Why reducing customer churn is crucial to your bottom line

What are you doing to keep your existing customers? If not much, then you probably need to read this.

Having an effective customer retention strategy is more than just a sound business decision—it’s crucial for keeping your business, well, in business. Losing customers is an expensive affair, as it will likely cost you more to gain new customers than it does to keep your existing ones.

So if you keep your customers happy, they’ll come back for more. And if they really like you, they’ll tell their friends about you and hopefully create a snowball effect.

What is customer churn?

Customer churn is essentially when a customer (subscriber, user, client) ceases their relationship with a company. It is also sometimes known as cancellation rate. Ideally, you’d like to have a 0 per cent churn rate, but often that’s not the reality. Loosing customers can end up being expensive as the cost of gaining new clients often outweighs the cost of retaining existing ones. 

Our research shows that if your customer churn rate* is higher than 10 per cent, even increasing sales by 10 per cent won’t enable your business to grow. In this scenario, your marketing and customer acquisition costs will increase, which will have a negative impact on your overall profit.

Increasing sales is often the key focus for businesses. However, a more important goal is actually ensuring your customers remain customers.

The customer churn rate formula

Take the number of clients lost, divided by the total number of clients for the time period selected ie. 12 months/1 month. Then multiply this by 100. For example, if you have 300 clients and you lost 20 in a month, then your churn rate is 6.7% per month.

With this in mind, here are 5 critical need-to-knows when is comes to customer churn:

1. The full cost of customer churn includes both lost revenue over the lifetime of a customer and the acquisition costs involved with replacing those customers with new ones.
2. It is possible to have a negative churn rate. This happens when your existing customer base spends more in a given month than they did in the previous month.
3. Keeping track of your churn rate is essential to success; it is just as imperative as increasing customer satisfaction and building customer relationships.
4. Monitoring churn allows you to consider what you’re doing to keep customers or lose them. What actions might result in a higher retention rate?
5. Businesses who upsell their customers to more expensive products or plans without losing existing business, experience negative churn. This means that not only are you able to retain your current clientele, but you are also able to sell them more products or services over time.

Ideally, you’d like to have a 0% churn rate, but often, that’s not the reality.

* "Customer churn rate" is your cancellation rate, the percentage of customers who have cancelled a product or service within a given period of time.

Related content: The customer retention playbook

Why track your churn rate?

Here's why you shouldn't ignore your customer churn rate:

1. Marketing is expensive. You need to keep your customers to ensure you’ll get ROI for your valuable marketing budget.
2. Calculate your customer lifetime value. How much is a customer worth to your business? In order to do this you need to know your customer churn rate. The formula is: Margin X Number of year with your company = Customer lifetime value. 
3. Grow your business. Your churn rate has a direct impact on the ability to grow your business.
4. Know what to improve. Tracking changes in churn rate lets you identify what improvements to make.

8 ways to improve your churn rate

1. Set and meet customer expectations

Ensure expectations are set right from the first customer contact with your sales consultant. Setting clear expectations from the start will allow you to avoid situations where you’re unable to deliver on promises.

• Be aligned. Ensure your sales and service team are aligned with expectations and define what promises can be made to customers.
• Loyalty counts. Being aligned internally contributes to increased customer satisfaction which in turn builds customer loyalty and reduces churn.

Read more: Fuel the Customer Experience Flywheel

2. Make your first impressions count

The “wow” factor is a key component that helps improve churn rate. Focus on helping customers experience the wow moment as quickly as possible during their first impression with your business.

By creating a world-class experience, you can help educate your customers on the true value of your product or service, as well as create a cohesive relationship that is less likely to churn.

3. Identify and improve your points of difference

What is your company’s point of difference? What gives your business the competitive advantage?

• Research your competitors. Is there anything that they are doing that you’re doing better? Identify your competitors’ weak points and ensure you outperform them in those areas. Likewise, identify what your competitors currently do better and plan for improvements to your own business.
• What makes you special? Why should anyone use your product? Clearly define what the benefits of using your product or service are (as opposed to just focusing on features). What is your company really good at? What is it that only you can provide?

4. Add value

Ensure your product or service adds value. Generic solutions can easily be replicated.

• Be unique. How can you be different in order to keep customers? If anyone can replicate what you’re doing, you’re at risk of losing customers to your competitors.
• How do you add value? Improving value doesn’t necessarily mean adding new features or services. It can also be making improvements to your existing product or service offerings. Saving customers admin time and reducing any ineffective processes you may have (like billing) is always a welcome change.

5. Benchmark against competitors

No business is immune to unhappy customers. In fact, even companies with the best customer service in the world will still lose up to 9 per cent of their customers to competitors. The good news is you can take action to retain those customers.

• Benchmark it. Benchmark your performance and customer satisfaction levels against competitors and others in your industry. If you’re offering the best service possible in your industry, combined with a great product, your customers won’t want to leave. If you’re not, clarify what you could do to improve.
• Define next steps. When you know how you’re performing against the industry average, it will be easier to determine what you can do to boost your performance levels if needed. Then, devise a strategic plan and share it internally.

Read more: See the latest NPS Benchmarks for New Zealand

6. Build customer loyalty

Customer loyalty is all about attracting desirable customers and retaining them for the long term. Focusing on sales is not how you build customer loyalty. Instead:

• Communicate. Maintain regular contact with customers. Use email marketing, email newsletters and thank you cards. Find legitimate reasons to contact them. Decide what level of contact is appropriate for your business.
• Create a positive and productive work environment. Employee satisfaction often equals customer satisfaction. Positive staff engagement will be reflected in customer interactions.
• Personalise the customer experience. Tailoring customer interactions to satisfy their unique preferences shows them that you care.
• Offer rewards. Reward customers for their loyalty. Examples of rewards include loyalty points and vouchers.

7. Actively listen to your customers

Effective listening is paramount to successful customer relationships. Ask relevant questions and actively listen to your customers to discover what they like and don’t like about your product or service.

• Be social. Listen to what your customers are saying on social media. Employ customer satisfaction surveys.
• Measure and manage it. Customer Monitor is a fully managed software solution specifically designed to help you measure, manage and execute amazing customer experiences.

8. Turn naysayers into promoters

Identify your at risk customers and transform them into promoters of your business.

• Assess your NPS. The first step is to understand how your customers perceive you. You can do this by assessing your NPS (Net Promoter Score).
• Go the extra mile. Contact the customer and offer them a solution that’s tailored to their needs. Excellent customer service translates to customer loyalty and increases the likelihood that clients will promote your business to others.

If you'd like to learn more about how to keep your customers happy, download our white paper Grow your business with NPS by clicking on the link below.

*Customer churn rate is cancellation rate; the percentage of customers who have cancelled a product or service within a given period of time.