Churn rate: what is churn rate and how to manage it

By January 16, 2023 Digital Stories

In an increasingly fast-paced and competitive world, it becomes complicated for companies to keep up the level of customer loyalty. In order for users to be interested in and trusting of the brand, it becomes essential to monitor certain KPI (Key Performance Indicators) specific.

Among the most relevant metrics to pay attention to is undoubtedly the so-called churn rate, or the rate at which customers abandon a service. This is a figure that should not be underestimated in order to understand whether one's business will be successful in the long run and be able to make the right adjustments.

With the advent of the e-commerce sites churn rate has become even more crucial. It is very easy to derive thanks to a special mathematical formula and can be used not only in marketing, but also for other business performance.

So let's go on to find out in detail what the churn rate consists of, how it is calculated, and how you can lower its index.

What is the churn rate

The churn rate belongs to the most important performance evaluation metrics and represents the dropout rate, expressed as a percentage, of the customer base.

In simpler words, it is the data that expresses The average number of customers leaving a service or they no longer purchase a certain product in a particular time period, compared to the total number of customers in the same time segment.

Certainly the loss of customers is no small inconvenience to any business sector. In fact, it is not uncommon to find a very high churn rate in companies that are leaders in their fields.

There can be a variety of reasons for this, but usually the real underlying problem is the tendency to focus on new customers rather than on established relationships.

In practice, the churn rate is the inverse concept of the retention rate, which goes to calculate how many people remain loyal to the brand by a predefined amount of time.

A low churn rate means that users are fully satisfied with the product offered, and it will then be possible to focus on new customers without having to put too much effort into replacing lost ones.

Retained customers are even more valuable than newly acquired ones, and increasing churn rate can be vital to the beneficial effects on business.

Such metrics are critical to understanding the health of the company and its prospects for the future, while indentifying The impact of changes in their offerings commercial. The churn rate thus helps to better understand which kind of customer appreciates the product most.

In addition, the cost of acquiring new customers is higher than what must be spent to maintain the existing customer base. This is because a long-standing customer is more valuable than a newly acquired one.

How is churn rate measured?

Once we understand exactly what churn rate means, it is good to go on to explain How is this parameter calculated. In this sense, it is useful to specify that for some types of enterprises the churn rate is easier to verify than for others.

The calculation is easier for the subscription services and for activities that uniquely identify customers forced to take a particular action for abandonment. The churn rate is then also measurable for the e-commerce companies.

However, to obtain a figure such as the dropout rate, it is necessary to define some details in advance. First, you will need to set a time frame on which to calculate the churn rate (monthly, quarterly or annually).

Next, you will need to indicate the general number of customers at the beginning of the chosen time period and the number of customers lost at the conclusion of this time window. Then you will simply divide the first value by the second and multiply by 100. The percentage obtained will be your churn rate.

Thus, the formula is as follows:

customers lost at the end of the period/total customers at the beginning of the period X 100

To be even clearer, we can give a practical example. If the company has 200 customers at the beginning of the year and 20 people have decided to drop out, applying the formula we will have to divide 20 by 200, multiplying it by 100.

20/200 x 100 = 10

According to the calculation just performed, your churn rate will be 10%. As for the time period to refer to, there are companies that survey the dropout rate every 4 months, 6 months or every year, while others even go as far as a 4-year interval.

To know which time range is most suitable, one must refer to the specific business model. For example, a company such as Spotify who offer monthly subscriptions will be able to check the churn rate every month or bimonthly.

Finally, a positive churn rate should be around. Between 2 and 8%, especially for B2C services.

How to assess churn rate

The churn rate is expressed as a percentage, so that we can Keep track of the evolution of the investments made according to different time intervals. However, before monitoring the brand abandonment rate, it is essential to know when a customer can be called lost.

There are products with sales cycles longer, such as household furniture or eyeglasses, for which customers may let years pass before a new purchase is made.

This means that for each specific product, it is necessary to adjust the meaning of churn rate according to the customer lifecycle most suitable. When you are confident that the data are correct, you can set up the analysis best suited for your needs.

Different methodologies can be exploited to support churn rate management, starting with the customer satisfaction. Simply ask users for feedback and opinions on the shopping experience to identify the elements of customer satisfaction/ dissatisfaction.

Another useful index is the Net Promoter Score, a metric that employs a survey to measure customer loyalty to the company.

With a score of 0 to 6 you will have detractor customers, those who do not recommend the company and speak ill of it. From 7 to 8 are passive customers, those who are neutral but still would not recommend the brand. Finally, scores 9 and 10 include. promoter clients, more satisfied and inclined to recommend the enterprise.

In conclusion, it may help to analyze the Voice of the Customer, so you know how the buying experience or after-sales service went.

How to reduce churn rate

The most immediate system for lowering churn rate Is to improve the customer experience of users. In this regard, historical data regarding this segment is the basis for any self-respecting loyalty strategy.

The first step is to prevent the abandonment of the most loyal customers, and to do this there is a need for predictive analytics that must answer 4 main questions:

  1. What factors lead customers to abandonment?
  2. How can the identification of at-risk clients be made more automatic?
  3. What actions to take according to the degree of probability of abandonment?
  4. How to automate the actions to be performed in the immediate?

To curate the customer experience, one must start with the provision of an excellent service/product and by after-sales customer support to provide quick answers to any problems and difficulties. Today this can be done in so many ways, including salespeople, chat rooms, social profiles, and so on.

The important thing is to be quick and accurate in responding when users ask questions or leave feedback. Another element to sustain loyalty and contain churn rate is the Reward customer loyalty.

It is no coincidence that discounts, cards and loyalty programs are one of the oldest marketing strategies as they encourage customers to continue shopping with the brand.

Whichever approach is chosen, it is essential to Focus on the people who have shown appreciation for your services over time. In short, such trust relationships are decisive and must be cultivated with special care and attention.

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