Did you know that on average, losing a customer costs a business $243? Customer churn is a major challenge for all companies and industries, especially subscription or SaaS (Software-as-a-Service) companies.
Why? Because SaaS businesses depend on recurring payments as a fee for subscribing to a service or product. Losing a customer represents not only a one-time revenue loss but also a loss of future revenue.
Additionally, the cost of acquisition (CAC) of new customers is high.
Despite this, customer churn is something SaaS businesses experience significantly during the initial phase of growth. As per research, new SaaS companies can expect churn rates of up to 15% in the first twelve months since market entry.
However, rather than allowing high churn rates to negatively impact morale, businesses must focus on implementing effective strategies to reduce churn and increase profitability. We’re here to help! By the end of this article, you will learn about:
- Customer churn and its impact
- Factors that lead to customer churn
- Types of customer churn
- Strategies to reduce customer churn
What is Customer Churn?
Customer Churn, also known as customer attrition, occurs when a customer decides to stop using a company’s products or services. Essentially, it means that your customer is no longer YOUR customer. This loss of customers can have a significant impact on your business’s revenue and growth potential.
Customer churn is measured using a customer churn rate calculator – which shows the percentage of customers who have stopped doing business with your company over a specific period. This could be a month, a quarter, a year, or any other set time frame. A high customer churn rate indicates that a company is losing a significant number of customers, which can be costly and damaging to the business in the long run.
However, customer churn should not be confused with revenue churn. Revenue churn does not necessarily mean that your customer has left, it can be due to a service downgrade.
Suggested Reading: What is churn rate in the subscription business and how to calculate it?
How to calculate Customer Churn?
The churn rate formula provides a way to measure the percentage of customers who have stopped using your company’s product or service within a given period. There are different ways to calculate churn rate, but the most common formula is:
Churn rate = (Number of customers lost during a given period ÷ Total number of customers at the beginning of the period) x 100
For example, let’s say your company has 1,000 customers at the beginning of the month and loses 50 customers over the course of the month. Using the formula, the churn rate would be:
Churn rate = (50 ÷ 1,000) x 100 = 5%
This means that your company lost 5% of its customers in the specified month.
It’s important to note that the churn rate can be calculated for different periods, such as monthly, quarterly, or annually, depending on the company’s needs and goals.
Why is it important to track the customer churn rate?
Customers are the lifeblood of your business. Without them, you will neither survive in the market nor grow. So, you must acquire more and more customers for your business and ensure that these customers stay with your business for a long time.
Calculating the customer churn rate is a key step toward customer retention. It is important because:
Customer Loss = Revenue Loss
Losing customers means losing revenue. By tracking the customer churn rate, you can understand the extent of revenue loss due to customer attrition and make necessary changes to overcome it.
Retaining customers is cheaper than acquiring new ones
It’s cheaper to retain customers than to acquire new ones. Research shows that acquiring new customers can cost anywhere between five to 25 times more than retaining existing ones. Therefore, reducing customer churn can have a significant impact on your business’s bottom line.
Sustained growth requires acquiring new customers while retaining existing ones. By tracking customer churn rate, you can identify patterns and reasons behind customer attrition, and make improvements to retain more customers and achieve growth targets.
A high customer churn rate may also indicate that your company is losing customers to its competitors. By tracking customer churn rates and identifying the reasons behind them, you can develop strategies to retain customers and stay competitive in your industry.
Types of customer churn
Customer churn can largely be categorized into two types:
a) Voluntary Churn: This occurs when your customer actively decides to end their relationship with your company. Reasons for voluntary churn can include:
- dissatisfaction with a product or service,
- moving to a competitor,
- or a change in financial circumstances.
b) Involuntary Churn: This occurs when a customer’s relationship with your company ends without their intent or knowledge. For example, the customer may have had an expired credit card, and your company was unable to renew their subscription. This is also known as passive churn.
Many companies sometimes consider the cancellation of service as a churn too. However, cancellation is not a customer churn (at least not yet).
For example, if a Netflix subscriber decides to cancel the subscription, it is not necessary a move to completely stop using the service. They might come back. So, it might affect only your revenue.
Also, when a customer cancels while the subscription is still ongoing, it gives businesses a chance to use inbound marketing efforts to win the customer back before the subscription is finally over.
What causes Customer Churn?
So far, we’ve learned what is customer churn, its impact on business, and its types.
We come to a very critical question now – what causes the customers to leave?
It’s important because you can work out customer retention strategies only once you recognize what’s making your customers leave in the first place.
Let’s look at what can cause customers to leave:
Poor customer service
This is one of the most obvious reasons behind customer loss. Customers who receive poor customer service are more likely to churn. This can include long wait times, unresponsive customer support, or unsatisfactory resolutions to issues.
Product or service quality: Customers may churn if they are unhappy with the quality of a product or service. This can include issues such as defects, malfunctioning, or lack of value for money.
As per reports, 55.3% of consumers are brand loyal because they love the product. Hence, you must focus on perfecting your product to drive brand loyalty and thus reduce churn.
Price is one of the most critical factors that customers consider when making purchasing decisions. If a company’s products or services are priced too high, customers may choose to look for alternatives that offer similar value at a lower price.
Conversely, if a company’s products or services are priced too low, customers may perceive the quality as poor and may choose to look elsewhere.
If customers have access to other companies that offer better products, services, or prices, they may churn.
For example, if a company offers a software product that is less user-friendly and less feature-rich than its competitors, customers may be more likely to churn and switch to a competitor’s product.
Similarly, if a competitor offers a similar product at a lower price, customers may be more likely to switch to the competitor.
Customers’ needs and preferences may change over time, and if your company cannot meet those evolving needs, customers may choose to leave.
Let’s say a company offers a streaming service that focuses on classic movies and TV shows. For years, they’ve built a loyal customer base who love the service’s selection of classic content.
However, over time, customer preferences begin to shift. More and more customers are starting to prefer newer, more contemporary content. If the company fails to add new, more contemporary content to its selection, its customers will begin to churn.
Effective communication is crucial for building strong relationships with customers. If you fail to communicate effectively with your customers, they may feel ignored or undervalued, leading to churn.
Effective communication is particularly important when customers are experiencing issues or have questions about a product or service.
Customers’ life events, such as moving, job changes, or financial difficulties, can cause them to churn.
For example, a customer may move to a new city where your company does not have a presence or does not offer the same services as they did before, leading them to churn.
Similarly, a customer who experiences a job loss may need to cut back on expenses, and your company’s products or services may no longer fit within their budget.
Ineffective retention strategies
Companies that fail to implement effective retention strategies may experience higher churn rates.
For example, a company may implement a loyalty program to reward customers for their repeat business or offer personalized discounts or promotions to incentivize customers to stay.
Companies can also implement retention strategies that focus on building strong relationships with customers.
This can involve providing exceptional customer service, offering educational resources or content that helps customers get the most out of the product or service, and actively seeking customer feedback and incorporating it into product development.
How to reduce Customer Churn?
Reducing customer churn is critical to the long-term success of any business. However, as per data, U.S. companies lose 136.8 billion per year due to avoidable customer switching. So, it can be correct to say that most of the customer churn is avoidable.
Let’s look at some ways through which businesses can reduce customer churn:
1) Improve customer service
Providing excellent customer service can improve customer satisfaction and reduce churn. However, improving customer service is not easy as it sounds. It all starts with understanding your customers’ needs.
As per research, 80% of American consumers believe that speed, convenience, knowledgeable help, and friendly service are the most important elements of a positive customer experience.
You should focus on training your customer service representatives to be responsive, empathetic, and effective at resolving customer issues.
2) Personalize the customer experience
Personalizing the customer experience can help to build customer loyalty and reduce churn.
For this, you can use data to understand your customers’ preferences and tailor their products and services to meet those needs.
For example, Amazon’s recommendation engine suggests products based on the customer’s purchase history and browsing behavior.
Another example can be Starbucks. They run a Rewards Program that offers personalized promotions and discounts based on the customer’s purchase history.
3) Offer proactive customer support
Proactive customer support can help to identify and resolve issues before they become major problems. The latest customer service trends show an increased inclination towards self-service customer portals, automated emails, and chatbots.
As per a study, more than 6 in 10 U.S. consumers said that their go-to channel for basic inquiries is a digital self-serve tool like a website or a mobile app.
Customers like to be in control when it comes to at least basic services related to their subscriptions.
4) Provide value-added services
Offering value-added services, such as loyalty programs, can help to improve customer retention. These services can incentivize customers to continue doing business with your company and increase their overall satisfaction.
Some examples can include exclusive invitations to loyalty programs, personalized product recommendations, extended warranties, free shipping, etc.
5) Communicate regularly with customers
Regular communication with customers can help to build strong relationships and reduce churn. You should keep customers informed about new products or services, promotions, and upcoming changes that may affect them.
Using timely and automated email strategies is one way to communicate with customers regularly.
6) Collect feedback and act on it
You should regularly collect feedback from your customers and use that feedback to improve your products and services.
This can help to identify issues that may be causing churn and address them before they may lead to customer losses.
7) Implement data-driven solutions
Companies should use data to identify trends and patterns that may be contributing to churn.
By analyzing customer data, you can develop targeted solutions to improve customer retention and reduce churn.
8) Focus on onboarding and user education
Ensuring that customers have a smooth onboarding process and providing adequate user education is also an effective way to reduce churn.
By providing customers with the tools and resources they need to succeed, you can improve customer satisfaction and retention.
9) Offer flexible pricing and plans
Offering flexible pricing and plans can help to accommodate customers’ changing needs and financial situations. This can include offering a range of pricing tiers or allowing customers to customize their plans based on their usage.
10) Use customer segmentation
Customer segmentation is a great yet underestimated strategy when it comes to customer retention.
By segmenting your customers, you can identify high-value customers and develop targeted retention strategies for those customers. By focusing on retaining your most valuable customers, you can reduce overall churn and improve profitability.
It also makes your loyal customers feel valued and appreciated. Many service providers offer premium customer support to customers who have been associated with them for a long-time or are subscribed to a costlier plan.
11) Address billing issues promptly
Billing issues can be a significant source of customer frustration and churn. Companies should have systems in place to address billing issues promptly and ensure that customers are billed accurately.
Think about investing in robust recurring billing software with subscription management capabilities and a customer self-service portal.
12) Foster a company culture focused on customer success
Keeping the customers happy and satisfied should not be limited to your customer service team, but to everyone in your organization.
Fostering a company culture that prioritizes customer success can help to reduce churn.
By emphasizing the importance of customer satisfaction and retention, companies can create a culture that encourages employees to go above and beyond to retain customers.
13) Make it easy for customers to cancel
Making it easy for customers to cancel their subscriptions or service can help to reduce churn. Sounds contradictory, right?
By removing the friction and frustration associated with canceling, you can create a positive customer experience, even when a customer decides to leave. Your customer should not feel stuck with you. They should have the flexibility to come and go as they please.
Customer Churn is a big challenge, but you can control it!
Customer churn can be a significant challenge for businesses, but it’s not an insurmountable one. By understanding the various causes of churn and implementing effective retention strategies, you can reduce customer attrition and build a long and lasting relationship with your customers.
RackNap, as a robust billing and subscription management tool, can help you with that.
We provide businesses with the necessary insights and automation to monitor customer behavior and streamline billing processes.
By using RackNap to identify at-risk customers and implement effective retention strategies, you can not only reduce churn rates but also improve your customer loyalty, brand reputation, and bottom line.
To see how – book a demo now.