What is Customer Churn?

Understanding why customers stop purchasing from your company is critical, regardless of industry. However, it can be challenging to differentiate between solvable issues with your product or service versus external problems that exist for your company. 

Here we explain what customer churn is, why it’s important, how to measure it, and how to reduce it and keep your customers satisfied.

The Definition of Customer Churn

Churn is when a customer decides to stop using your product or services for some reason. This might mean canceling a subscription, ceasing their logins to your website, or not buying anything else from your company. A high churn is often a bad sign for companies, even if you’ve got plenty of new customers, as we explain below.

Why is Customer Churn Important?

Customer churn is a metric measuring long-term satisfaction with your company, products, and services. It’s more expensive to appeal to new customers than to retain existing customers. So businesses who inspire devoted brand loyalty often find that their profits increase significantly when they reduce their customer acquisition costs.

Knowing how long users typically engage with your products or how long they subscribe to your services is a major indicator of how satisfied they are. If people aren’t sticking with your products for very long, that usually means there’s room for improvement on your end. 

Causes of Customer Churn

There are plenty of reasons why customers churn, some are within your control and some are external. Any one of the following reasons might inspire some of your customers to churn.

  • Replaced by a competitor with lower prices/more features/features that add more value
  • Need no longer exists
  • Money is tight
  • Dissatisfaction with the product/service
  • Dissatisfaction with your company’s customer service
  • Dissatisfaction with your brand’s message

How Do You Identify Customer Churn?

Identifying customer churn isn’t as simple as you might think. The reason is that the majority of metrics measure the number of active users at any given time. If you have a large number of new users signing up for accounts, your user numbers might look steady over time. 

However, if most active users are new users and not existing ones, you’ll be spending more on customer acquisition costs than you need to.

Cohort Analysis

Cohort analysis is the process of segmenting your website visitors or users into groups based on their behaviors and interactions within a specified time. Everyone in a single cohort has made the same decisions and triggered the same events within the period and parameters you input in your product analytics tool

Kissmetrics’ cohort report shows you the people who progress from doing one event to doing another event. It also shows you if people are repeatedly doing a single event. This can demonstrate whether you have a high churn rate among existing customers and are only seeing consistent user numbers because of incoming users or if your users are sticking around for multiple cycles. 

What is Churn Rate?

Your churn rate is the rate of existing customers who stop doing business with your company over a given timeframe.  

Churn Rate vs. Growth Rate

Churn rate and growth rate aren’t opposites like their names might lead you to believe. Your growth rate is the number of new users your brand acquires in a given timeframe. It’s essential to distinguish these new users from your existing users because otherwise, enough new users could disguise an alarming churn rate if you only measure currently active users. 

How to Calculate Customer Churn

Calculating a customer churn rate requires you to choose a timeframe first. For example, if you wanted to calculate customer churn during the month of June, you would take the number of subscribers who canceled their subscription or failed to renew it and divide that number by the total number of subscribers at the beginning of the month. The answer is your churn rate. 

What Does a High Churn Rate Mean?

Typically, a high churn rate means your product or service is not providing long-term satisfaction. This might mean people try your app for a few days before becoming bored with it and moving on. Or that the customer doesn’t value your service enough to continue paying for it. 

Is There an Acceptable Churn Rate?

Churn rates often vary widely between industries. However, product analytics tools and informational websites often present reports on rough estimates for churn rates in some of the largest industries at the end of each fiscal year. 

According to Statista’s 2020 report, the industries where companies saw the most considerable churn rates were credit card companies and cable companies, with an average churn rate of 25%. Conversely, big-box electronics stores saw an average customer churn rate of only 11%. 

How Do You Reduce Customer Churn?

While every business must deal with some amount of customer churn, there are also steps you can take to reduce your customer churn and incentivize customers to stick with your company.

Listen to Your Customers

Everyone likes to feel like their complaints are being heard. When customers leave you negative reviews or feedback on surveys, it’s easy to dismiss them and forget about it, but that feedback is quite valuable. When customers specify where they had issues with your product or service, you can take them into account and look for solutions.

Similarly, when customers praise your company for a feature or function, you might consider focusing on it in the future. If you’ve made something that meets or exceeds their needs, maybe that is what you should be advertising or updating in time. 

Provide Great Customer Service

Whatever your product or service may be, customers will likely need to contact your business directly at some point. Whether it’s because they’re having trouble setting up your software, they’ve encountered a major error, or something else altogether; most companies must interact with their customers.

You should try to provide as many avenues of customer support as possible. Nowadays, people aren’t always content to call a hotline; they want options. Including an email and a live chat are a step in the right direction since no one likes to be on hold for hours at a time. 

Generally, customers contact support when there is a problem, and emotions can run high. That’s why you need to ensure that your customer service/customer success representatives are patient, helpful, informative, and proactive. Customers are already in a bad mood because something went wrong, but you can demonstrate why they should stick with your brand with great customer service. 

Exceed Expectations

You should constantly be looking for ways to exceed your customers’ expectations. Whether that means taking surveys to see which features need some improvement, making more customer support available, or otherwise interacting positively with customers, you should be proactive in reaching out to your existing customers and making them feel valued.

You can also exceed expectations by building great products. Use an analytics tool like Kissmetrics to track what customers use/buy and what gives them problems. Track your UX to see where customers get stuck. By spotting and solving problems before customers bring them to your attention, you’ll not only exceed their expectations but likely reduce churn in the process. 

Let Some Churn

Some customers are going to churn for reasons you can’t fix without a complete pivot. For instance, if your brand makes a luxury product, an economic downturn or global pandemic might make it unaffordable for some previous customers. Alternatively, customers might have a more intimate change in their lives like having a baby that forces them to change their habits, they might move away, or find a replacement. 

One way or another, you’ll have to come to terms with some amount of customer churn.

Identify Problems and Fix Them

Knowing where users drop off in your conversion funnel is a powerful antidote to a high churn rate. If you can see exactly where users become frustrated or stop interacting with your product, you’ll be able to pinpoint the problems and find solutions. 

For example, if you see that customers who churn within a month are never using one of your product’s key features, it could be they need more instruction or encouragement to use it. Especially if that feature is popular amongst power users. But if no one is using that feature, then it might be too complicated to figure out, or users don’t find it useful. Kissmetrics’ activity report will show you what users are doing with their accounts so that you can see which features are being used. 

Similarly, the cohort report will provide information about clients who complete designated events. You can see if the people who are churning haven’t completed specific events and whether that may have affected their decision. 

Conclusion

Customer churn may be a part of doing business, but you don’t have to just accept it for your company. By identifying how many customers are churning, how long they take to churn, and why they’re leaving, you can retain more existing customers and lower your customer acquisition costs. 

Get in touch with us to learn why customers churn and how you can prevent it.

 

Sources:

Cohort Analysis: Beginners Guide to Improving Retention | Clevertap.com

How to Calculate (And Lower!) Your Customer Churn Rate | Wordstream

Customer Churn: Definition, Rate, Calculation, Analysis, and Prediction | Questionpro.com

Customer service: churn rate by industry US 2020 | Statista.com