Customer Churn Rate: Definition, Measuring Churn and Increasing Revenue
As long as customer acquisition keeps consuming marketing efforts, your customer churn rate will continue to rise. When left unchecked, customer churn not only wastes your acquisition efforts, it also reduces revenue and narrows your profit margins.
In order to increase customer spending and overall revenue, reducing churn through Retention Marketing is crucial for your business success. Measuring your churn rate and understanding your ability to retain customers is the first step towards reducing it.
Define Churn Rate
Customer churn can be defined as when a customer unsubscribes from your service, ceases to purchase from you, or simply stops engaging with your brand. In other words, your customer leaves you for a competitor.
Adobe reports that online retailers spend nearly 80% of their digital marketing budgets acquiring shoppers. But where is an e-commerce company’s budget better spent?
Research continues to prove that existing customers are worth far more than newly acquired customers. In Bain & Company’s Prescription for Cutting Costs paper, they found increasing customer retention rates by 5% increases profits by 25% to 95%.
So now we’ve established the importance of customer retention and reducing churn, let’s work out how to measure your customer churn rate.
How Do I Measure My Customer Churn Rate?
A customer churn rate allows you measure how many of your customers leave within a specific time period. Taken as a percentage, a customer churn rate is often measured on a monthly, quarterly or annual basis.
Before you measure your churn rate, it’s important to first define what constitutes an actual churn event for your business. For a software as a service (SaaS) company it makes sense to measure churn based on the length of a subscription/membership. You define a churn event as when a customer does not renew or cancels their subscription.
For non SaaS-based companies though it can be a little more unclear. For example, a running shoe retailer who may predict the average customer would repurchase within one and a half to two years when the shoe loses its support; however, for some customers who are athletes, their shoes get worn out and lose support at a faster rate. This is where data science and predictive analytics can drive accuracy: by analyzing customer behavior, a clear rule can be set to define churning customers.
Once you’ve clearly established how you identify your churned customers, you can then calculate your churn rate.
The basic formula for churn rate is:
Churn Rate= # of customers lost in a period/#of customers at the beginning
Let’s say you want to measure customer churn over a month period. As subscription company with 500,000 customers, you have 15,000 customers leave in the month of September.
A 3% monthly churn rate may not seem like anything to worry about initially. However, if you calculate it on an annual basis, that 3% monthly rate equals to 36% of your customer base lost. So in this case, that equates to 180,000 lost customers per year.
Measure your customer churn rate both before and after implementing your retention campaigns. This allows you to measure your campaign’s effectiveness and make adjustments when needed. In other words if your customer churn rate reduces, your campaigns are effective. If it increases then you need to be doing something different.
You Can Present Your Churn Rate As…
- Number of customers lost
- Value of recurring business lost
- Percent of recurring value lost
In addition to measuring your customer churn rate, track your win-back rate. This allows you to measure the number of customers who came back.
For example, Retention Science worked with Dollar Shave Club to reduce churn by reactivating canceled subscribers. When our platform personalizes messaging based on each customer’s reason for leaving, we reengage 50% of customers who unsubscribe. Using this technology, Dollar Shave Club saw a 7x increase in their win-back rate.
To learn more about why customers leave, and how to prevent it by using a scientific approach to eliminate customer churn, download The Scientific Guide to Eliminating Customer Churn