Churn rate is one of the important metrics for companies whose customers pay on a regular basis like subscription-based companies or SaaS companies. Including your monthly revenue, if your potential customer left and that increases the churn rate then you are in trouble.
Here we will cover:
- What is Churn Rate?
- The formula for Churn Rate
- Advantage and Disadvantage of Churn Rate
- Growth Rate vs. Churn Rate
- How to Reduce Churn Rate?
What is Churn Rate? 😵
Churn rate is a measurement of the number of individuals or units leaving a group over a specific time period. The churn rate is used in many places, including in business, human resources, and IT. It is also known as attrition rate or customer churn.
In technical terms, churn rate is referred to as the proportion of subscribed customers who terminate their subscriptions with a company in a given timeframe. In this place, the churn rate is primarily associated with businesses operating on a subscription basis.
The formula for Churn Rate 👩🏻💻
The churn rate is calculated by dividing the number of customers left the company in a given period by the total number of customers at the beginning of a given period. It can be expressed mathematically using the formula:
For example, let’s say your company acquired 1000 customers last quarter. Eventually, you lost 100 customers due to expired contracts and a few poor customer service interactions.
It can be expressed mathematically, your churn rate would be the 100 churned customers divided by the 1000 acquired customers, which means 50 divided by 1000 is 0.10.
Then multiplied by 100%, this gives you a customer churn rate of 10%.
This is how it looks when you do the math out:
Churn Rate = (Customers who left / Customers who acquired) x 100%
Churn Rate = (100/1000) x 100%
Churn Rate = (0.10) x 100%
Churn Rate = 10%
Now that you have found what churn rate is and how to calculate it. Take a look at the next section to know the advantages and disadvantages of the churn rate.
Advantage and Disadvantage of Churn Rate 🎭
- Provides clarity on the business quality
- Identify whether customers are satisfied or dissatisfied with the service or product
- Compare with competitors to gauge an acceptable level of churn rate
- Easy calculate pattern
- Doesn’t provide clarity on the types of customers leaving which means you couldn’t find out which one left, the new or old customer
- Doesn’t differentiate companies between industry types
Growth Rate vs Churn Rate 🥊
A company can compare its new subscribers and its loss of subscribers to identify both its churn rate and growth rate to see if there was overall growth or loss in a specific time period. While the growth rate tracks new customers and the churn rate tracks the customers they left in a specific period.
If the growth rate is higher than the churn rate, the company is actually in a growth position. But when the churn rate is higher than the growth rate, the company is actually at a loss with the customer base.
For example, if a company added 80 new subscribers in one quarter but has lost 110 existing subscribers, then the net loss would be 30. There was no growth in that quarter for the company at all but rather a loss. This would be a negative growth rate and a positive churn rate.
How to Reduce Churn Rate? 🤐
It is important to ensure that its growth rate is higher than its churn rate for a company or else it will experience decreasing revenues and profits with the eventual scenario of having to close the business.
So here are the five things that you can do to reduce the churn rate:
- Analyse when churn happens 🧐
Even you have done your best efforts, churn will happen and when it does happen, use it as an opportunity to dig into what makes the customer leave, and what you can do to prevent that churning in the future.
- Start with the right thing ▶️
You can work to prevent churn rate from the moment someone becomes your customer by creating a robust new onboarding process, a new customer welcome email, or an online customer onboarding. Create educational content on your blog, social media, and video channels to instruct customers and teach them how to get optimal value from your product or service.
- Excellent training for support and sales rep 🤹
Sales reps should be selling the true value of your product or service so that your customers don’t feel like they are deceived. Also, customer support employees should be well-equipped to manage any issue that comes in their way to provide excellent customer satisfaction. By investing in these two departments, you can see the drastic impact on the churn rate.
- Ask for customer feedback and respond quickly 🤞🏻
Make sure you are regularly asking for feedback from customers at key moments across the customer experience. If you have notified that customers are likely to churn if they don’t log into your tool every 10 days, ask them for feedback around day 10 and try to re-engage with them. Also, if they hit a milestone using your product or service, ask them for feedback after that moment.
Then figure out the specific moments which make or break a happy customer and ask for feedback at those touchpoints to strengthen the relationship with customers.
- Have proactive communication with customers 🗣️
Build a strong relationship with your customers by communicating proactively with them so that they can see you as a trusted person in the business. And reach out with content you think they will find interesting or helpful, connect and engage with them on social media, and solve out if issues or outages crop up on the product or service side so they know they can trust you on this.
Don’t forget the math we did earlier to calculate churn rates? Well, even though you need to know what your churn rate is, you also need to know why customers left while doing business with you.
Many businesses fail at this because it involves asking some uncomfortable questions and admitting that they are best at everything. However, identifying the most common causes of leaving the business and action on them to improve such things can be a great way to reduce customer churn rates.
You can apply some of these churn rates reduces tips to your own business to see the difference and unless you have a zero-churn rate, you are excellent at doing business.
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