Customer churn might seem straightforward enough — essentially, losing customers is bad for business. And no, a high customer acquisition rate won’t savel you, either. Your sales team might be busy closing deals, but if your customer churn rate is also high, you’re likely to be caught in a vicious cycle that will burn out your team and burn through your revenue.
So what is customer churn on a more nuanced level? While understanding that churn has a negative impact on your company’s financial health and growth potential is the first step, it’s essential to know how to calculate customer churn, why customers are leaving in the first place, and what you can do to retain them.
What Is Customer Churn?
Customer churn, also referred to as customer attrition, is the measure of how many customers stop purchasing or engaging with a company’s products and services. For example, a subscriber canceling their streaming service or a shopper no longer buying from their preferred retail store are both tangible examples of churn.
Churn Rate vs. Growth Rate
While churn rate focuses on customer loss, growth rate measures customer acquisition.
It’s calculated by determining how many first-time customers your business gains within a specific timeframe. As we discussed earlier, a high growth rate is not an indicator of positive business outcomes on its own. A high customer churn rate can cancel out positive acquisition gains.
Understanding Customer Churn
If you want to learn how to reduce customer churn, there are a few metrics and formulas you need to brush up on first. When you know how to calculate customer churn data correctly, you can use that data to power an effective customer retention strategy.
Customer Retention Rate (CRR)
CRR is the percentage of customers retained over a specific period of time. This key metric sheds light on customer loyalty and satisfaction.
- Formula: CRR = Number of customers at the end of a period – Number of new customers acquired during that period) / Number of customers at the start of the period × 100.
Customer Lifetime Value (CLV)
Customer lifetime value indicates the total revenue a business can expect to earn from a customer throughout their entire lifecycle, underscoring the importance of nurturing long-term customer relationships.
- Formula: CLV = (Average purchase value x Purchase frequency) x Average customer lifespan.
Net Promoter Score® (NPS®)
NPS® is a customer loyalty and satisfaction benchmark, based on a single question: “How likely are you to recommend our product/service/company to a friend or colleague?”
The answers fall on a 0-10 scale (0 being not at all likely; 10 being extremely likely). Promoters respond with 9 or 10, passives respond with 7 or 8 and are not included in the formula, and detractors respond with 0-6.
Time-to-Value (TTV)
TTV is the duration between a customer’s initial purchase or sign-up to the moment they first recognize significant value from the product or service. A quick TTV can drive customer satisfaction and retention by demonstrating the immediate benefits of a purchase.
- Formula: Depends on your business and offering. Here are two places to start.
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- Measure the duration between when a customer first becomes aware of your product or service and when they purchase it
- Measure the time it takes to upgrade to higher subscription tiers
Customer Satisfaction (CSAT) Score
Your CSAT scores is an important metric for assessing customer sentiment and is used to measure your customers’ satisfaction with your products or services.
- Formula: (Total number of satisfied customers / Total number of responses) x 100
Impact of Customer Churn
A high customer churn rate affects a business’s ability to generate reliable, sustainable revenue from loyal, high-value customers. It also forces leadership to invest in customer acquisition to fill the gap, further impacting the overall profitability of the business. If left unchecked, the negative impacts of customer churn can spiral quickly and lead to several unfavorable outcomes.
Decreased Market Share
High churn rates can erode your market position as your business potentially loses its customer base to your competition.
Reduced Customer Lifetime Value
Customer churn directly depletes CLV, as churn cuts a customer’s potential revenue stream to your business short.
Loss of Revenue
Customer attrition is an immediate hit to your bottom line. But it goes deeper than that. Not only do you lose a paying customer; you also lose the opportunity to nurture and grow your relationships profitably and derive referrals over time.
Customers and employees are intertwined in your business’s ecosystem — what affects one affects the other. Unsatisfied customers risk severely dampening employee morale, negatively impacting your business’s health in more ways than one.
How to Measure Customer Churn
If you want to know how to reduce customer churn to minimize its negative effect on your business, you first need to learn how to measure your customer churn rate. Your churn rate is typically calculated by dividing the number of customers lost over a specific period by your total customer count.
1. Choose a Timeframe
For your churn rate data to be useful, you have to measure a specific timeframe. You can start by breaking it down on a monthly, quarterly, or annual basis, depending on the unique needs of your business.
2. Determine Churned Customers
Based on your business model, what constitutes a churned customer? It’s important to define the criteria and disseminate it across the business. For subscription-based services, for example, a churned customer might be one who cancels their paid subscription — even if they stay on a free option. In retail, it could be a customer who hasn’t made a purchase within a specific timeframe.
3. Gather Total Customer Data
To accurately measure churn, compile comprehensive data on your entire customer base at the beginning of the measurement period. This includes all active accounts, buyers, or subscribers. Having foundational data sets to benchmark against will allow for more precise calculations when determining your churn rate.
4. Calculate Churn Rate
Here’s how to calculate customer churn.
Formula: Churn Rate = (Lost customers / Total customers at the start of a time period) x 100
5. Analyze Churn Rate
Now that you have your rate, it’s time to dive deeper by segmenting your customer data. A segmented analysis can reveal patterns and trends, giving you insight on which types of customers are more likely to churn. Armed with this information, you can tailor your retention strategies to be more effective for different segments.
Strategies for Churn Prevention and Retention
Uncovering how to reduce customer churn hinges on implementing personalized, data-driven approaches. At the end of the day, it’s about developing deeper, more fruitful connections with your customers.
Let’s get into some effective churn prevention tactics and invigorate your approach to customer retention.
Improve the Customer Experience Across Channels
Optimizing the customer experience across all channels has a huge impact on boosting retention. Data shows that 65% of consumers consider switching to a competitor after a negative customer service interaction
Investing in a customer experience management (CEM) software platform that can monitor, analyze, and enhance customer interactions at every touchpoint is a powerful solution for your business. The right CEM not only fights customer churn, but also drives ROI in other aspects of the business as well. Improving the customer experience is linked to business success and is the key to taking the lead in a competitive market.
Offer Personalized Customer Experiences
Tailoring products, services, and communications to individual preferences is inextricably linked to improving the customer experience. The result? Deeper relationships that last longer and are more profitable.
In fact, 61% of consumers are willing to spend more with a company that provides customized experiences. Plus, in a market with endless choices, 82% of buyers confirm that personalized experiences significantly influence their brand choices. If you don’t take personalization seriously, it’s likely your competitor will — and benefit from your high customer churn rate.
Deliver Responsive Customer Support
Efficient and professional customer support can transform potential detractors into your business’s biggest promoters. Nearly all consumers (97%) in the US and UK confirm they would stay loyal to a company that transforms negative experiences into positive ones by prioritizing quick resolutions. On the flip side, 67% likely to abandon a brand after 2-3 poor interactions — so you need to get customer support right.
Invest in contact center technologies, such as omnichannel solutions and customer analytics, to supercharge support efficiency and agent performance. By enhancing your customer report, you’ll be reducing churn, too.
Collect Customer Feedback and Act Upon It
Your customers want to have a voice, and are ready and willing to help you improve, as 73% of consumers express a desire to leave feedback after a customer service interaction. But gathering customer feedback is a waste of time and resources if you don’t act on it.
Business leaders who truly recognize the value of customer feedback analyze and act on it, using the valuable data to enhance the customer journey and ensure issues are promptly addressed. There’s a direct correlation between customer feedback, experience enhancement, and business success. So give your customers a voice, and then listen to it.
Utilize Advanced Analytics
Leveraging advanced analytics, including Text Analytics to evaluate written feedback and Speech Analytics for customer call sentiment, will provide a deeper understanding of your customers and their behaviors.
By identifying patterns that can predict which customers are at risk of churning, your business can be proactive in addressing concerns and customizing retention strategies to mitigate attrition.
Case Studies: Successful Churn Reduction Stories
What is customer churn, applied to real-world contexts and situations? Let’s take a look at the tangible impact customer churn has on businesses by examining case studies that demonstrate practical and effective churn reduction strategies.
T-Mobile Captures Real-Time Customer Feedback to Reduce Customer Churn
T-Mobile is on a mission to “change wireless for good.” One way they’re driving this mission forward is by boldly shifting their focus from cost reduction to implementing a transformative customer experience strategy that prioritizes satisfaction.
By implementing Medallia’s solutions, including Medallia’s Conversation Intelligence and Text Analytics, T-Mobile enhanced its ability to listen and act on customer feedback in real-time. This customer-first approach led to T-Mobile achieving the lowest churn rate in its company history, less than 1% year over year, and underscores the effectiveness of listening to and addressing customer feedback to foster loyalty and reduce customer churn.
- Less than 1% churn rate year over year, the lowest in company history.
- Reached $45B in total revenue over four years, with a 4% increase year over year.
- Over 41k users leveraged role-specific dashboards for insights into customer experiences.
- Experienced a huge 25-points increase in NPS® within four years.
Zurich Insurance Invests in Customer Experience Management to Reduce Churn
Zurich Insurance, operating in the competitive general insurance sector, decided to tackle the challenge of customer loyalty and retention head-on. Recognizing how easy it is for customers to switch providers, Zurich made the strategic move to enhance customer experience and implement a CEM platform.
Using this new system, the company meticulously measured, analyzed, and acted upon customer feedback to achieve amazing results and insights.
- Achieved an incredible 20-point increase in NPS®, a testament to the positive shift in customer sentiment and loyalty.
- Zurich Insurance promoters contribute 27% more in premiums monthly compared to detractors.
- Promoters are 5x less likely to leave within 12 months, reducing churn significantly.
Such strong outcomes not only underscore the benefits of prioritizing customer experience, but also highlight the effectiveness of Zurich’s strategy in building a loyal customer base of promoters who can actively refer new business.
Retain More Customers with Medallia
Whether it’s through advanced analytics predicting potential churn or personalized engagement enhancing the customer journey, Medallia empowers businesses to reduce churn effectively.
Ready to turn insights into action? Book a demo with Medallia today and explore how we can tailor our solutions to meet your unique business needs and ensure your valuable clients remain just that — yours.
