Customers vary in their interests and behaviors, and they can occasionally be picky consumers that are satisfied one day and switch moods the next day. As a result, they stop paying for their subscription-based plans for various reasons. In light of this, it's critical for enterprises of all sizes to measure their customer churn rate or keep tracking churn. Therefore, it is essential to get in touch with each of them regularly to retain them in your customer base.
Examining; how many existing customers are moving their purchases elsewhere is the first step in understanding this insight. You can dive further to discover trends among departing consumers, spot areas for improvement, reduce churn, and enhance retention rates. Although -businesses see customer churn as a sign of problem rather than progress, it's among the most crucial indicators to monitor. (After all, a firm wouldn't exist without its clients).
Is retaining customers a top priority for your business? If yes, you have to be aware of the salient strategies to deploy at the right time for each buyer or customer. In this article, we will explore; what is the customer churn rate and how to calculate and reduce it effectively. Are we ready? Let's dive in!
What Is Customer Churn Rate?
Customer churn rate is the proportion of a company's clientele that discontinue trading with it during a predefined timeframe. The average churn rate is a potent indicator of a brand's strengths when compared to other important customer retention rates indicators.
Based on the mode of operation in an online store, business owners can deploy quarterly or monthly churn rate models to check if churned customers exist within a specific period. However, no matter the strategy any enterprise adopts, customers will always come and go, even though every business -aspires to have a customer base of devoted clients and a churn rate of 0%.
What Is a Good Customer Churn Rate?
The optimum churn rate would've been zero, meaning that a company isn't losing existing customers, but this will never be the case. For emerging startups or small and medium-scale businesses, a good churn ranges from 15% to 10% within the first year. However, the monthly churn rate ought to be in the range of 3 to 5 percent. Larger companies that cater to the consumer market -typically see lower net churned customers than their smaller competitors.
How do You Calculate Customer Churn Rate?
To ascertain your customer's churn rate, select a time frame to evaluate and note the following parameters;
- Customer count at the beginning of period (B)
- Number of existing customers lost within that period (C)
Now, to calculate the customer churn rate (D) as a percentage, use the formula below;
Customer churn rate: (C/B) x 100% = D
Example 1: Alpha Beta Enterprises had 300 existing customers at the beginning of the month and lost 21 customers by the end of the same month. Calculate the average churn rate.
Solution
Total number of customers (B) = 300
Number of customers lost within the period (C) = 21
Using the formula: (C/B) x 100% = D
Where C = average churn rate
D = (21/300) X 100% = 7%
Note: The above -straightforward method works perfectly for every time frame, be it 2-years, quarterly, or even a month. However, firms could run into circumstances requiring more complicated churn rate calculations.
For A Rapid Growth Company:
The churn rate "formula" above -took into consideration; an overview of the number of clients a business had at the start of a period and the number of subscribers who departed throughout that period mentioned above. However, for businesses that are expanding rapidly, the number of users at the beginning and end of the month may fluctuate significantly. To this effect, a company may have a significant intake of new clients that makes up for its apparent high churn rate.
Surprisingly, there's a technique to modify the standard "churn rate formula" to account for this faster growth rate. For accuracy, companies must integrate the following parameters;
- Number of clients at the beginning of the period (A)
- Number of "new clients" at the end of the period (B)
- Total Number of churned customers within that period (C)
The formula below is suitable for calculating the customer churn rate (D) in this case;
Customer churn rate formula: (C / [ (A+B) / 2 ] ) x 100% = D
Example 2: Netflix Incorporation had 38,000 customers at the start of November. In the course of doing business within the month, 9,500 new customers signed up for their subscription-based monthly video-streaming plans, and a total of 3200 customers unsubscribed. Calculate the customer churn rate.
Solution
Number of churned (unsubscribed) customers (C) = 3200
Number of clients at the start of November (A) = 38,000
New clients within the period (B) = 9,500
Therefore, customer churn rate = (3,200 / [ (38,000+9,500) / 2 ] ) x 100% = D
D = (3,200 / [ (47,500) / 2 ] ) x 100%
D = (3,200 / 23,750) x 100%
D = 13.47%
The customer churn rate for Netflix Incorporation = 13.47%
However, if we had used the first formula that doesn't account for new customer acquisition, the average churn rate would have been;
D = (3,200/38,000) x 100%
D = 8.42%
How Will Seasonal Swings Affect Average Churn Rate Calculations?
Market seasonal variation is another element that can easily distort customer churn rates in addition to rapid growth. When determining the customer churn rate for a seasonal firm, pick a time frame to analyze and note the following indicators:
- Number of times clients you served throughout the peak period (A)
- The rate of churn during the peak period (B)
- The total number of clients you served all through the slow period (C)
- The churn rate during the slow period(D)
Therefore, for cyclical or seasonal market periods, the average customer churn rate is computed as :
{ [ (A x B) + (C x D) ] / (A+C) } x 100% = E
Where E = Customer churn rate for seasonal periods.
Example 1: Mcdonald's Eateries sells pastries on University campuses in the United States. During this period, whenever school is in session, it normally has 2000 loyal students (customers) between January to April and a student churn rate of 7%. When the Universities go on holidays, over 83% of the existing customers will churn. However, since a portion of students stays back in school to complete their internships or work-study programs, there's a reduced churn rate of 4%.
In July, the average number of college students on campuses skyrockets to 250 or greater and remains at that level when school is in session. Compute the average churn rate of McDonald's Eateries.
Solution
Number of students served throughout the peak period (A) = 2,000
The rate of churn during the peak period (B) = 7%
The total students served all through the slow period (C) = (100 - 83)% of 2000 = 0.17 x 2000 = 340
The churn rate during the slow period(D) = 4%
E = { [ (A x B) + (C x D) ] / (A+C) } x 100%
E = { [ (2,000 x 0.07) + (340 x 0.04) ] / (2,000+340) } x 100%
E = { [ (140) + (13.6) ] / (2,340) } x 100%
E = 6.56% (McDonald's church rate for the period).
Note: In this instance, an enterprise will get a more accurate picture of the company's growth since the existing customer base is in two groups; customers in peak periods and those in slow periods.
How do You Calculate Revenue Churn?
Most firms examine their revenue churn rate to their customer churn rate because -customers generate varying amounts of revenue every month. To determine the revenue churn rate, select the time frame for measurement and note the following parameters;
- Total churned revenue (A)
- Total revenue (B)
For the revenue churn rate, use the formula below:
(A/B) x 100 = C%
Where C = revenue churn rate.
How do You Reduce Customer Churn Rate?
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Identify Clients at Risk
Understanding which clients are much likely to disengage is crucial if you want to concentrate on retaining customers.
Identify patterns in the statistics "you have access to" -that might point to a customer who may likely leave. Some risk indicators may include the interval since they last purchased, browsed your website, recurring negative reviews, e.t.c.
Engage those consumers with attractive offers or improved support once you've determined who is likely to disengage. By doing that, you will win back their commitment and trust. Here are 10 Tips To Boost Your E-commerce Customer Experience
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Identify your top valuable clients
Retailers must prioritize their most valuable buyers and go above and beyond to ensure they receive all the best incentives or services you have agreed to offer them. In reality, these are customers your enterprise wants to hang onto the most since they provide the most money. As such, give high-value customers the topmost priority.
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Provide rewards
Companies should offer incentives like special offers and discounts to consumers who are likely to leave, as it will be a smart move. The most successful strategy for lowering churn is providing rewards and special deals. However, it would be best to estimate your risk-to-reward ratio before giving out such incentives or bonus offers.
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Choose the Appropriate Audience
Regardless of how intelligent your retention strategies are, they can all fail if you are drawing an unsuitable group of customers. In actuality, you run the danger of bringing customers that are not interested in the value your business offers -when your first contact with the buyers is about "cheap deals." These "free bonus" hunters; are the most prone to disperse anytime the Incentives are no longer there.
Targeting esteemed customers who immensely value the premium worth of items and understand the benefits of spending money on high quality is preferable. It's better to concentrate on those groups of purchasers.
Learn More: How to Know Which Customers to Target
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Provide an excellent customer service
You already know this advice, don't you? It is, indeed, the much more obvious way to retain customers in your eCommerce business. The most common reason for unsatisfied customers is subpar customer service. Ineffectual and rude employees and intolerably delayed service, according to a report by Oracle, are two major reasons why customers quit dealing with a business.
What Next?
For retaining customers and providing lasting customer satisfaction, It's critical to anticipate customer churn. Enterprises can take decisive measures before it becomes too late to keep the customer. Every retail company has an additional revenue source when it can foresee when a customer is at great risk of leaving when the time exists to take action.
Are you evaluating your customer churn rate today? Please do so as to remain afloat.
