“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
Companies typically spend most of their effort and resources on customer acquisition, even though the cost of retaining an existing customer is 5 times lower than acquiring a new one.
Customer retention is a measure of how many of your customers continue to buy from you over time and are therefore loyal to your brand. Churn, sometimes known as customer attrition, is at the opposite end of the spectrum, i.e. how many customers stop buying from your company.
Industries that use a subscription-based business model have traditionally focused more on churn than others. Banks, telecom companies, insurance firms, energy services companies, are among the many types of businesses that often use customer attrition analysis and customer churn rates as one of their key business metrics. With the rise of businesses based on recurring revenue models, such as Software as a Service (SaaS), churn has become an important business metric for software companies.
Here are a few reasons why you should care about churn:
- Customer churn reduces profitability through revenue loss
- Churn results in greater marketing and re-acquisition costs
- The probability of selling to an existing customer is a lot higher than to a new prospect
- Knowing the customer churn rate is helpful for calculating customer lifetime value
- It is a measure of the company’s health and long-term prospects
- Customer churn determines whether customer retention is improving
- It helps identify which customers and segments are the best fit for your product
In this blog post, I will look at the different types of churn, review how to calculate churn and, most importantly, discuss new ways to reduce churn using journey analytics.
1. Calculate Basic Churn Rate
You can’t reduce what you don’t measure, so the first step is to calculate your customer churn rate. There are several different ways to calculate your churn rate.
Netflix was even sued by its shareholders over the way it reported churn rates. The shareholders’ argument was that Netflix used an improper calculation that resulted in an artificially low churn rate. The case was thrown out by a judge, ruling that there is no single, industry-wide measure of calculating churn.
So, let’s start by defining two ways to measure churn: customer churn and revenue churn. Customer churn is the proportion of contractual customers or subscribers who leave a supplier during a given time period.
Revenue churn, on the other hand, is the proportion of recurring revenue lost in a given time period. Revenue churn is commonly used in SaaS and other business models that rely on recurring revenue models.
Next, I will describe basic methods of calculating your customer churn and revenue churn rates. For a more nuanced explanation, read this post by Recurly or this one by Evergage.
How to Calculate Basic Customer Churn Rate
To start, choose a time frame for your calculation. Companies typically calculate monthly customer churn rates but you could also do quarterly or annually.
In this timeframe, determine the customers lost and divide it by the total number of customers at the beginning of the month.
* Avoid including new sales during the month.
So, if company X has 400 customers at beginning of the month and loses 40 customers during the month, the churn rate is (400-360)/(400) = 10%
How to Calculate Basic Revenue Churn Rate
Revenue Churn Rate can be calculated in two flavors: gross and net.
To calculate your gross revenue churn rate, start by choosing a timeframe. In your chosen timeframe, determine the revenue lost from existing customers and divide it by the revenue at the start of the timeframe.
So, if company X has $10M of monthly recurring revenue (MRR) at the beginning of the month and $2M of MRR from existing customers is lost from cancellations and subscription downgrades during the month, the gross revenue churn rate is 2/10 = 20%
Net revenue churn also takes into account increases in revenue due to up-sells to higher cost subscriptions and is a critical indicator of the health of a SaaS business.
So, if company X has $10M of monthly recurring revenue (MRR) at the beginning of the month and $1M of MRR from existing customers is lost from cancellations and subscription downgrades during the month, but $2M of MRR is gained from upsells, then the net revenue churn rate is (1-2)/10 = -10%
Net revenue churn can be confusing, because positive numbers are bad and negative numbers are good. A strongly negative net revenue churn means that a company’s revenue would increase even if there were no new sales. If net revenue churn is near zero, then churn erases the growth from upsells, so all growth must come from new customers. If it’s positive, the company’s sales team must work harder to overcome revenue leakage from existing customers.
Calculate Churn Rate Using Customer Journey Analytics
Customer journey analytics tools can be used to calculate churn rate directly in real-time. The beauty of this calculation is that you not only get the quantitative metric of churn rate but can actually visualize it through the customer journey, knowing precisely the steps that led to customer churn.
The diagrams above show customer churn for a retail bank, visualized both in terms of journey steps and as a quantitative metric measured monthly over a 2-year period.
2. Calculate Churn Rate for Different Customer Segments
Churn can be divided into short-term, mid-term or long-term depending on how long the customers have been active before they decide to discontinue and cancel the service.
Short-term churn is when customers churn after the initial few months. Short-term churn rates are typically high as customers test out different products and decide whether or not it adds value or they like it.
A lot of companies have discovered that reducing short-term churn comes down to finding the right fit between the customer and your product and proving value of the service to them quickly. When your short-term churn rate is extraordinarily high, examine your sales and marketing funnel to see if you’re targeting the right customer segment.
Mid-term churn occurs when customers have used the product for a few months and have had a chance to evaluate, understand and experience it.
Improving mid-term churn rates is about keeping customers engaged and interacting with your product and giving them reasons to keep coming back. This can be done by adding features, providing a consistently good customer service and maintaining regular communication.
Long-term churn happens when an established customer with a long history decides to cancel your service. To keep customers engaged over the long-term, you need to reinforce the core value of your product consistently. Look for up-sell and cross-sell opportunities to keep them invested and interested in your product.
3. Identify At-Risk Customers to Reduce Churn
Prevention is better than cure, right?
Some customer groups, and more importantly, some customer behaviors are more predictive of churn than others. But it is hard to spot these behaviors proactively and in real-time so you can take steps to make these at-risk customers stay.
Companies are using customer journey analytics to improve their ability to identify at-risk customers and thereby reduce customer churn. By gaining a data-driven understanding of customer preferences and the best ways to reduce friction in particular situations, companies can more easily identify and prioritize opportunities for improvement.
Using predictive analytics and machine learning algorithms, journey analytics can help identify which customers are most likely to churn, thus providing you with valuable data to turn the situation around.
Use Customer Journey Analytics to Identify Friction Points that Lead to Soft Churn
The CX team at a retail bank wants to understand the root causes of soft churn, i.e. when an account remains open, but activity severely drops.
Using Pointillist’s predictive analytics and machine learning algorithms, the team is able to visualize high-impact journeys that lead to decreases in savings account deposits, reduction in app activity and stoppages in auto payments.
By analyzing mobile app usage, the CX team discovers that in-app check deposits and bill payment problems are the main contributors to soft churn.
The bank uses the data to justify a redesign of their app experience to improve usability, increase account engagement, and ultimately reduce churn risk.
4. Focus On the Entire Journey Rather Than Only the Last Interaction Before They Churn
By mapping the customer journey you are able to analyze the complete experience from end-to-end in the eyes of your customer. Different customers will have different experiences and you will visually be able to see each one, the various touchpoints encountered and the actions taken from there.
But too often people take shortcuts and rather than taking the time to discover the entire journey, executives focus on only the last event that occurred before the customer churned.
In reality, poor experiences accumulate over a period of time. An incorrect bill, repeated follow-ups, poor installation, non-personal customer service are all factors that erode your customer’s confidence and trust. As a result, they are primed to churn when they receive an attractive offer from your competitor.
If you are not discovering the entire journey but only focusing on the last interaction, you will reach inaccurate and misleading conclusions which will do nothing to stem the tide of leaving customers.
Customer journey analytics can pinpoint the drivers of customer satisfaction in a way that traditional analytics cannot. By understanding and quantifying what matters most to your customers, you can consistently provide a superior customer experience and measure their impact on customer churn and other key quantitative metrics like online sales, repeat purchase rate, and others.
5. Discover Your Most Profitable Customers and Focus on Keeping Them
Let’s face it – all customers aren’t equal, and while you may want to retain all, your resources aren’t unlimited and you need to focus on the most profitable ones first.
“You have to look at the net profitability of the retention campaign. If I offer an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for me? The traditional method is focused on reducing churn, but we contend the goal should be maximizing profits, rather than only reducing churn.”
—Sunil Gupta, Professor, Harvard Business School
Customer journey analytics plays a big role in this endeavor by providing a detailed, quantitative picture of the entire customer journey, how they interacted with the product, the problems they faced and the resolutions at each step along the journey.
Using customer journey analytics, you can group your customers into segments defined by profitability, readiness to leave and the likely response to offers to stay. In this way, you can reduce customer churn by better predicting it.
6. Target the Right Customers to Begin With
If you’re going to work hard to retain your most profitable customers, then another way to reduce customer churn is to be laser focused on acquiring customers that are less likely to churn.
No matter how deep and sophisticated your retention strategy, it will be a huge waste of resources if you are attracting the wrong audience. It is imperative to make sure you are targeting those customers who are the best long-term fit for your product and can see the value in it.
Customer journey analytics tools can help you better target and segment customers based on behavioral, demographic and product attributes. Journey analytics tools discover the most predictable paths and the key attributes of prospects who eventually turn into long-term, profitable customers.
Armed with this information, you can more precisely target the right audience, set the appropriate customer expectations and significantly reduce the possibility of eventual churn.
7. Engage with Your Customers at Optimal Times and Through Their Preferred Channels
Too obvious, duh.
But you’ll be surprised how many companies only communicate with customers when they either want to upsell or when the customer is breathing fire.
Besides emails and phone calls, there are other techniques such as those suggested below to proactively and consistently talk to your customers:
Satisfaction Survey – Conduct short, open-ended customer surveys which let customers voice their opinions in an easy, convenient manner.
Social Media – Be present and answer questions through all your social media channels. After all, your customers spend most of their time on social channels, so why wouldn’t you be there too?
Feedback Bar – Incorporate a feedback bar into SaaS products and mobile apps, so customers can ask questions, comment on features or give feedback as they are using the product.
Customer journey analytics can help you optimize omni-channel journeys by automatically engaging with each customer at the best time, and in a relevant, personalized way. By embedding triggers at any event along the journey, you can activate engagement (such as an email send) to your target customer group. Advanced customer journey analytics platforms integrate with commonly used marketing tools, so you can engage with your customers as you improve your marketing technology stack.
8. Identify Problem Areas in Customer Experience to Reduce Churn
Customer journey analytics is the best approach to help you quickly identify problem areas throughout the customer journey. These problem areas could be caused by flawed and inefficient processes inconsistencies in your user experience, lack of personalized service, bugs, or a whole host of other things.
By using these data-based insights, you can now decide on the appropriate steps to take to mitigate these customer experience issues and create experiences that reduce customer churn and suit the best interests of the customer.
Identify High-Impact CX Issues that Lead to Churn with Journey Analytics
The CX team at a leading telco uses Pointillist to understand the drivers of churn, so they can identify and prioritize CX initiatives that will have the largest impact on reducing churn.
First, the team uses Pointillist to analyze CX issues across all support channels to identify the most common issues customers encounter that could subsequently lead to churn. Through the analysis, they find that billing and tv issues are by far the most prevalent.
However, in the next step of the analysis they discover that while the highest volume of customers are experiencing billing and tv issues, internet-related issues are actually driving the largest number of account closures and are responsible for the greatest revenue loss. They also determine that customers who experience internet issues are most likely to churn, and at the highest velocity.
Armed with this new information, the CX team uses Pointillist to isolate two specific internet related issues that are having the highest impact on churn, and prioritize an initiative to address them.
They anticipate that the initiative will reduce their overall churn rate by roughly 2.0%, saving the firm an estimated $1.8 million in lost revenue over the first 12 months after implementing the solution.
9. Create A Customer-Centric Culture to Reduce Churn
A lot of companies pay lip-service to the concept of creating a customer-centric culture in the organization. But real change comes when you put resources behind it, measure it and share the results across the organization.
One highly effective idea is to connect compensation to important customer experience metrics such as churn rate. This creates an organization-wide focus on the issue.
Use customer journey analytics to monitor these KPIs in real-time and over the long term through dashboards. Share these metrics regularly across the organization.
In addition, when hiring new employees (even those in non-customer-facing roles) look for customer centric attributes and skills. Invest resources and time in training and supporting employees to be customer-focused. Give your employees the power to do what it takes to meet and exceed the customer experience standards you have set and reward those who consistently shine in this aspect.
To reduce customer churn and become customer-obsessed is a technological, organizational and cultural shift. It requires consistent effort and focus over a period of time. The results may not be immediate but they are decidedly sweet.
Customer journey analytics tools help you identify problems and at-risk customers, discover profitable customers, build quantitative links and help communicate with customers in a relevant, personalized manner.
Is reducing churn a focus in your organization? What methods are you utilizing to accomplish it? Share with us by leaving a comment below!