Editor’s Note: This post was originally published in April 2017 and was updated for accuracy and comprehensiveness on February 16, 2018.
Churn is something that all businesses, big and small, have to deal with. While you are busy acquiring new customers, losing some of your old customers is bound to happen. Your churn rate is the metric that defines just how many customers you are losing.
While it can be unpleasant to think about, understanding churn and the conditions that cause it will have a huge impact on how your customers relate to your brand. After all, the first step to minimizing your customer churn rate is understanding it.
How Do I Calculate Customer Churn Rate?
At its simplest form, overall churn is the amount of customers you lost divided by the total amount of customers. This division allows you to see “churned customers” as a percentage of your customer base.
How do you figure out if and when a customer is lost? To come up with an estimate, segment your customers by purchase frequency. Then, justify a point at which your data tells you that if they haven’t purchased in a certain amount of time, they are likely to never return.
For example, if after a year of inactivity 90% of customers never return to make another purchase, then you can use 1 year of inactivity as your benchmark for a customer that is considered lost.
Lifetime churn is a powerful statistic but for ongoing analysis it may be easier and more meaningful to calculate churn on a per-period basis. To calculate this, you need to find out how many customers you’ve lost during a given period.
How to Calculate How Many Customers You Lost
To do this, at the beginning of the period take your amount of active customers (customers that have purchased in the past year), add the amount of brand new customers, and subtract the amount of active customers at the end of the period. For example, if you had 100 active customers at the beginning of the period, gained 30 new ones, and at the end you have 125 active customers, then you’ve effectively lost 5 customers.
This shows you that although you grew your customer base from 100 to 125 this quarter, 5 of your customers still churned. Some analysts get distracted by growth numbers and fail to examine the churn under the surface. To calculate your churn rate for the period, you would return to the per period formula, which with our variables would give us:
So there you have it. Churn rate the quick and easy way. Now that you’ve got your churn rate we can focus on ways to decrease it.
2 Ways to Decrease Churn Rate
Now that we’ve discussed how to calculate your churn rate, let’s attack how to decrease it and keep more of your customers coming back to your store.
1. Delight Your Customers
The most fundamental way to decrease your churn rate is by keeping your customers happy. While you definitely want to avoid letting them down, you have to look for areas to go over and above your customer’s expectations and delight them.
Impressing your customers is an important factor in the level of customer satisfaction your brand evokes in your target market. Many marketers view customer satisfaction like a light switch; something that is either on or off but in truth, customer satisfaction is more like a spectrum.
As you gain higher levels of customer delight, customers start to perform positive, value affirming actions like repeat purchasing or becoming brand ambassadors. On the other hand, when your brand evokes lower levels of satisfaction, your customers are at risk of churning.
Whether it’s information they find in the pre-purchase phase, your product itself, the rewards in your loyalty program or even the support they receive when something goes wrong. Each time a customer interacts with your brand you have an opportunity to move them further along the customer satisfaction spectrum.
2. Create Switching Costs
Any cost that a customer incurs by trading one product or service for another is referred to as a switching cost. Higher switching costs naturally reduce churn by reducing the likelihood that a customer will switch to a substitute product instead of returning to your brand.
Traditionally marketers have shied away from creating switching costs for fear of “imprisoning” their customers and creating a forced commitment rather than genuine affection for the brand. To see the dangers of this kind of customer relationship you don’t have to look much further than the telecommunications industry where switching costs take the form of harsh financial penalties.
That being said, switching costs don’t have to feel like a prison! In fact, they can actually be positive elements of your brand that help build relationships with your customers. Features like personalized data can be switching costs that make a customer appreciate the product they currently use.
A great way to generate positive switching costs is through implementing a loyalty program. By rewarding your customers for purchases you’re providing them with value that acts as a switching cost. This means that if customers choose to leave you for another brand, they’ll be giving up their points, or their progress towards some really awesome rewards. The effect of rewards as a switching cost can be a subtle but powerful tool in effectively reducing your churn.
How to Learn From Your Churn
They say that all good things must come to an end, and this idea extends to customer relationships. Churn is a natural part of doing business and there isn’t a brand on earth that boasts a 0% churn rate. However, by understanding your churn rate, delighting your customers, and creating switching costs, you can ultimately reduce the impact that churn has on your business.