Do you know your percentage of customers who unsubscribe in a given period? Today we will learn what churn rate is and how you can monitor it to avoid losing more customers.
There’s a lot you need to know about how to reduce churn and why customer retention is cheaper and more rewarding than acquisition.
Churn is a pattern of customer behavior. The more data that is collected regarding churn and its dimensions, the easier it will be to understand the customer’s mind and create truly effective strategies to retain them.
Let’s start with the basics…
What is churn rate?
Churn rate is the rate at which a subscription-based business (such as a SaaS company, phone company, Internet service company, bank, etc.) is losing its customers due to to account cancellations or non-renewal of subscriptions.
Churn rate is a critical KPI for these types of companies because the cost of retaining a current customer is almost always less than that of acquiring a new one, and because for companies with recurring revenue models, keeping a customer can be worth hundreds and even thousands of future income.
Companies concerned about customer churn often distinguish between gross and net customer churn rates. The gross churn rate is the rate at which a company loses customers, while the net churn rate is a measure of the difference between the gross churn rate and the rate of new customer acquisition.
For example, if a company’s gross customer churn rate is 7% and its new customer acquisition rate is 5%, the company’s net customer churn rate is 2%. For companies with a subscription-based business model, a positive net customer churn rate is an indication that the company is in trouble, as customer growth is slowing.
Because of the importance of keeping churn rates low, subscription-based companies often have departments dedicated to engaging and improving relationships with dissatisfied customers, or winning back lost customers.
Importance of measuring churn rate
The churn rate serves as an indicator of business performance. In the field of digital marketing, churn occupies first place on the list of KPIs used to determine the effectiveness of a service. The goal is to allow offers to adapt to customer needs, which are bound to change depending on the economic, cultural and technological situation.
Among other things, the churn rate measures:
- Customer satisfaction;
- The effectiveness of customer loyalty;
- The effectiveness of the commercial communication strategy, including action on social networks: Facebook, Twitter, etc.;
- Customer Lifespan;
- Revenue churn as a result of customer loss.
How is the churn rate or customer cancellation rate calculated?
It is important to understand in advance that the cancellation rate is not an exact science. In more than half of the cases, the result can only be an estimate. The churn rate calculation is based on certain data:
- The number of unsubscriptions from offers that require a commitment;
- The decrease in the number of sales made;
- Disinterest in online service offers when the number of followers is no longer increasing;
- Negative comments about user experiences.
The churn rate should be used to improve and adapt offers to current customer needs. In practice, it has been proven that it is more expensive to gain new customers than to retain existing ones.
What is a good churn rate?
Some believe that a monthly customer churn rate is between 3-7% for SMEs and 1-2% for the average market.
If measured annually, retention can increase, therefore churn decreases, with increasing size of target customers. This benchmark is only a guide to objectively classify what can be considered a “good” churn rate.
What is drawn from high dropout rates depends on how dropout is viewed. Do you consider loss of customers or loss of income? Which metric should you prioritize when trying to reduce customer churn?
Customer Churn vs Revenue Churn – Which is Better?
It’s best to track customer churn, because customer churn performs best as a customer success metric and not a financial health metric.
If revenue loss is your primary churn metric, you’ll be tempted to segment recurring revenue loss into high-paying products or services that take up the lion’s share of your revenue.
You may think it’s acceptable or even intentional when low-paying or freemium customers abandon you because you only see a small percentage of revenue churn. You may even be trying to introduce a new product or transition your existing customer base to a new product.
The bottom line is that revenue loss analysis leaves you dangerously unsure of why your customers are leaving or if you have a customer churn problem. How can you tell if you’ve crossed the expected churn threshold if you’re just tracking the revenue stream?
I don’t mean that you should completely ignore the loss of customers for revenue. However, it’s more useful to track customer churn as your primary metric.
This is mainly because you have other metrics to track revenue, such as annual recurring revenue rate , but how many metrics can you think of that measure customer flow? And before you say acquisition cost or customer lifetime, those also count as revenue metrics.
Customer churn is a customer success metric rather than a financial performance metric.
If you have a customer churn problem, but are convinced that you will sell more to recover costs, you are not the only one who thinks this way. But you cannot compensate for the loss of customers with additional sales, the loss is a symptom of two factors:
- poor adaptation to the client and
- bad customer experience
If you have a customer churn problem, i.e. a high customer churn rate, you’re not likely to solve it by trying to upsell customers what hasn’t worked for them.
Instead, find the reasons for your churn rate and create strategies to keep your customers happy, increase loyalty, and grow your business.
How to improve your churn rate
To limit the customer churn rate, you must implement a long-term loyalty strategy. You have to work on many points, for example:
- The quality of the offers corresponding to the initial expectations of the clientele and the sales promises;
- User assistance to better guide new customers in the use and effectiveness of the offer or product;
- Improving the user experience.
- Know your customers better to identify the reasons for customer loss
- Implement an automated and personalized customer journey
- Develop a customer retention strategy
Monitor your churn rate on a dashboard
Once you’ve established benchmarks and goals to measure churn rate, you’ll want to establish processes to monitor this and other KPIs. Dashboards for SaaS companies can be essential in this regard.
In this dashboard you can also view other metrics that allow you to measure the percentage of loyal customers who remain in your company in the long term, or know what the repurchase rate is and keep an eye on the number of customers who return to make a purchase. order after your first purchase.
You can monitor customer lifetime value and measure the benefits generated by a customer throughout their relationship with the company. Or various customer churn metrics to improve your churn rate.