Customer churn or customer churn: definition, churn rate, analysis, prediction, tips to avoid it

Prevent customer churn or customer cancellations by using QuestionPro's intelligent and innovative Customer Experience Management solutions. 

Customer Churn: Definition

Customer churn is the phenomenon in which a company's customers no longer purchase products or services or no longer interact with the company. The English term “churn rate” is made up of the terms change and turn. The customer churn rate is a KPI that represents the mathematical calculation of the percentage of customers who are actually or are unlikely to make another purchase from a company. The customer churn rate is an important indicator for any business as acquiring new customers could cost almost seven times more than retaining existing ones. A high level of customer churn is a clear alarm signal for every company and customer retention strategies should be decided immediately in order to avoid a further increase in customer churn and thus enormous losses in sales.

The opposite of the churn rate is the retention rate, i.e. the customer loyalty rate. Both KPIs added together equal 100% when measured over the same time period.

Possible reasons for customer churn

It is essential for every company to find out why customers are leaving in order to counteract this. There are many different reasons why customers leave. A rough distinction can be made between competition-related, company-related or customer-related reasons. Often these reasons are interdependent.

Competitive reasons for customer churn

Competitive reasons for customer churn can include better product quality, cheaper pricing, a better image or better customer service on the part of your competitors. It is therefore important to always keep an eye on your competitors and to carry out market research on a regular basis!

Company-related reasons for customer churn

By company-related reasons we mean that the cause of customer churn is to be found within the company itself, such as an increasingly poor image, lack of service or additional services, unfriendliness, slowness, poor accessibility, inadequate complaint management or unfulfilled expectations from advertising promises.

Customer-related reasons for customer churn

However, the reasons for customer churn can also be on the side of the consumers themselves, such as increasing "saturation", lack of purchasing power, lack of interest or shift of interest, changed life circumstances, etc.

What does customer churn management mean?

Churn management refers to all activities of a company that are aimed at preventing customer churn. Those responsible for churn management investigate the causes of customer churn on the basis of a broad range of data and then develop strategies and concepts for action to avoid customer churn. Even today, customer value plays a central role in churn management. Measures to prevent customer churn are primarily developed for customer segments with the highest customer value, i.e. those customers that generate the greatest turnover for a company. However, those responsible for churn management today are also increasingly developing strategies to prevent customer churn in customer segments that generate below-average sales. This is especially true in the consumer segment of online business, where automation has made it quite easy to implement customer retention measures.

Calculating the customer churn rate

In its simplest form, customer churn rate is the number of customers you lost in a given period divided by the total number of customers:

Customer churn rate = number of customers lost/total number of customers (period) x 100

Typically, periods of one month, one quarter or one year are chosen.

Using this formula is very simple, but it becomes more complicated when you need to calculate customer churn over multiple time periods.

It must be decided which point in time will be used as a basis, for example either the beginning or the end of a month. The problem is that the beginning and end are only a part of customer behavior and comparisons over different time intervals can lead to misinterpretations.

As a result of these inaccuracies, the churn rate formula is adjusted as follows:

With the help of these adjustments, customer losses are adequately mapped to the time interval.

Example of calculating the customer churn rate

For example, if you acquire 10 customers each year who buy 100 EUR worth of goods and services over a period of 3 years at a churn rate of 0%, you generate (100 x 10) + (100 x 20) + (100 x 30) = 6000 EUR.

However, things get more complicated when customer churn kicks in. Now let's take an average churn rate of 30% and suddenly you only have a turnover of (100 x 10) + (100 x 17) + (100 x 21,1) = 4810 EUR.

In other words, customer churn cost the company € 1.190, which costs the company about 20% of total revenue over a three-year period.

Many companies spend a significant amount of budget on acquiring new customers, but much less emphasis is placed on ensuring that customers continue to make repeat purchases. Some experts even suggest that as a business grows, there should be more focus on higher customer retention and lower churn rates.

In addition, higher churn also has a visibly negative impact on a company for the following reasons:

• The costs of acquiring new customers are significantly higher than the costs of retaining customers.
• The sales rate to an existing customer is, on average, 60% higher than that of customers who are unfamiliar with your brands, services, or products, or who are new to them.
• Existing customers, if satisfied, are an excellent source of brand promotion through the organic spread of 'word of mouth'. In other words, they become your brand promoters and recommend your brand to others, increasing your overall customer base without you having to spend more on customer acquisition.
• A high customer churn rate means that you also lose these brand promoters and it can even happen that customers who have left the company report negatively about their experiences with your company in social networks or rating portals.

So, for any business that wants to make additional profits, having a low churn rate and high customer satisfaction is crucial.

What customer churn rate is normal – when should you take action?

In no company in the world is every customer completely satisfied at all times, so a certain level of customer churn is normal. Optimally, even if only hypothetically, a churn rate is zero percent.

The question of how high the customer churn rate in a company can be cannot be answered in general and depends primarily on the type of products or services offered, the industry and the type of customers. Companies that depend heavily on regular customers, for example, should be more concerned about a lower customer churn rate than, for example, companies that benefit from walk-in customers.

In order to be able to estimate your own churn rate (customer churn rate), you can use the following rule of thumb:

A “normal” customer churn rate is up to ten percent, and for digital products and services up to fifteen percent. As a target, you should aim for a churn rate of five percent.

Importance of Predicting Customer Churn

As a company, being able to predict customer churn is the first step towards avoiding customer churn. If you are able to predict customer churn, you are also able to prevent it through appropriate measures. And avoiding customer churn is of utmost importance for every company.

• The fact is that acquiring new customers is costly and involves a lot of effort, while preventing customer churn is far more cost-effective.
• Competition is increasing significantly, products are often similar or even interchangeable. The probability of customer churn is thus increasingly growing. Therefore, every company should have strategies for long-term customer retention.
• There are many different factors that lead to customer churn and it is important for companies to identify, understand and eliminate each factor so that customers stay connected to the company.
• Identifying these factors for customer churn is relatively easy with the right Customer Experience Management tools. Regular customer surveys and touchpoint analyses along the entire customer journey are the most important step here.

If you want to prevent customer churn, you need a broad database for prediction. With QuestionPro's CX dashboard, you have an overview of data from customer surveys and touchpoint analyses in real time and can therefore predict and recognize tendencies towards customer churn.

How to predict customer churn?

The keyword here is: Predictive Analysis (Churn Prediction). To do predictive analysis, you need data. And lots of data at that. That's why it's essential to regularly ask your customers about their satisfaction, consistently along the entire customer journey and at virtually all points of contact. The more data you gain, the more precisely you can predict customer churn.

Example of a possible customer churn prediction

When you carry out touchpoint analyses, you determine so-called key performance indicators at the contact points, such as the Net Promoter Score, Customer Satisfaction Score or the Customer Effort Score. In our customer survey blog, we have clearly illustrated the principles of measuring the KPIs. If these values fall, there is a high probability that customer churn is imminent. But there are other indicators of a growing likelihood of churn.

Net Promoter Score: Probably the most important indicator

The Net Promoter is a widely used measurement method within Customer Experience Management in fact it is almost ubiquitous and has gained a huge following around the world - primarily because of its simplicity and, just as importantly, as a measure of predicting customer loyalty - and therefore profitability. The NPS, then, primarily measures customer loyalty, with just one question: "Would you recommend our brands/products/services to close friends and acquaintances". If customer loyalty is consistently high, you most likely have no significant or only moderate customer churn to worry about. However, if the score drops, this means that your customers are less loyal to your company and would also buy from the competition. So if the NPS is falling, you should find out why. There are reasons why loyalty is decreasing.

• Has the product quality decreased?
• Is the service no longer as friendly as it used to be?
• Does the competition have better offers or better pricing policies?

Reduce customer churn rate: How you can prevent customer churn with simple methods. Tips from QuestionPro

There are many ways to prevent customer churn. We have summarised some practical tips for you on how you can reduce your churn rate. It is important that you always have certain key figures in mind, which you can determine by means of customer surveys and touchpoint analyses along the entire customer journey. These key figures provide you with information about the likelihood of customers leaving in the near future.

• Always keep a close eye on your Net Promoter Score (NPS): The Net Promoter Score not only helps you identify your loyal customers (promoters), but also the dissatisfied customers (detractors). You can reduce your churn by tracking your NPS score sustainably.
• Question a declining Net Promoter Score and ask your customers questions about growing dissatisfaction.
• If possible, contact your customers immediately in the event of bad reviews as part of a survey and clarify any differences “in-time”.
• Customer Effort Score (CES): The Customer Effort Score (CES) helps you understand how much effort your customers have to put in to reach a certain goal when interacting with your company. The lower the Customer Effort Score, the better your customer service. With better customer service, customer churn should be lower.
• Ask your customers regularly about their satisfaction: It is extremely important for a company to know whether customers are satisfied with its products or services. With innovative survey technologies, you can ask your customers wherever they come into contact with your company (touchpoint analyses).
• Keep your loyal customers satisfied: Always give your loyal customers good reasons to remain loyal to you. Loyal customers not only buy from you regularly, they also recommend you to others. Offer loyalty or reward points, birthday/anniversary discounts, redeemable reward points, etc.
• Provide exceptional customer service: Make it impossible for your customers to go to your competitors. excellent customer service is the key to customer loyalty. If a company offers exceptional customer service, there is less chance of customer churn. Be better than your competitors. Don't just sell a product, make sure you add value to it!
• If you are present on social media platforms, never leave negative comments or complaints in the comment columns unanswered. Respond immediately and address the issue exactly. Do not use phrases or general text modules and certainly do not refer to the possibility of using a contact form on your website. Your customers want to communicate with you on the spot. Ask your customers if they can send you a private message within the platform.
• Monitor review portals such as Yelp or Google Business and respond on the spot as well by responding to negative reviews and comments and offering solutions.

You should also track these indicators to prevent customer churn

Customer retention is an excellent measure to check how loyal your customers are. Customer retention is important to avoid high customer acquisition costs, spread positive word of mouth and maintain a steady flow of sales. And, of course, to prevent customer churn. Customer churn not only hurts your sales, but also creates a bad online reputation. Be sure of one thing: if customers have a negative experience with your company, services or products, they will inevitably post it on review portals. The following five indicators will help you determine where your company stands when it comes to the issue of customer churn!

Average time of processing

How long does it take your staff to answer customer enquiries when they contact you through a variety of channels? How successfully do you resolve complaints or support requests? And within what time frame? Our tip: Acknowledge enquiries as early as possible, even if you don't have a solution ready immediately! The processing time of customer enquiries is crucial for customer satisfaction and accordingly for customer loyalty. Poor customer service, long waiting times and disinterest in finding a solution will lead to customer churn and significantly damage your company's reputation. Make sure that you provide your customers with as many contact options as possible without them having to search for them for a long time.

Number of repeat purchases

Companies that offer periodic services, such as newspaper publishers or streaming services, determine customer retention and satisfaction by how long their customers stay subscribed. This is a simple and excellent metric. For companies that sell products, measuring customer loyalty becomes more difficult. Here, the number of repeat purchases is a proven metric for determining customer loyalty. This is the way your customers tell you they are satisfied. Talk to these customers to understand why they love and appreciate your products. Market research methods, as well as touchpoint analysis and customer surveys, will help you determine the relevant data. A key element for repeat purchases is to make your customer service and complaint management a great experience for your customers. This way, customer churn doesn't stand a chance, because no customer will turn their back on your company if you not only offer good products, but also provide excellent service and support.

Consumer recommendations

Your happy and satisfied customers are your greatest advocates and promoters. They are the best salespeople all businesses hope for. Satisfied customers will tell their family and friends about your products, services and offers. This doesn't cost you anything and actually gives you more sales through referrals. The costs of acquiring new customers are immensely high and often do not bring the desired ROI. Rather focus your efforts on keeping your existing customers happy and you will have a steady stream of customers through referrals. You can use all kinds of ways to get your customers to recommend your brand. Creating incentives helps support this form of advertising. If you create discounts and rewards, your customers will inevitably spread them around as they see themselves as the bearers of a positive message.

Website statistics

Many companies strive to attract new customers through their websites as well as social media channels such as Facebook, Instagram, Twitter, etc., but do not examine the traffic patterns on their own website. It's important to understand which pages your customers visit most often, how often the Recommend button is clicked, and how much time your customers spend on your website. These statistics help you improve user experience and increase website visitors.

Because positive customer experiences are often shared on social networks. If you run an e-commerce portal or ordering website, you should look at how many items were added to the shopping cart, how many items were discarded, or how smooth the overall shopping experience was on your website. QuestionPro CX is a renowned Customer Experience Management platform and can help you with all your customer initiatives. A really well thought-out website with constantly new information, lots of positive customer experiences, simple ordering processes and a high diversity of payment options as well as constantly new offers and great usability prevents customer churn.

Net Promoter Score

The Net Promoter Score is one of the most important indicators of customer churn. If your Net Promoter Score has a good value, the probability of high customer churn is rather low. You should pay particular attention to your passive customers and detractors. Passive customers leave at the first opportunity, critics have already left and are looking for alternative products and brands. If you want to prevent customer churn, then you need to regularly determine the Net Promoter Score and draw your conclusions from the results. At which customer touchpoints do your customers have negative experiences? Where is your service poor? Where do your customers have to go to great lengths to get a problem solved? Once you have found this out, you can initiate improvements at the crucial points and thus prevent customer churn.

→ Net Promoter Score

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KEYWORDS OF THIS BLOG POST

Customer churn | Customer churn | Churn rate