Customer Churn: How to Calculate, Predict & Reduce It?
- Last Updated: 06 Dec 23
- 12 min read
Customers are the driving force that pushes your business forward. And it’s never a good thing when you lose your customer.
However, gaining and losing customers is a recurring process in business. But that being said, it’s never wise to overlook the customers your business is losing.
Retaining existing customers is the greatest growth hack in today’s competitive market. Several studies have also shown that retaining a customer is several times cheaper than new customer acquisition.
For a business to maintain steady growth and eventually succeed, it should work to stop losing their client and customers. And to do that, the business should focus on an important customer metric, i.e., customer churn. You might also want to learn more about:
- What is Customer Churn or Churn Rate?
- How to Calculate Customer Churn Rate?
- How to Predict Customer Churn?
- Benefits of Customer Churn Using Machine Learning
- Ways To Reduce Customer Churn
What is Customer Churn or Churn Rate?
Customer churn (AKA customer attrition) refers to the percentage of customers lost by a business over a specific period. It gives an idea about the rate at which your valued customers stop using your products or services. The churn rate is also an indicator of how you are holding up with your customers.
In SaaS and subscription-based services, it’s easier to measure and visualize churn rates. By measuring the active users over a certain time, you can get a rough idea of customer churn as well as customer retention and satisfaction.
Measuring, understanding, and reducing churn is essential to ensure the steady growth of your business. Letting go of the customers won’t be fruitful for business in the long run. According to a study, recruiting a new customer can be 11 times costlier than retaining the ones you already have.
Churn Rate vs. Retention rate
Since churn rate and retention rate are used in a similar context, it may be hard to identify the differences between the two.
Churn rate is a measure of customers lost over a specific period, whereas retention rate deals with the customers who continue using your products and services. So to explain in simple words, the retention rate is the inverse of the churn rate.
Customer retention is really important for businesses to generate revenue and maintain sustained growth. And for that, it requires keeping the customer churn to the minimum.
How to Calculate Customer Churn Rate?
To Calculate the customer churn rate in business, first of all, Allocate the total number of customers in a month or year, and the number of customers lost in a specified period. Divide the customers lost in a specific period by the total number of customers in a month or year, and multiply it by 100 to derive the churn rate in %
Customer churn is an important factor to assess and estimate how well you are performing. A sustained high churn rate can be an indicator of the downfall of the company. So it’s crucial to calculate the churn rate and identify the possible issues.
Customer-based Churn rate
Customer churn rate is a measure of the lost customers in a specified period over the total number of customers available. It can be calculated by using the following formula:
An Example of Customer-based Churn Rate: Suppose a SaaS company had 500 customers initially but lost 50 of them in the first quarter of the fiscal year. In that case, the churn rate for the first quarter of the fiscal year will be 50 / 500 * 100 = 10%.
Revenue-based Churn Rate
Sometimes, the churn rate is measured in terms of revenue. Such a revenue-based churn rate is a measure of revenue lost in a specified period compared to the overall revenue generated.
An example of a Revenue-based Churn Rate: Suppose 50 of your customers subscribe to your services at $20/month and spend $25 on average on the in-built features. So that case, your revenue will be ($20 x 50) + ($25 x 50) = $2,250.
If you gain 10 new customers in the next month and now have the customers, who spend $10 on average, your total revenue will be ($20 x 60) + ($10 x 60) = $1800.
In this case, the revenue churn rate calculation can be done as (2250 – 1800) / 2250 x 100% = 20%.
So, customer churn does not tell the whole story. Despite having customer growth, there can still be a significant revenue churn. Hence, it should also be taken into consideration to calculate the performance of the business.
How to Predict Customer Churn?
It’s always better to have a heads-up so that you can plan and reduce churns more effectively. For that, it’s really essential to predict customer churn and act accordingly to reduce it.
Customer churn prediction is done by accessing the proactiveness of the users and their spending patterns. If an active and high-spending customer appears less and spends less, they are more likely to opt out of your products and services.
Here are the key elements to predict the churn and take necessary actions for its prevention:
- Understand what drives customer churn
- Identify the customers that are at risk (more likely to opt out of your services)
- Define thresholds for the churn and take necessary actions if churn is close to or exceeding the threshold.
- Easily create tickets and take immediate action for closed-loop follow-up
Churn prediction is a complex phenomenon. It requires a careful collection of all the data related to customer behavior, analyzing and preprocessing them, modeling and testing, and finally implementing and monitoring.
While predicting manually, many aspects can get overlooked. Analyzing patterns and identifying severity can be a difficult task for humans. So for a more effective and consistent result, the use of machine learning is on the rise.
Benefits of Customer Churn Prediction Using Machine Learning
The benefits of customer churn prediction using machine learning are:
1. Identify At-Risk Customers
Understanding customers’ behavioral patterns is a crucial step in identifying probable churns. And for that, machine learning systems prove to be more efficient.
They can be trained to analyze the behavioral patterns of the customers who canceled their subscriptions and stopped using your services. And comparing such data with the existing customers can help you identify at-risk customers.
2. Optimization Products and Services
Churn prediction using machine learning also helps the companies understand the flaws and pain points of the products and services pushing the customers away.
So understanding the forecasts of the machine learning systems, companies can get insights on how to improve their products and services for the better.
3. Increased Revenue
Predicting churns and forecasting their reasons give companies a sufficient heads-up to improve on their products and services. So it helps to achieve customer retention.
Similarly, by addressing the insights and analytics, companies can also improve the customer experience and can also reduce the Customer Acquisition Cost (CAC), and increase the Lifetime Value of customers (LTV). It helps to gain new customers, which ultimately helps to increase the business revenue.
How to Reduce Customer Churn?
Maintaining customer growth is the key to succeeding in your business endeavor. But at the same time, it requires keeping the churn rate to a minimum.
Maintaining a zero churn rate would be ideal. But achieving that be quite far-fetched. Nonetheless, you shouldn’t stop reducing customer churns. And for that, you can implement the following eight strategies.
1. Improve User Experience
Bad user experience is the main reason why people stop using your products or services. And improving customer experience is the key to preventing churn.
Every business should focus on keeping its customers happy, satisfied, and engaged. So when you maintain quality in your products and services, users are less likely to leave.
Also, the business should always to evolving. Taking customers’ feedback and adapting to them is also necessary.
2. Generate Engagement
The major challenge when it comes to preventing churn is identifying its sources. So for that, you have to take note of all the customer analytics you have at your disposal.
However, that may not tell you the whole story.
The best way of knowing the reasons for customer dissatisfaction is by asking the customers themselves. You can encourage them to fill in the survey forms and drop feedback and complaints. You can also take their feedback directly through phone calls.
Generating customer engagement can help you understand users’ pain points and the source of dissatisfaction. Addressing such issues reduces the risk of churning and helps you achieve customer retention.
3. Educate The Customers
Oftentimes, customers stop using your products or services by not knowing how to use them right. And the most effective churn-prevention technique in such cases will be to educate the customers.
Prepare adequate handouts and online resources to give the users enough information about your products and services. Offer them free training and product demos, and come up with podcasts, webinars, and video tutorials.
When you have sufficient information to provide to the users, you will not only be able to retain your current customers but can also gain new ones.
4. Offer Incentives
Gaining and retaining customers is the secret behind running a successful business. But it’s equally important to encourage these users to spend more on your services/products and their adjacent features.
However, making the customers spend is no easy task.
To woo the customers to spend more on your services, you’ll have to provide incentives. Run compelling campaigns offering generous discounts, special offers, and extra benefits on bulk purchases.
5. Target The Right Audience
Generating attention is easy when you are offering your products/services for free or at a cheap price. You might, as well, get a good number of users with such schemes. But you may not always get genuine customers with such tricks.
Those who only subscribe to your business to get free services will eventually leave. Such users will neither help you generate revenue nor in your growth. So always target the user base, who are more likely to appreciate and use your products for the long term.
6. Make Your Best People Deal With Cancellations
Making the ones who are willing to leave is no easy task. Similarly, it can be quite far-fetched to stop customers who are about the churn.
But good counseling can turn things around. If you employ your best sales experts to persuade such users to stay, they might as well do so.
Customers always want to feel heard and valued. If their queries are not answered, and complaints are not addressed, they are more likely to leave.
7. Differentiate Yourself From The Crowd
If a business comes up with the same offering as its competitors, it would be easier for customers to find alternatives.
So to prevent your customers from looking for alternatives, you need to highlight your stand-out features. Always try to prove yourself better with your Unique Selling Points (USPs).
Users need to understand what sets your business apart and what competitive advantages you get while using your services. At the same time, they need to know about what they will be losing if they stop using your services.
8. Offer Long-term Contracts
Another useful trick to stop churn is binding users with long-term contracts.
When a customer uses your product for a long time, they will have a more comprehensive understanding of the features inside. It gives them the freedom to explore more of the product and use them to maximize benefits.
A user habituated with your services and knows how to use them for their benefits is less likely to churn. So instead of focusing on monthly and short-term contracts, you need to persuade users for long-term contracts.
The Handy Trick
Customer experience plays a vital role in preventing churns. With proper customer support, you will not only be able to ensure a better customer experience but can also retain them.
That, however, requires promptly answering their queries and addressing their feedback. And the best way to receive and sort them out is through a phone call.
Getting a business phone number and providing customer support through it would be the most convenient way to get in touch.
But when the business starts to grow and call volume starts to surge, handling calls can often be a problem. So to avoid that, it would be wise to get a cloud telephony service rather than relying on Plain Old Telephone Service (POTS).
Cloud telephony services like KrispCall have made a huge mark in the telecommunication industry in recent times. On top of regular telephony features, you get many additional features like call waiting, call routing, call forwarding and transfer, IVR, automatic call distribution, etc. which can help you handle calls like a pro.
What makes KrispCall so interesting of all is its affordable subscription price. You can schedule a free demo if you want to explore its features without spending a penny.
What are the ways to track Customer Churn?
The ways to track Customer churn are:
- Analyze Customer Feedback
- Utilize Churn Prediction Models
- Create Churn Predication Members
- Look for Customer Surveys
- Monitor Engagement of Customers
What do you mean by Revenue Churn?
Revenue Churn is a metric that is used to measure the percentages of lost customer subscription revenue over a given period. All types of businesses need to measure revenue churn that relies on a subscription-based model to enhance their business revenue stream.