Churn rate – how to calculate and reduce customer churn

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Your product or service depends on your customers. For this reason, it is important to know how your offer is received by users.

Today, every marketer wants to know what the status of customer satisfaction or, even better, customer enthusiasm is.

An important indicator for this is the churn rate. That’s why we’ll take a closer look at this key figure in this article.

Churn rate - what is it all about?

The term “churn rate” comes from the words “change” and “turn“. The churn rate is a KPI that indicates customer churn over a specific time interval. It is usually collected on a monthly, quarterly or annual basis.

In detail, this KPI describes the ratio between customers who stop using a service and the company’s total number of customers.

The opposite of the churn rate is the retention rate. Both key figures together add up to 100% when collected over the same period of time.

The exact meaning of customer churn can have different implications. Examples of this are:

    • Cancellation of a subscription 
    • Deactivation or deletion of an account on the part of the customer
    • Non-renewal of a contract
    • Customer decision to use another online store or service provider
 

How to calculate the churn rate

To calculate the churn rate, simply divide the number of customer losses in a time interval by the number of total customers and multiply the result by 100 to get a percentage value.

In order to adequately reflect actual customer behavior, you should not use a snapshot value for the total number of customers, but rather the average over the time interval under consideration.

The corresponding formula therefore looks like this:

(customers at the beginning of a time period MINUS customers at the end of a time period) DIVIDED BY customers at the beginning of a time period.

Churn rate Formel Formula
Calculating the Churn Rate

What churn rate is normal - when should you act?

In no business is every customer completely satisfied at all times, which is why a certain churn rate is quite normal. An optimal, but hypothetical, churn rate is 0%. The reality is, of course, different.

How high your churn rate may be cannot be said in general terms and depends primarily on the type of your product or service and the type of your customers. A business that sells regional food and lives off regular customers, for example, should be concerned about a lower rate than a startup that offers a SaaS solution.

Young startups from the SaaS sector in particular often experience high churn rates in the first one to two years and should factor this in. The main reason for this is the fact that the product sometimes undergoes profound changes, especially in the early days. This is because it is constantly and iteratively improved and adapted, which makes for fluctuating customer lifetime value.

 

To estimate your churn rate, use the following rule of thumb:

 

A “normal” churn rate is up to 10%, for digital offers of larger companies up to 15%. As a target, however, you should aim for a churn rate of 5%.

At streaming provider Netflix (according to info from Neil Patel’s blog) the churn rate was up to 9% in 2018, but that didn’t hurt its success.

SaaS startup Buffer, which offers a now widely used social media management tool, reports a churn rate in the range of about 5%.

 

In general, “common” churn rates differ depending on the industry, below you will find some examples for orientation:

  • American credit card providers have a customer churn rate of approx. 20%.
  • European mobile operators have a rate of around 20 – 38%.
  • SaaS companies typically report churn rates in the range of 5 – 7% annually
  • Retail banks have rates of around 20 – 25%.

Churn is just the beginning!

Customer Insights Suite Light dark version

What the key figure tells you - and what not

The churn rate reveals how many customers you actually have over a specific period of time and also takes into account churning users.

High churn rates indicate that your customer base is likely to decrease in the near future. However, you should always keep in mind other factors such as industry and time period when making these considerations. For example, it may be normal for an online store to see its churn rate increase after Christmas, as seasonal customers no longer need the offer.

Beware! A churn rate of more than 0% alone does not mean that your number of customers is decreasing. If it exceeds a certain level, however, it indicates an imminent loss of customers.

Keeping customers - How to lower your churn rate

The churn rate serves as an indication that customers are dissatisfied. However, as an economic indicator, it cannot tell you the reasons for this. The causes can be manifold, which is why you should investigate them thoroughly. Use customer relationship management, if available, to do this.

Customer recovery and acquisition measures can help counteract the negative consequences of too much churn. However, they are of course no substitute for eliminating the weak points that are responsible for too high a churn rate.

Therefore, before you increase your customer base, you should identify the causes of your too high churn rate. Look at the entire value chain. Weaknesses can lie in customer service, as well as in the entire Customer Journey , including all associated solutions and processes.

Possible factors for a too high churn rate can be:

 
  • Quality and scope of the services you offerKonkurrenz und Wettbewerb
  • Customer service and complaint management
  • Usability of website and product
  • Customer journey
 

 

Tips for implementing and lowering the churn rate

The following tips can help you improve your customer satisfaction and thus increase customer loyalty, which in turn counteracts churn:

 

>> Make a good impression from the start

If your customer sees results from the first moment they use your product or service, they are less likely to look for other options and may churn. The better your first impression, the stronger the customer’s commitment.

 

>> Meet and exceed expectations

A good first impression alone is not enough. You should always meet and, if possible, exceed your customer’s expectations.


Don’t over-promise to attract new customers, and always be honest about what your customers can and can’t expect.

 

 
>> Provide great customer service

This point goes without saying, yet almost everyone has experienced poor customer service. A survey conducted by ClickFox revealed the following takeaways:

42% of respondents said their most frustrating customer service experience was having to explain their concerns again to multiple employees

    • After a negative experience with support, twice as many people would share their experience on social media (16%) than after a positive one (8%)
    • 82% of respondents said they were existing customers when they broke with the company due to poor customer service, according to a Zendesk article. 

Therefore, offer good, friendly and reliable service at all times. Be aware that negative experiences of individual customers can become public.

 

>> Listen to your customers

No one knows your business better than you? Wrong, your customers do. Always listen carefully to user feedback. This will help you identify customers who are about to bail, as well as where the user experience or other aspects are sticking. 

If a customer is threatening to cancel your service because the price is too high, for example, it may well be that they didn’t see the full functionality and therefore value. A change in the user interface or documentation may help. Of course, there is also the possibility that your price is actually too high. 

Caution: listen to what the customer actually says, not what you think you heard.

 

>> Let some customers go

Before you take potentially costly measures to save individual customers or an entire customer group that is threatening to leave, you should weigh up whether this is actually worthwhile. The following questions will help you to do this:

 
    • How much revenue will you lose with the customer in question? Is it financially worthwhile compared to the cost of saving the customer?
    • How likely is it that an incentive or measure aimed at retaining the customer will have any effect at all?

Only when these questions have been answered should you take action, if necessary, to convince those willing to switch to continue using your product.

 

>> Find out why customers leave

Even if it means asking uncomfortable questions and admitting that your product isn’t perfect, ask customers who have left for feedback to find out their reasons. Give them a variety of options, including multiple choice, a text box, or even a “we miss you” email. This way you can find out general and possibly specific reasons for customer loss.

Conclusion

The churn rate is a metric that indicates the ratio of lost customers to total customers in a specific period of time. What churn rate is acceptable or already too much in your case depends on various factors such as the age of your business, the type of product or service you offer, and the type of users you have.

A too high churn rate is an indication of impending customer loss, but says nothing about the causes. It requires further action to evaluate customer satisfaction and uncover weaknesses. 

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As a founder and entrepreneur, I experience every day how important customer centricity is for companies.

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