All Strategies You Need to Calculate and Reduce Customer Churn Rate
It’s not enough to learn how many users unsubscribe and why in order to minimize and prevent the customers churn . The customer churn coefficient or Churn Rate can be calculated using varying indicators.
Churn Rate: what it really is
Churn Rate is the clients’ churn coefficient. It allows you to determine the ratio of clients who have stopped using your services for a certain period of time.
For example, for SaaS business, the client churn is made up of those who have unsubscribed, for e-commerce these are the clients who haven’t made any purchases within a certain period of time, for the services sector these are the people who haven’t renewed a contract.
It is important to track and minimize the churn of clients for companies focused on providing repeating services. It is believed that new clients compensate the ones who have left, but studies prove that you’ll spend five times more money on attracting new clients than you would trying to keep your current ones.
Indeed, in the case of keeping current clients, you’ll spend less money because:
- they are acquainted with the company — which allows to minimize marketing expenses;
- they are a part of the target audience and you can’t say the same for sure about new leads;
- they tend to change their decision about leaving if a company demonstrates understanding and solves the clients’ problem.
It is important to track the moment the client is ready to leave you in time and to understand the reason for them doing so.
The possible clients churn signs: What usually happens before the client leaves?
1.The clients’ behavior changes. This change is measured with the KPIs chosen precisely for a concrete business. For example, for email messages, this indicator is open rate and click rate, for games — the time spent playing them, for a grocery store — weekly purchases.
You can track the clients’ behavior via RFM analysis. This method allows not only to determine the clients that have potential to churn or are already there, but it also divides the clients by their Revenue Per User. Don’t try to retrieve all the clients — it’ll cost you too much and it won’t be very effective. You need to spend time trying to retrieve the most valuable clients.
While doing RFM analysis, the clients are also divided into valuable and regular ones.
You can see that it’s better to concentrate on the “good leaving clients” as their average check is 2.4 times bigger than the regular leaving clients’ check. Your efforts to keep these clients will pay off better.
2.A client contacts support. If a client contacts support more often and his contacts have negative character it is unequivocally one of the possible signs of them leaving . It is important to solve their problems ASAP. The clients who didn’t like the quality of the goods/services are really difficult to win back.
3.The competitor has a similar product at a price lower than yours. Most of the clients won’t stay with you and pay more for the same goods and services. But these clients are easier to keep by offering them individual terms.
There are reasons to leave that are difficult to influence and there are situations in which nothing depends on you. Concerning this there are two types of churn:
- Unavoidable — when the client faces global circumstances changes: place of living, interests, views on life and etc.
- Avoidable — when the client isn’t okay with something in your product: its price, quality, service and so on; and the company has an opportunity to influence the clients’ decision.
How clients churn influences business indicators
Retention Rate is closely connected with Churn Rate — it reflects the number of clients that continue using your services. In general, these rates are interchangable. RR should aim for 100% and CR for 0%.
Theoretically, the less the Churn Rate value is, the less clients are leaving and the more revenue increases. In practice it’ll become really noticeable if we concentrate on keeping valuable clients.
The churn coefficient influences the Average Customer Lifetime: the smaller the churn is, the longer the client stays with you. Don’t forget that the calculation period for both indicators is equal (if CR was calculated in the period equal to one week, then ACL will be equal to a number of weeks).
Customer Lifetime Value or LTV is another important metric that is connected with client churn and its calculation. The more the client stays with you, the more money they spend.
LTV has several calculation options depending on data availability and business type, but in any case Churn Rate influences the LTV value.
For example, the Churn Rate’s influence in the first calculation is already embedded into the examined ACL metric, and in the second variant into RR. Here you can see AOV — Average Order Value and AGM — Average Gross Margin.
How to calculate Churn Rate: Basic calculation
Using this calculation, you will get the customer churn for the entire time.
This metric is more indicative if it is used for a specific period (a week/a month/a quarter). In this case, you will get more detailed statistics and an ability to react to changes in time.
This is how Churn Rate for a certain period is calculated, the formula includes TC (tp) — Total Customer (this period) — the number of clients in the current period, TC (lp) — Total Customer (last period) — the number of clients in the previous similar period, NC (tp) — New Customer (this period) — new clients in the current period.
The churn can be a negative value. It indicates that the number of involved clients is greater than the number of the ones leaving.
Advanced calculation
This calculation presupposes the clients churn calculation with the help of the cohort analysis and allows to determine the quality of the clients attracted in different periods of time and reveals the reasons of acquiring more loyal and long living clients.
A registration date (as in the example) or a subscription/first purchase date of your client can be chosen as a cohorts (a line) formation sign. Next you need to choose a period in context of which you want to track the cohorts’ (columns) behavior. Churn Rate is calculated for every cell of the matrix.
For example, this matrix shows that the main churn of clients falls into the first two-three months after registration. February and March 2020 cohorts had too great of a churn in the first months unlike the others. This means you need to find the reasons and try to eliminate them and track what happened during this time: new functions were introduced, the interface was changed, the bonuses were canceled, etc.
Clients Churn and Revenue Churn
As we already know, the value of leaving clients plays the leading role in the retention process. From the point of profitability, one valuable client can replace two, three, or more regular ones. Determining the Revenue Churn helps to not only understand how much money the company has lost because of the clients that left, but also to determine the quality of those who’ve stayed with you.
MRR — Monthly Recurring Revenue.
Churn Rate and Revenue Rate are the most revealing if you use the advanced calculation.
Churn Rate in email marketing
This is the number of subscribers who have left your database for a certain time. The subscribers’ churn in email marketing can be calculated by the same rules and with following calculation:
Unsubscribe — a number of unsubscriptions, Soft/Hard Bounce — soft and hard refusals, List Size — a subscription database size.
You need to make sure the database filling with new subscribers is not smaller than their churn. Otherwise the database will be shortening until it disappears completely.
There are two subscriber churn variables:
- Clear. When you unequivocally understand that the subscriber doesn’t want or can’t get the emails. The number of unsubscriptions, spam complaints and invalid addresses show this.
- Unclear. When the subscribers don’t interact with the emails because they aren’t interested or they don’t check their inbox and other unclear reasons. Unclear subscriber churn can’t be calculated precisely.
Churn Rate acceptable indicators
If your business is a startup a normal Churn Rate is 10–15%. But, if the indicators don’t go down eventually, this is a bad sign.
For small and medium companies that have provided their service for a rather long time, a normal Churn Rate is 3–5%. And the longer the company is on market, the lower the CR should be.
For big companies a normal CR is no more than 1%.
For email marketing the annual Churn Rate is about 25–30%.
How to reduce the Clients Churn
- Analyze the target audience. It’s not worth trying to attract as many people as possible. It is a rather expensive option : every non-target client still costs money, but target ones are interested in your services and products and they will stay with you for a longer time.
- Focus on customers. Arrange personalized interactions with clients. Choosing the right communication channel and segmentation by interests and needs will help you.
- Provide quality support. Negative moments are remembered much more often while using services. About 35% of the clients are ready to abandon the company if they are not satisfied with the service, another part will share their negative experience with their friends and write a review. This goes for not only existing clients, but for newly attracted ones as well.
- Ask for the audience’s opinion. Create a survey or call the clients, learn the level of their satisfaction. Ask about their wishes — it will help you become better for your client. And the most important thing is that if you promise to do something — do it!
- Encourage your clients. Any client wants to know that he or she is valued. Show it, but do it cleverly and not at a loss for your company. For example, introduce a loyalty program.
There are a lot of ways to influence the client and prevent them from leaving. It all depends on your business, your awareness about the clients, and your abilities. But no matter how you try, client churn is a characteristic every business deals with. The main thing is to keep everything under control.
