what you can improve upon. While churn may seem like a simple concept from a birds-eye view, there is a lot more to it.
What is Customer Churn
Customer churn is the rate at which customers stop doing business with a company within a specified period. Many organizations choose to track churn monthly, quarterly, or yearly.
It is an essential metric to track because it provides insight into how well your company is performing over time. When you consider how much it costs to acquire a new customer vs. retaining existing customers, the value of this metric is even more apparent.
How Customer Churn is Measured
Churn is measured as the number of lost customers over a period of time compared to how many customers you had at the start of that period. For example, a business that started its third quarter with 2,000 customers and lost 32 before the end of that quarter has a churn rate of 1.6%.
Note that this equation does not take into account how many customers you gained throughout that same time frame, it is only a metric used to understand the rate at which you’re losing customers. This isn’t the end-all-be-all metric, but you can use it to make sure you’re regulating customer loss as much as possible.
A Deep Dive Into Churn
The bottom line is that churn means your business has failed a customer. While the reasoning for this failure at the surface level may be price, performance, or incorrect product usage, there are typically deeper seeded reasons a customer churns including:
1. End Outcomes vs. Product Results
Even if your product is working exactly as it is supposed to, if your client isn’t an ICP fit, they will churn. Oftentimes, organizations believe that the outcomes the client wants are the same thing as the solutions your product provides, and unfortunately, this isn’t always the case.
As an organization, it’s essential to understand what is important to your client and whether or not your product is a good fit for them.
2. Lack of Trust
Relationships are built off trust. To retain strong client relationships, there must be a human-to-human element that helps build trust between your organization and your clients.
It’s important to understand what kind of relationship each client wants. Some may want more constant communication while others may want to reach out when they need you but not have you reach out to them. Pay attention to how your clients interact with you and how you can build trust with them and they will be less likely to churn.
For more reasons why customers churn, take a look at this article.
Churn Rate vs. Retention Rate: What are the Differences?
Not only do you need to be monitoring your churn rate, but you should also be keeping tabs on your retention rate. Both of these metrics refer to the quality of your product or service, and the insight you gain from measuring these rates will help you understand your customers better.
What is Retention Rate?
While your customer churn rate measures the rate at which customers stop doing business with you, the customer retention rate is the percentage of customers who stick with you. The benefit of a high retention rate is that you can more accurately predict your business's future. A high retention rate gives you the confidence to invest more into your business because you know you’ll have money coming in.
A high retention rate also helps you rest assured that your customer satisfaction is up. For example, if your retention rate increases from 2021 to 2022, you should look at the changes you implemented over that year to see what may have helped retain more customers.
To calculate retention rate, you’ll utilize this formula:
[(Total Number of Customers at the End of a Given Period — Total Number of New Customers in That Period) / Total Number of Customers at the Beginning of That Period] X 100 = Customer Retention Rate (CRR)
Similar to churn rates, retention rates can be calculated monthly, quarterly, or yearly.
Churn Rate vs. Retention Rate
The best way to look at retention rate vs. churn rate is to note that churn is bad because it means customers are leaving, and retention is good because it means customers are staying. If you have a high churn rate, your retention rate will be low and vice versa.
Churn and retention rates will vary depending on the industry and size of your business. For many industry leaders, their retention rate sits at about 94%. However, insurance companies average around 84% and retail at 63%. SaaS organizations sit lower at 35%. Therefore, it’s important to track these metrics over time to understand what is ideal for your company specifically rather than trying to compare to other businesses.
KAM software, like Kapta, can be useful when it comes to monitoring churn and retention rates so you can be sure to make the most informed decisions for your clients and business. For more information about churn and retention rates, read this helpful guide.
Tips to Reduce Customer Churn
Unfortunately, B2C companies typically experience higher churn rates than B2B companies at 7.05% vs. 5%. These numbers equal huge loss across the board, from lost marketing dollars, customer service hours, and forecasted revenue.
While some churn is inevitable, the more you can reduce that number, the better off you’ll be. Here are some causes of churn and ways you can combat it.
What Causes Customer Churn
There are four main causes of customer churn. These include:
When your product or service is too expensive for your customer’s budget.
This doesn’t always mean your product is bad, it may just be poorly aligned with a customer’s needs. Other times, faulty products, poor services, or buggy upgrades can send customers elsewhere.
3. Poor Customer Fit
If your customer’s needs or wants change, they may evolve past what your product can do. You may have also misunderstood your client’s needs from the get-go.
4. Poor Customer Relationship
Account managers and especially key account managers should prioritize building strong relationships based on customer satisfaction and trust. A strong relationship can allow your organization to solve issues before the customer leaves and will help ensure a good customer fit.
How to Reduce Customer Churn
Once you understand why customers are churning, you can begin to address these issues and reduce churn. To do this, follow these six steps:
1. Follow a Process
A consistent process produces consistent results. This process should also help give you clear insight into customer behavior.
2. Focus on Communication
A communication-first approach will help decrease all four common causes of churn. It will also give you more clear and upfront information about problems customers are having with your product or service. Build a communication-first methodology by:
- Having personalized communication
- Reach out before customers do
- Spend time listening and fully understanding their needs and goals
3. Support Your Customers' Goals
When you fully understand your client's goals, it’s easier to build a strong roadmap to get them there.
4. Be Transparent
Both in client-facing and internal communications, you should always remain transparent. It’s essential to be able to discuss details across departments and with your customers.
5. Remain Proactive
As an account manager, you should always be monitoring your clients’ account health, potential needs, and in-progress deliverables that way if any red flags come up, you can address them before they become an issue.
6. Focus on the Bottom Line
The bottom line isn’t your financials, it’s your customers. Your reputation and customer relationships are the most essential aspect of your business and it’s important to form a culture around that.
For more information about how to spot and reduce churn, take a look at this blog.
How to Execute a Churn Analysis for Account Managers
Understanding why customers are churning is essential to a business's health and growth. Without this information, you won’t understand how many customers are leaving and why and you won’t have a direction in which to go when it comes time to make changes. This is where a churn analysis comes into play.
What is a Churn Analysis?
A churn analysis tells you what percentage of your customers don’t return compared to the percentage who do. This will help you better understand your business-customer relationships and what is keeping them coming back or driving them away.
A churn analysis can also uncover trends in customer behavior at different touchpoints. This will help you establish more personalized engagements to make your clients feel more valued.
How to Execute a Churn Analysis
1. Keep Track of Churn Over Time
Keeping an eye on churn over time will help you evaluate churn as it stands right now, as well as allow you to look back over churn to see trends.
Many companies choose to track churn on a monthly or quarterly basis. Monthly analysis can help you identify problems sooner however, quarterly may be more beneficial for a broader outlook.
2. Establish KPIs and Goals
Without goals and objectives, you won’t have a direction in which to go. These goals depend on your business and can include items such as:
- Customer engagement
- Competitor pricing
- Likelihood to upgrade
3. Track Customer Behavior
Tracking your customer's behavior will help you understand how certain groups use your service and will help you anticipate future customer behavior.
4. Determine the Reason for Churn
Understanding why clients churn can come from implementing a voice of customer survey after a customer leaves. This is a way to gather feedback from customers so you can fully understand why they left.
5. Utilize KAM Software
KAM software will help you not only keep track of churn in one place, but it will also help you utilize other metrics to understand and begin to reduce churn. It will give you access to all the data you need in one place such as:
- Org Charts
- Voice of Customer and SWOT Analysis Tools
- Account Plans
- Account Health Score
- Plus Many More
Customer churn is one of the most important components of your business to measure. Understanding why customers churn will help you begin to combat churn so you can provide a better customer experience and retain more clients. For more information about executing a churn analysis, check out this step-by-step guide.
Is Your Customer at Risk of Churn? 5 Ways to Find Out
Now you understand what churn is, why it’s important, and how to perform a churn analysis. Now it’s time to understand how to see churn coming before it hits you seemingly out of nowhere. Being able to predict churn and make changes before it happens will help you retain more customers, and in turn, save more money, time, and energy.
Where to Look for Churn and How to Combat the Risk
Here are the areas where you should be on the lookout for churn and how to combat the risk:
1. Voice of Customer and SWOT Results
A VOC will be your number one source to keep track of potential churn. This is an opportunity for you to sit down with your client and listen to their thoughts, concerns, and needs. This allows you to hear directly from the source what is working and what isn’t and allows you to make changes.
A SWOT analysis is another helpful tool. While most client relationships begin with a SWOT analysis, you should run an analysis throughout the engagement to keep an eye on new threats and opportunities that may arise.
A VOC will give you direct insight into your clients’ goals and expectations while a SWOT analysis will give you insight into internal and external forces working for and against you and your team.
2. Your Footprint
If your entire client relationship is centered around one person in your clients’ organization, it’s time to branch out. This is a big red flag because if that person leaves, you’ll be left without a contact and churn is more likely.
Your goal should be to expand not only vertically within an organization, but also horizontally. This will help you not only grow additional relationships but will also help you become more effective.
3. Strategy Plan
Without a comprehensive, long-term strategy, your customer is at a higher risk of churn. You need actionable steps and specific items to help you achieve your goals. These plans should be long-term, customer-centric, and strategic.
4. Units of Measurement
If you are unable to prove your value to your customer, they will likely churn. Keep track of relevant KPIs such as revenue and whatever else is relevant to each client specifically so when the time comes, you can prove without a doubt that you are beneficial to them.
5. Account Health Score
An account health score is a way to keep track of how your client is doing. This can include communicating with your customer-facing team as to how your client is and what problems they have encountered, tracking KPIs, and tracking lagging indicators.
Having a client churn out of nowhere is an account manager's worst nightmare. Change the narrative by tracking potential churn and working proactively rather than reactively. To learn more about how to do this, take a look at this guide.
How to Successfully Manage Customer Churn
It is harder to acquire and easier to lose customers than ever before, which is why it is essential to cut churn rates and increase retention rates. No matter what industry you’re in, managing churn rate is an essential component of success. The insight you gain will allow you to see when and why customers are churning and will help you make decisions for the future of your organization.
Types of Churn
There are two types of churn:
Voluntary churn is the most common and it refers to when a customer actively decides to leave a company at a specific time. While the reasons for this may vary dramatically from customer to customer, they are all making a conscious decision to stop service with you.
Involuntary churn refers to a customer leaving passively. This is more common among organizations that require a subscription. In this instance, a customer isn’t consciously leaving because they are dissatisfied necessarily, but more likely because of their payment declining or finishing a trial.
How to Successfully Manage Customer Churn
The better you can manage customer churn, the more prepared you will be to anticipate and prevent it.
To anticipate churn, you must start tracking predictable behavior that suggests a customer is considering leaving. The sooner you can detect these signs, the sooner you can make changes that help them change their mind. Some signs may include:
- The customer isn’t as involved
- They downgraded their subscription
- Other changes to their account
- Their customer health score is failing
Once you notice a customer is more likely to churn, you can work to prevent it. Some ways you can do this include:
- Making a good first impression
- Making the customer your priority
- Ensuring proper product-market fit
- Rewarding loyalty
- Personalizing your products or services to the customer
Your customers are the reason your business has gotten as far as it has. They're also the ones who will take it to the next level as long as you take the time to not only understand their needs but appeal to them with your products or services, advertising messages, and customer service experiences. The better your relationship with your target consumers, the better you will be at increasing customer retention and decreasing customer churn. To learn more about managing customer churn, read this article.