You’ve probably heard the word “Churn” thrown around in various different business settings. People talk about it in meetings, seminars, YouTube videos, podcasts, books, etc.
It’s a pretty popular term.
But what exactly is it? What does it mean? What does it do? Why should you care? How can it help you?
Hopefully I can answer a few of those questions for you and shed a little light on why this whole churn thing is such an important and talked about topic.
So what is churn?
“Churn” – or better said, “Client Churn Rate” – is a measurement of the rate (percentage) at which your clients/customers are stopping or canceling services with your company. It is generally used for products or services that are paid for on a recurring basis.
For example – a company like Netflix would be very interested in tracking this kind of data. Here’s how that might look for Netflix. Let’s say that there are 100 subscribers at the beginning of the month of May. Throughout the month, 10 of those customers cancel their subscriptions. To find the churn rate, you’re simply going to divide the number of cancellations (10) by the total number of active subscriptions at the beginning of the month (100). So, in this case, our churn would be 10/100, or 10 percent.
And that’s essentially churn in its simplest form!
It can definitely get more complex than this and can be very useful/insightful for various cases, but this is the basic idea.
Why Should You Track Churn Rate?
Netflix offers various tiers with corresponding price points for its service, so it might be a good idea there to track churn at a tier level. If you offer multiple products or versions of your product, it would be more accurate and offer greater insight to track churn at the product level. If your tiers, products, packages, or offerings vary greatly or are custom made to each client, you might want to look at churn as a percentage of total revenue and not focus so much on the actual number of client cancellations. It would probably mean more to see the total impact on revenue rather than number of clients. Etc. etc.
Like I said, it can start getting complicated very quickly, but this can be one of the most important and valuable pieces of data for the success of your company!
Why is that, you ask?
I’ve come up with seven reasons why you should track churn for your business. While there are many, many reasons, and this is not even close to being an exhaustive list, I hope that this can help you see why it is so important and you should be tracking it!
1. To Understand Why Customers Leave
The number one reason to track churn is to understand why customers are leaving in the first place. This particular reason might take a few extra steps (such as a client cancellation survey or an exit/offboarding call where you request feedback from the customer), but you won’t even know where to start with those extra steps if you don’t have a solid process in place to track who is leaving anyway!
Knowing which customers are leaving can help lead you to start asking why they left at all.
Is it due to a poor product experience? Is your customer service not up to par? Are they being wooed away by a competitor?
Tracking churn will help you pinpoint the root cause of why customers are leaving, so you can take steps to mitigate it.
2. To Gauge the Effectiveness of Retention Efforts
You’ve probably thought of and implemented some really cool ways to try to retain your customers. Some of those ideas might be incredible! Others might be extremely costly.. But how do you even know if it’s worth the work/cost?
Churn can help!
Retaining customers is vital for any business, but it’s also important to know if your retention efforts are actually working. After you implement a new retention effort, are you losing fewer customers than before? Are more customers sticking around for the long haul?
By tracking churn, you can get a clear picture of how effective your retention efforts are and adjust them accordingly.
3. To See the Impact of Changes
Any type of change in your company can have an impact on churn!
If you make a change to your product or pricing, it’s important to track churn to see how it impacts customer behavior. A small change can often have a big impact on churn, so it’s important to keep tabs on it. By tracking churn, you can quickly adapt to changes in the market and keep your customers happy.
4. To Make Smarter Business Decisions
Churn data can be used to inform a variety of business decisions, from product development to marketing strategy.
If you know which segments of your customers are most likely to churn, you can focus your resources on retaining them. Additionally, if you see a spike in churn after launching a new product, you can quickly adjust your strategy.
If you know where you have the least amount of churn, you can focus more efforts on developing that product line or increasing the amount of customers you have there, because it will most likely lead to the highest, long-term profits.
5. To Benchmark Against Competitors
It’s important to track not only your own company’s churn rate, but also to know that of your competitors.
This will give you a better idea of how you stack up and where you need to improve. Additionally, it can help you identify areas where you have a competitive advantage.
You won’t ever be able to completely eliminate churn. It’s going to be something that is a constant. Some industries naturally have more churn than others, and it’s just a part of figuring out how to best succeed. You might have a churn rate of 8 percent, and that might sound like a lot! Maybe it is! But, if you then find out that most of your competitors have a churn rate of 12 percent, you might reevaluate and see that you’re doing a better job than you might think!
Everything needs to be put in perspective and compared.
6. To Understand Your Customer Lifetime Value
Customer lifetime value (CLV) is the amount of revenue a customer is expected to generate over the course of their relationship with your company. It’s an important metric to track because it helps you understand how much each customer is worth to your business. By tracking churn, you can get a better idea of your CLV and make sure you’re investing in the right customers.
7. To Predict Future Trends
Churn data can be used to predict future trends in customer behavior. If you see a trend emerging, you can take steps to address it before it becomes a bigger problem. Additionally, tracking churn can help you identify new opportunities for growth. By understanding how and why customers leave, you can find new ways to keep them coming back.
Tracking churn is crucial for any business that wants to retain its customers. By understanding why customers leave, you can take steps to mitigate it. Additionally, tracking churn can help you gauge the effectiveness of your retention efforts, see the impact of changes, and make smarter business decisions. So if you’re not already tracking churn, now is the time to start.
Hopefully this article has been helpful to you and you can see why churn is such an important piece of information to know. I also hope that you can use it to figure out and fix the reasons that are making customers leave in the first place.
When you have that all buttoned down (or even before you have it buttoned down), we would love to help you expand your audience and attract more and more customers by increasing your online and digital presence. Reach out to our team, and let us figure out the best strategy to help you grow!