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What is customer churn and why should you care about it?

Are customers churning, or leaving, your business each month? Follow these four steps to reduce your churn rate and retain more customers.

July 17, 2020 by Cyn Meyer

You’re looking at your month-end earnings from your membership site, and you can’t help but hang your head and sigh. 

Your membership revenue is down -- again. 

You’ve lost more paying members this month.

You desperately ponder, What are you supposed to do to retain customers? 

Here’s the thing: 

Customer churn -- when customers leave a business -- is simply par for the course as an entrepreneur. 

But, once you understand it, there are ways you can reduce customer churn without throwing hundreds of hours or dollars at the problem. 

Today, we’ll tell you everything you need to know about understanding customer churn, including: 

  • What churn is 
  • How it hurts your business
  • How to figure out your customer churn rate
  • Three churn prevention and reduction strategies you can start using today

So, if you’re ready to take on your customer churn and keep more customers on board, let’s define it first. 

What is customer churn?

Simply put, customer churn -- also known as customer attrition -- is when customers leave your business. 

It’s a term often used when customers stop purchasing services they pay for on a recurring basis, like in a monthly membership or subscription plan.

And it comes with a lot of damage.

How does customer churn hurt your business?

First and foremost, customer churn hurts your business by taking away future revenue you would have earned from customers who leave your business. 

The most immediate effect is that you won’t earn more money from a churned customer unless you can find a way to earn back their business. 

Not only will you lose money on your customers’ recurring payments, but you also lose revenue on items you could upsell or cross-sell to those customers.

What’s more, you can also lose money if a customer’s lifetime value (CLV) is less than your customer acquisition costs (CAC).  

CLV refers to the total you earn from a customer over the lifetime of their relationship with your business, minus expenses to earn and retain that customer. 

CAC refers to the money you spend to turn a potential customer into a paying one, such as the cost of marketing tools and campaigns.  

While you need to spend money on earning new customers, spending more on CAC than your CLV means you’re not profitable in that overall customer relationship. 

On top of that, there’s yet another way churn can hurt your bottom line: lost referrals. 

Many of your churned customers probably won’t refer their friends and family to your business, meaning you’ll lose revenue from additional prospective customers. 

That’s especially hurtful when you consider the impact of word-of-mouth. 

A hefty 45% of shoppers say they first heard about the most recent retailer they purchased from through a friend or family member, which is nearly three times the amount of the second-next most popular referral channel (Google search). 

So, to revisit our question: How does churn hurt your business?

At its core, it takes away future revenue you could have earned from customers and their referrals.

But OK. That covers the ways customer churn kills your business. In terms of numbers and dollars, turn to our next section to find out how much you’re losing each month to customer churn. 

How to calculate customer churn  

You can calculate your customer churn rate (a.k.a., the number of customers you lose to churn per month) by using the formula below:

Just subtract the number of customers you had at the end of a period (such as a month or quarter) from the number of customers you had at the start of the period. 

Then divide this number by the number of customers you had at the beginning of that period, and you’ll have your churn rate. 

To put this into real terms, let’s walk through an easy example. 

Let’s say you had 100 members as of July 1, and 93 as of July 31. 

Subtract 93 from 100, which gives you seven. Then divide seven by 100. This puts your monthly churn rate at 7%. 

If you’re wondering how this fares compared to other businesses, subscription businesses see an average churn rate of 5.6% once they “mature” out of their first few growth phases. That said, it’s worth mentioning that churn rates vary drastically across businesses.

What’s more, it’s OK to have a higher than average churn rate, especially if you’re running a small business with limited resources for reducing churn.

The important takeaway here is by simply calculating your churn rate, you have a metric to better understand the health of your business and you can take action in the right direction. 

But contrary to what you might think, customer churn itself isn’t a problem -- no business can keep all of their customers happy all of the time. 

The real issue is in the reasons for your churn rate. 

So, before picking a churn reduction strategy, it’s worth investigating the top reasons for churn to pinpoint the right course of action. 

That being said, here are a few universal topics to consider for reducing your churn rate overall.

3 ways to reduce churn in your business

Method #1: Listen to your customers 

Arguably the most effective way to reduce customer churn is to ask your customers what you can do to keep their business and then act on those requests. 

You’d hardly be the first. 85% of small and medium enterprises (SMEs) said online feedback from customers is helpful for their businesses. 

Asking for feedback also shows your customers you care about their happiness and customer experience.  

It has the added benefit of making those customers see your business more positively. In fact, an overwhelming 90% of shoppers have a more favorable view of businesses that give them an opportunity to give feedback. 

To get this valuable feedback, start by sending out surveys through email or customer messaging. 

Take it a step further and conduct customer interviews using video conferencing tools like Google Hangouts or Zoom. You can often get more insightful and detailed responses by talking to customers one-on-one than through a short survey. 

Besides, as this VP of Customer Success said, “People like to do business with people.” Showing up as a real human can work wonders.

Seek answers to these questions:

  • Why did your customer leave your business?
  • What product did they choose to use instead?
  • Was your product too difficult to use?
  • Did your product live up to their expectations?
  • What could you have done to keep their business?
  • What would it take for you to earn their business again?

The answers may surprise you, since reasons for not buying from a brand cover a range of topics. 

For example, 68% of people say they won’t purchase from brands that have poor ethics. 

Another 72% say they’ll stop buying from a company or using a service because of privacy concerns. 

If you receive this kind of feedback, you can feature your brand’s values and/or privacy statement on your website and marketing materials more prominently. 

Among other top reasons to buy is price. A whopping 79% of consumers say they might switch from a brand they like to a brand that offers a better price. 

In that case, your next step may be to experiment with different price points or dig deeper to understand what value to add to your product to justify your price. 

Essentially:

Survey and interview your customers and accommodate their feedback whenever it’s reasonable to do so. After all, your customers are the ones who know best what they want from you. 

Part of your customer-pleasing strategy should also involve our next tactic -- boosting your customers’ experience. 

Method #2: Invest in your customer experience

Your customers’ experience can greatly impact their loyalty to your brand, which makes improving your customer service and customer experience an effective way to retain clients. 

Just how important is customer experience? Very.

A staggering 84% of shoppers claim the experience a brand provides is as important as its products and services. What’s more, 66% of shoppers are willing to pay more for a great experience. 

To that end, you’ll want to make sure customers have an enjoyable and informative experience with your brand from the very first time they hear about you (and especially after making a purchase).

To secure a positive customer experience, start by improving your onboarding process, or the emails and messages you send to new customers. 

One way to do this is to send educational articles or videos, as Trim does as soon as a customer comes on board. 

It’s also wise to tell them who to contact if they have questions, just like Leaf Shave does in their welcome email. 

Another option is to create a FAQ page where your customers can find answers on their own. 

Aside from onboarding, regularly provide your customers with value, which can come in the form of educational content in videos or blog posts. The occasional gift or discount can also be a nice valuable surprise for customers. 

Another key part of creating a positive customer experience is to level up your customer service. 

Again, the numbers backing this one are overwhelming. A mighty 95% of consumers say customer service is important in their choice of and loyalty to a brand. 

So, if you want to strengthen your customer service, one way to do it is by answering each customer’s email. Sounds obvious and simple, but, sadly, 90.5% of businesses don’t acknowledge a customer service email. 

If you receive an overwhelming amount of customer service emails, consider using a customer messaging tool for chatting with customers in real-time, or even hiring a virtual assistant (VA) for keeping up with the demand.

(Speaking of messaging tools, for an all-in-one platform that includes a built-in messaging tool, use this no-obligation 14-day Podia trial.)

Regardless of how you do it, the point is to solidify every customer relationship and leave no inquiry behind. 

Another way to improve your customer experience is to simply make your customers feel good. 

To do this, thank them for being customers. Yes, it can really be that easy. For an example, check out how DAVIDsTEA’s email thanks their customer for their purchases and outlines all of the products they purchased over the past year.

Another option is to congratulate and remind customers how much they’ve achieved since joining your brand.

Not only does it make them feel appreciated, but it also highlights how your brand helps them, which puts your brand in a brighter, more positive light. 

Bulb Energy’s email, which features their customer’s positive impact on the environment since joining their brand, is a great example to follow.

Basically:

Improve your customer experience -- by creating a seamless onboarding process, providing educational resources, and delivering excellent customer service -- to retain more paying customers. 

Of course, you’ll need to meet your stellar customer experience with an equal part in products to really make it worthy of your customers’ wallets -- that’s where our third strategy comes in. 

Method #3: Improve your products and marketing

The third way to shrink your customer churn is to revamp your products and marketing to better align with what your customers want. This is more relevant, of course, if you find out from customer research that your products and marketing are where your business falls short.

For instance, maybe you discover your customers aren’t as in love with your products as they used to be. 

Or they find your courses or memberships no longer offer up-to-date information. 

Or you discover that your product doesn’t live up to its promises. 

This is when it’s time to give your products a facelift, update your marketing content, and/or find a new target audience that better suits what your products deliver. 

Take, for instance, this Wonderbly email with the subject, “What’s new in the bookshop?” that reveals fresh updates and offerings to its product line. 

By the way, this email received an impressive 20% open rate across six markets and a 30% open rate in the Italy market alone, which means the update was definitely wanted.

Another example is this Framer Web email that announces new updates, including making their customer experience “faster, easier, and even more flexible”.

Regardless of what you need to update in your products, a big way to improve your business is to personalize whenever possible.

After all, 56% of marketers say that personalization has a strong effect on improving customer relationships, with 88% saying that prospects and customers expect personalization.  

Check out how Emfluence personalizes their customer experience by sending user-specific reports that measure their customer’s progress. 

Doesn’t get more personalized than that, right?

The gist of it is to find the right ways to improve, iterate, and update your products to keep your customers coming back for more. 

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Better understand your customer churn, so you can pinpoint the right way to reverse it

While you can’t eradicate customer churn completely, you can certainly better understand it, measure it, and make the right moves to reduce it.

To recap: 

  • Customer churn happens when your customers leave your business and their recurring payments come to a halt. 
  • Churn hurts your business by taking away future revenue from what could have been loyal lifetime customers and referrals.
  • Calculate your customer churn rate to better understand and track the impact it’s having on your business.
  • Three universal ways to combat customer churn include listening to your customers’ needs, issues, and desires; delivering an excellent customer experience; and iterating your products and messaging to better match your customers’ desires.

It’s time to get to the bottom of your customer churn, and use what you know to fight it the right way.

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