Churn: what is it, how to calculate and how to lower it?

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Yasmim RestumYasmim Restum - 25 de November de 2021.

Churn Rate. This expression, which is a matter of relief or despair for many entrepreneurs, is a metric that helps to better understand the loss of customers in a certain period.

In the current scenario, with the rise of subscription business models and the Saas model, this Churn nomenclature has become more widespread.

However, it is important to understand the best way to use it to guide your company in a more sustainable growth direction.
And well, losing customers is something natural, and in times of crisis this becomes more common and there is no way we can blame your business. 

But there is nothing that can serve as an "excuse" for not taking action and trying to understand why customers are not doing business with you and how to avoid further losses.

Throughout this article, you will understand:

  • What is Churn?
  • How is Churn calculated?
  • What is the ideal churn rate?
  • How to lower Churn?
Shall we?

What is Churn?

Churn, in a more generalist definition, is the total number of customers lost or who canceled their relationship with your company.

This metric indicates how much revenue or customers your company has lost. But thinking beyond revenue, Churn can help you visualize the level of customer loyalty - which reveals a company's ability to keep its customers satisfied.

So, to further increase its client base, a company needs the number of new customers to exceed the Churn rate. 

In other words, Churn is a metric that speaks of customers who stop being customers, but it also speaks of success. It is very decisive and directly impacts the revenue, helps to understand the level of success of a company, and is, therefore, often an enemy of many businesses, regardless of the segment.

But this relationship doesn't always have to be so tough, does it? Continue reading and we will tell you how to invest in your company to lower this rate.

Read also: 5 steps to start Data-Driven Decision Making in your business

How is Churn calculated?

It's simple. Just divide the amount of customers you lost/cancelled by the end of the period by the total number of new customers, new subscriptions. For example, if 10 clients cancelled your service out of 100 = 10% churn rate.

Conta-churn-EN

The math is actually quite simple, isn't it? Keeping track of this percentage is always important for managers. But how to know the ideal Churn Rate for your niche market?

What is the ideal churn rate?

The best answer is always: as low as possible.

But don't get frustrated if your rate doesn't reach zero quickly or even goes negative. Lowering this rate is not an easy task, especially if your business model is Saas.

Moreover, variations in Churn rates are expected in any business - the important thing is to understand whether, for the reality of your business, the rate you found is a threat or a relief.

In some B2B model segments, for example, Churn rates are lower. This is because these companies have a contract model that is usually annual and are not very sensitive to market price variations. For small businesses, however, Churn tends to be a bit higher.

Companies with negative churn of -10 or 30% are usually already consolidated in the market and have influence.

But to try to answer the question raised by this topic, a survey of 2020 North American companies found the following average rates, divided by market areas. However, please pay attention to the moment of your company, the type of customer, and other characteristics that may help in the best and fairest interpretation of this rate.

Gráfico EN

How to lower Churn?

Now that you have a better idea of what Churn is, let's talk about strategies that help decrease the number of customers that quit.

Obviously, the best strategy for reducing churn is to make your product/service indispensable. But you can also answer this question by understanding why clients cancel. 

The answers can be many: 

  • doesn't see the value of your product/service;
  • bankruptcy
  • financial crisis in the market
  • the product is good, but the service is not - and vice versa
  • the competition is better
  • lack of cash flow to close the contract

among others...

Read also: DMP x CDP x CRM: Strategic Differences and Benefits

In fact, part of these reasons are out of your company's control, but it is possible to improve all the others that are under your control to prevent customers from canceling.

With that in mind, here are some tips to lower Churn as much as possible in your business.

  • Always keep track of this metric

Never stop calculating Churn. It is necessary that managers always have a visualization of this percentage to make assertive decisions on a frequent basis - this will ensure that this rate remains low.

  •  Create a great first impression

The moment your customer has an exceptional experience from the very first contact with your brand, the chance that he/she will consider a competitor later on decreases a lot.

Kickoff labs CEO Josh Ledgard says that the first five minutes with a new client are the most important for making a positive first impression and encouraging them to believe in continuous improvement of the relationship.

  • Map out customers most likely to cancel

Listening to your customer is crucial to getting closer to meeting their needs and increasing their brand loyalty. 

Many entrepreneurs believe that no one knows more about their business than they do. Okay, there is some truth to this statement, but nothing like a client to bring valuable input.

So use surveys and NPS as your allies. Try to do them in a way that generates little friction in the communication with the client and in different stages of the sales funnel, such as at the time of signing up and at the time of a cancellation attempt.

According to Lee Resources, if a company resolves a complaint favorably to the customer, there is a 70% chance that the client will continue to consume the brand's products/services.

  • Avoid the same mistakes and have an action plan

If your company wants to avoid new mistakes, it is also fundamental to map recurrent complaints. This way it is possible to elaborate an action plan to work on the most critical cases - and that your team knows blow-by-blow.

Besides this mapping helping to rescue customers who canceled, it is a way to anticipate bad situations with current customers and also to avoid that members of the company's team go through uncomfortable situations during customer service.

  • Invest in Customer Success

This team is worth gold! All this monitoring of the customer journey can be done by a specialized team in an efficient way. Just to recap: the customer journey is the entire trajectory of a consumer with a company, starting from the moment he hears about the brand until the decision to buy.

Therefore, investing in a CS team can help leverage the loyalty of your customers - which helps a lot to lower your company's Churn.

In conclusion...

As we have seen, there are reasons for increased churn that we cannot control, but look how many solutions we have found to prevent and mitigate it.

If a better knowledge of the customer is a goal of your company, maybe what is missing is a more unified and organized view of your target.

If you would like to learn more about Zoox's solutions to increase your revenue from a better understanding of your customer, please contact our consultants.

Zoox works with valuable metrics, custom analytical modeling, comprehensive databases, intuitive visualization dashboards and unique IDs for your company to increasingly understand your customers' needs and anticipate market trends.

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