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What is Churn Rate?

Churn Rate

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What is Churn Rate?

A churn rate is a metric expressed in percentages that measures the rate at which a business is losing its customers or subscribers within a specific time period. Depending on the nature of your business, customer churn can refer to a closure of an account, cancellation of a subscription, buyer decision to shop at another store or not to renew a contract with your business.

How is Churn Rate Calculated?

When you decide what customer attrition means for your business, you can move on to doing the math. Although the churn rate metric is more suitable for SaaS business models, it can be adapted to eCommerce and customized for the goals that you want to achieve. However, you must have a clear definition of what an active customer means to you and when you consider that customer lapsed.

The simplest formula to calculate the churn rate is:

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(number of churns during a certain period) : (number of customers at the beginning of that period) x 100 = churn rate %

For example:

5 customers lost : 100 starting customers x 100 = 5% churn rate

What is a Good Churn Rate?

A good churn rate is different for every industry. For instance Baremetrics says that a good monthly churn rate is 3-5% for a SaaS company. But this percentage should be lower the more niche your industry is.

Britebill reported in 2018 just how volatile customers are within the telecoms industry with company churn rates varying from 14% to 75% monthly. Since customers in this industry are more inclined to change supplier regularly it is a special case that is not repeated in many other industries.

Interestingly Recurly Research averages the customer goods industry at a churn rate of 9.62% annually, and IoT at a much lower rate of 5.88%. What all these churn rate averages tell us is we should benchmark against others in our industry as oppose to leaders in other industries. This is help us to build businesses that are informed and built for the future.

Why is Churn Rate Important?

The churn rate can be one of the defining metrics (non-vanity metrics) that shed light on the actual growth of your business. To achieve significant growth, a company’s acquisition rate must exceed its churn rate.

Sudden changes in a company’s churn rate can provide feedback on customers’ response to new pricing, products, competitors, and policies and should be monitored constantly to prevent customer bleeding. It has been demonstrated time and time again that it is by far more cost-effective to retain an existing customer than to acquire a new one. A robust and holistic churn prevention strategy will help you ensure your efforts are laser focused on retaining and growing your customer base.    

How to Reduce Churn Rate?

Decreasing the churn rate is a process, not a one-time motion. It will largely depend on how your business defines active and inactive customers as well as what problems you manage to identify as the main drivers of churning and loyalty change. For eCommerce businesses, the methods that seem to be yielding the best results in fixing the churn rate include:

  • Perfect your merchandising tactics. When you begin digging into the root causes of your churn rate, you will discover that there is no single factor that fuels customer attrition. It is usually a collection of different causes that can build up over time. Getting your merchandising tactics right and actively promoting to existing customers can dramatically improve your churn rate, as it focuses on reassuring your customer base that they’re using the best products and are getting the best deals.
  • Deploy marketing automation. If a customer chose to engage with your brand and left you their email address, it means something attracted them to your products, brand promise or style and you should continue building on this competitive advantage. Marketing automation is one of the best tools under your belt to showcase the benefits of your products, build up the desire and keep bringing your customers back to your store. Welcome emails, onboarding emails and customer reactivation campaigns can be very effective if they aim at engaging the customer rather than focusing on a hard sell. You should also implement trigger-based email tactics to send out emails based on customer actions, such as cart abandonment or wish list creation.
  • Build brand loyalty. Branding plays a central role in customer retention. Customers that have an emotional connection with a brand are less likely to churn, even in cases when they experience poor service or are let down. Focus on creating a strong bond with your customers through stories, marketing messages, and reward programs to prevent them from going elsewhere.
  • Provide adequate customer support. Leaving your churn rate unchecked can be a dangerous road to go down. One frustrating experience for your customer can be enough to drive them away, so why risk it? Providing a great 24/7 client support, whether via an online chat tool or by phone or via email, is a simple and effective churn prevention tactic. Providing help on time and to a good standard will not only help you retain your customers, but will also highlight issues and optimization opportunities in your sales funnel.

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