Customer churn is a crucial metric for every growing business. It can be painful to observe but the cold hard truth is usually the best tool for growth. The good news is that you can significantly improve business by identifying and reducing customer churn.
What is customer churn?
Customer churn is the percentage of customers that stopped using your product or service over a given time frame.
You can calculate your churn rate by dividing the number of customers you lost during that time frame -usually a month- by the total number of customers you had at the beginning of that period.
For example, if you start the month with 500 customers and end it with 450, your churn rate is 10% because you lost 50 customers.
That’s customer churn. But, according to the needs of your business, you can also calculate revenue churn, recurring revenue churn, ARPU (Average Revenue per Unit) churn…
What matters is that you know exactly where the leak is and how to quantify it so you can fix it.
How does customer churn affect your business?
Aside from its direct impact, customer churn can have undesirable side-effects.
Loss of revenue
The most obvious consequence of customer churn is loss of revenue.
But customer churn doesn't equal revenue churn. And if you have different pricing plans, you can afford to lose some of your less profitable customers. But, if you’re running a SaaS business with only 1 or 2 different pricing plans, there will be a more direct correlation between customer churn and revenue churn.
If you’re in the former case, you’re still not out of the woods. Losing your low-end customers to profit from a minority of high-paying clients might seem like a good trade but it leaves you exposed. If one of those big clients leave you, it might have a serious impact on your revenue. Having a multitude of smaller customers, however, safeguards your survival and even profitability.
It’s all about striking the right balance between bringing in -and keeping- big clients and making sure that your smaller customers guarantee you a healthy business model.
When you lose customers, there a chance it’s because they’re unhappy with your product. And if they’re unhappy with your product, they might post negative reviews. And that's going to tarnish your reputation.
While that trend is inverting, people share bad experiences with more people than they do good experiences.
On top of that, 82% of consumers proactively seek referrals from peers before making a purchase and 92% of consumers trust referrals from people they know. As for B2B, a 2017 report by DemandGen finds that 84% of B2B buyers said they seek input from peers/existing users, and 57% do so within the first three months of the buying process.
In other words, bad customer retention can directly impact customer acquisition.
Some of the advice in this article is specific to software companies but most of it can be applied by any type of business.
How to significantly reduce churn
There’s 4 big causes to customer churn: attracting the wrong customers, having a bad product, lacking customer care, and payment-related issues.