Churn

Customer churn definition

Churning is a term used to describe how businesses lose customers over a period of time. Churn rate, sometimes known simply as attrition rate, is a crucial metric that measures the percentage of customers who cancel their subscriptions with a particular company within a specific time period.

In general, the higher the churn rate, the worse off the company is. Monitoring the average churn rate lets companies make changes to improve customer retention rates.

Customer churn occurs when clients stop buying a product or service because it doesn't meet their needs or expectations. This happens naturally in every business; even companies that offer great products or excellent customer service, but how much churn a company experiences depends on many factors, such as the industry, the target market, and their customer retention efforts.

The importance of customer churn

Churn happens when a customer stops buying from a company. This can happen for many reasons, including dissatisfaction with product quality, price, delivery, or experience. In some cases, customers may simply change their minds about what they want. Regardless of the reason, understanding how to identify and address churn is key to improving retention rates.

In addition, because it is easier and less expensive to keep current customers than to acquire new ones, modern businesses should focus on understanding where, how, and why their customers churn to enhance the customer journey.

How to reduce churn

In general, the less churn a company experiences, the better. But there are ways to reduce churn without sacrificing recurring revenue. Here are three tips:

1. Offer more value than the competition

The best way to avoid churn is to make sure the value proposition of a company exceeds what its competitors are offering. If they can provide something unique or additional to their customers, they will continue to use that product or service.

2. Be transparent

If businesses don't tell their customers exactly what they do, they won't know whether something is worth keeping or not. Organizations must make sure they communicate clearly about their pricing structure, policies, and terms of use. Customers like transparency.

3. Provide better service

Customers often choose to switch providers based on the perceived quality of the support they receive. So, if a business wants to retain customers, it should focus on providing exceptional customer service.

Customer churn rate calculation

The revenue churn rate is calculated by dividing the total number of cancellations or returns by the total number of active subscribers over a given time frame, typically a month period.

An active subscriber is someone who has booked or renewed a subscription within the specified time frame.

Churn rate formula

Customer churn rate = ((Customers at the beginning of a time period - Customers at the end of a time period) / Customers at the beginning of a time period) x100

A high percentage of subscribers stopping doing business with a company can adversely impact profit margins and impede growth. Some companies even consider high churn rates a sign of poor management.

However, having the lowest churn rate doesn't necessarily mean better management of subscription cancellations or customer retention. Sometimes having an acceptable churn rate just means that a company has done a good job of customer acquisition.