Churn rate: What is it?
Customer Churn Rate is the mathematical calculation of the percentage of customers who are unlikely to buy from a company again. Customer churn is the phenomenon whereby a company’s customers stop buying from or interacting with it. High churn means that more customers no longer want to buy goods and services from the company.
Customer churn occurs when customers decide not to continue buying products/services from an organization and terminate their association. It is an integral parameter for the organization, as acquiring a new customer can cost almost 7 times more than retaining an existing customer.
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How is the Churn Rate calculated?
Formula:
This is a simple formula, the churn rate is the percentage that results from dividing the number of lost customers divided by the total number of customers.
Churn Rate = N. customers lost / N. total customers x 100
A high Churn Rate percentage can be an obstacle for an organization that is growing exponentially, so a retention strategy must be decided to avoid increasing churn rates.
Any business experiences churn at some point. However, there are a few things that can be done to prevent churn rate from occurring.
Find out why customers abandon
Knowing the reasons that cause a customer to abandon your website is the first step in being able to fix it. Consider asking customers who have churned to find out their reasons.
Provide support resources
If customers feel that they are not getting the most out of your product or don’t fully understand it, they may abandon it altogether. Depending on your industry, you can, for example, offer digital resources on your website or blog posts.
Target the right audience for your products
Reorient your marketing efforts to target the type of customers most in tune with your products.
Pay attention to the signs that a customer is likely to leave
Have they been offline for a long time, and are their sessions getting shorter and less frequent? Knowing the answers to these questions can indicate that a customer may be about to leave, giving you the option to intervene to prevent that from happening.
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Churn rate types
Voluntary Churn: This type of churn occurs when a customer consciously decides to stop using the service or cancel their subscription. Reasons may include dissatisfaction with the product, finding a better option, or simply no longer needing the service. For companies, it is crucial to identify these reasons through surveys or analysis in order to implement improvements.
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Involuntary Churn: Occurs when the customer stops using the service without direct intention to do so, such as in cases of automatic payment failures, expired credit cards, technical problems, or unwanted cancellations. This type of churn may be easier to prevent if automatic reminders are implemented or the payment data update process is facilitated.
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Active Churn: Refers to customers who actively decide to cancel their account or subscription. In these cases, customers are aware of the process and make the decision explicitly, which is usually related to customer satisfaction or changes in their needs.
Passive Churn: This type of churn includes customers who simply stop using the service without taking any specific action, such as cancelling their account. For example, a user who stops using an application or platform but does not cancel their subscription. Sometimes this churn is less visible, but it is just as detrimental to long-term retention.
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Churn by Competition: This type of churn occurs when customers decide to switch to a competitor, usually because they perceive superior value in another company. It is important for companies to be aware of their competitors’ movements and adjust their offerings according to customer needs.
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Life Event Churn: This occurs when a customer leaves the service due to a significant change in their life, such as moving, changing jobs or personal circumstances. This type of churn is more difficult to predict and avoid, as it is often beyond the company’s control.
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Importance of Churn Rate:
Customer satisfaction indicator: A high churn rate is usually an indication of customer dissatisfaction. If many abandon the service, it is a sign that something is not working properly, whether it is the product, customer service or value for money. This allows companies to identify problems and improve the customer experience.
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It affects profitability: It is much more expensive to acquire new customers than to retain existing ones. A high churn rate forces companies to invest more in customer acquisition to maintain revenue, which reduces profitability and can compromise long-term growth.
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Revenue forecasting: The churn rate helps forecast future revenue losses. If a company fails to reduce its churn rate, it will face a steady decline in revenue, which is especially critical in business models based on subscriptions or recurring customers.
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More effective retention strategies: Measuring churn allows companies to identify which types of customers are most likely to churn and gives them the opportunity to implement corrective actions, such as service improvements or offer personalization, to reduce churn.
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Direct relationship to Customer Lifetime Value (CLV): High churn reduces the value a customer brings throughout their lifecycle. This negatively impacts the company’s ability to generate sustainable revenue over the long term.
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Relationship to Other Metrics:
Customer Lifetime Value (CLV): The churn rate directly affects CLV, which measures the total value that a customer generates during his entire relationship with the company. The higher the churn rate, the shorter the time customers remain active, which reduces CLV. Therefore, a high churn rate has a negative impact on the long-term value a customer can bring.
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Retention Rate: The churn rate is the inverse of the retention rate. While retention rate measures the percentage of customers who remain loyal to the company, churn rate measures the percentage who leave. Reducing churn directly increases customer retention, which is vital to maintaining a strong customer base and increasing growth.
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Cost of Customer Acquisition (CAC): If the churn rate is high, the company will have to invest more in acquiring new customers to compensate for the losses, which increases the CAC. This may be unsustainable if the churn rate does not decrease, as the cost of replacing departing customers may exceed the revenue generated by new customers.
Net Promoter Score (NPS): A high churn rate is usually correlated with a low NPS, which measures the likelihood that customers will recommend a company to others. If customers are dissatisfied and leave (high churn), they are likely to be unwilling to recommend the service, negatively affecting NPS and thus brand perception.
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Customer Growth Rate: The net customer growth rate is affected by the churn rate. Even if the company attracts new customers, high churn can cause net growth to be low or even negative. Therefore, it is crucial to maintain a low churn rate to ensure positive growth.
These metrics, combined with churn rate, allow companies to have a more complete picture of the state of their customer relationship and adjust strategies to improve retention, satisfaction and sustainable growth.
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Success stories
1- Netflix
Netflix is one of the best known examples in the entertainment industry for its ability to reduce churn rate. Through an approach focused on user experience, Netflix has implemented several strategies to improve customer retention, such as the use of personalized recommendation algorithms that ensure that users receive relevant and engaging content. In addition, Netflix constantly optimizes its platform, improving service quality and content availability, which reduces the likelihood of churn. Its ability to retain subscribers has been key to its global success.
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2-Spotify
Spotify has successfully worked to reduce its churn rate through a personalization-based approach. Like Netflix, Spotify offers highly personalized music recommendations based on its users’ listening habits. It also implements exclusive offers for new subscribers and promotions to retain users who are about to cancel their subscription. Its focus on continuously improving the customer experience, both in the free and premium versions, has enabled it to maintain a strong and loyal user base.
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Churn rate frequently asked questions
Reducing churn rate is crucial because keeping existing customers is more profitable than acquiring new ones. In addition, high churn can negatively affect a company’s financial stability.
High churn means loss of customers and, therefore, a decrease in recurring revenues. This may require higher investments in the acquisition of new customers to compensate for this loss.
