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How customer churn impacts your bottom line over the long term

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customer-churn

According to customer intelligence leader CallMiner, U.S. companies lose $136.8 billion per year due to avoidable consumer switching.

Looked at in a more positive light, that’s a huge unrealized opportunity for companies. Most companies understand, at least conceptually, that generating new customers is expensive when compared to winning repeat business and referrals from existing, loyal customers. Unfortunately, few organizations are proactive when it comes to reducing churn; instead, they get caught in the hamster wheel of never-ending lead generation investment.

Here’s another remarkable churn statistic: 32% of all customers would stop doing business with a brand they loved after one bad experience. (PwC)

No company is perfect. You cannot completely eliminate customer churn or turnover. And, quite honestly, customers today are more educated and fickle than ever before. Some portion of customer turnover is simply out of your control. It’s a tough situation for businesses, but one that can be tackled and overcome. 

How quickly you can identify a customer attrition problem, how rapidly you can remedy this issue, and how successful you are at turning churn into a positive revenue force will all determine how churn impacts your bottom line over the long term. 

To grow, you must tackle customer churn head on. You can do this in a number of ways, all of which are focused in some way on improving the customer experience with your brand.

First, Understand What Churn Rate Is

According to HubSpot, churn rate is defined as “the percentage of your customers or subscribers who cancel or don't renew their subscriptions during a given time period.” This same approach can be applied to your client or customer base.

Churn rate is calculated by dividing your total number of lost customers with your total number of customers within a specific time period. You can look at customer churn in any time frame, but most companies will analyze it on a quarterly basis to identify trends. 

So, a company that started a quarter with 100 customers and lost eight over three months would have a churn rate of 8%. Like most Key Performance Indicators (KPIs), you can make them simple or more complex. Whether you use a simple formula or a complex one, the bottom line is this: If your churn rate exceeds your customer acquisition rate, you’re not in a good place. 

32% of all customers would stop doing business with a brand they loved after one bad experience.

32% of all customers would stop doing business with a brand they loved after one bad experience.

Then, Be Proactive About Measuring Churn

Many companies have a sense that customer retention is a challenge but they don’t have the systems in place to obtain the actionable data required to remedy this issue. To improve churn rate, you need to proactively measure analyze it to take action.

  • Define tracking time frames as monthly, quarterly, or annually, depending on your industry and business cycle
  • Build your basic churn rate formula according to your business needs and cycles
  • Use enterprise software or develop churn tracking tools to capture data and produce reports that empower your team to better understand churn patterns and impacts
  • Include churn rates and trends in internal reporting meetings and be sure to assign specific team members to churn (or a suite of related KPIs) so accountability is baked in to your process
  • Prepare your teams to be agile to respond to threats and opportunities that emerge from churn data analysis

Next, Tie Churn to Revenue

In order to truly leverage churn data to improve revenue generation, you need to link poor or strong churn rates to revenue. It’s not as simple as it sounds. This is where the simple churn rate formula becomes a bit more nuanced and complex.

  • For simplicity’s sake, we will look at a one-month period. Linking churn and revenue can be done for any time period but doing so on a quarterly basis brings in other complicated factors (this is a subject for a whole other blog)
  • Calculate your anticipated Monthly Recurring Revenue (MRR) at the beginning of a month
    • Your MRR is revenue that reliably comes every 30 days less any revenue generated from existing customers via cross-selling and upselling
  • Divide your MRR by the amount of MRR lost over the month to get your monthly revenue churn number
  • For example, if your MRR was $100,000 at the start of the month and was $50,000 at the end of the month, with $20,000 in existing customer revenue, your revenue churn calculation would like this:

$100,000 MRR - $50,000 Churn = $50,000

$50,000 - $20,000 (existing customer revenue) = $30,000

$30,000 / $100,000 MRR = 30% Monthly Revenue Churn

How many lost customers or clients makeup that 30% loss will depend on the makeup of your customer/client base. The important takeaway is that you need to link customer churn to revenue generation or loss, but these two data points will not always match up due to the divergent profiles of your customers, i.e. some produce higher revenues than others on a monthly basis.

Now, Better Understand How Churn Broadly Impacts Revenue

Customer churn rate has long-term ramifications for your bottom line on several fronts. Put simply, retaining customers and generating new business from them is far less expensive in time and treasure than generating new leads and converting them into new customers. 

Here are some critical stats to consider when educating yourself about the importance and impacts of customer churn rate, courtesy of our friends at Small Business Trends:

  • The probability of selling to an existing customer is 60-70 percent. The probability of selling to a new prospect is 5-20 percent.
  • Eighty percent of your future profits will come from just 20 percent of your existing customers.
  • Sixty-five percent of a company’s business comes from existing customers.
  • A typical American business will lose 15 percent of its customers each year.
  • The average repeat customer spends 67 percent more in months 31-36 of their relationship with a business than they do in months 0-6.
  • A five percent increase in customer retention can lead to an increase in profits of between 25 and 95 percent.
  • Lowering your customer churn rate by five percent can increase your profitability by 25 to 125 percent.
  • Repeat customers spend 33 percent more than new customers.
  • A 10 percent increase in customer retention levels results in a 30 percent increase in the value of the company. 

Finally, Use Churn to Guide Customer Experience Improvements

Churn rate and revenue churn analysis exist to help your business retain more customers for longer. It’s that simple. You’ll never get your churn rate to zero, but you can take action on identifying the weak links in your customer experience. In summary, customer service is one part of your customer experience. 

An important step toward improving the customer experience with your brand is understanding the difference between customer service and the customer experience.

The customer experience is the collective perception of your brand generated by a host of engagement experiences. Customer service is one aspect of the customer experience that also includes in-store experiences, social media engagement, website interactions, and any other interface with your brand. 

Although a very important component, customer service is just one part of the customer experience delivery system. Understanding this is critical to creating and executing a great experience platform. 

Leveraging customer churn and revenue churn data can empower your business to create a powerful new customer experience strategy that can be executed consistently across all of your engagement channels, including customer service. 

Your business will retain its customers at a higher rate, win repeat business, garner more and higher-quality referrals, and significantly increase revenues and customer lifetime value (CLV). 

Bill Gates once said, “Your most unhappy customers are your greatest source of learning.”

Often, companies don’t want to dig into the reasons a client leaves; they instead focus on replacing that customer as quickly as possible, leaving a valuable learning opportunity unrealized. Constantly pouring money into lead generation and new customer acquisition while failing to understand why customers leave is anathema to growth.  

Using churn and revenue churn analysis to look inward at what might at first be ugly and unpleasant is a critical step to growing your business. Remember, today’s consumers are in control; they are highly informed and have many, many options to choose from and will leave your brand for good, sometimes after just one bad customer experience. You cannot keep every customer from leaving, but you can certainly take action to ensure more customers stay. Perfection is not in the cards, but churn rate improvement is very realistic and can have a tremendous impact on your revenue production.

Unchecked customer churn can have devastating long-term impacts on your bottom line. At the same time, understanding and proactively addressing churn is a huge opportunity for a business to take things to the next level and to jump off the lead-generation hamster wheel.

Take control of churn and you’ll take control of your company’s future.

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