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Blog

Aug 29, 2016

Customer Churn: Quantifying Your Attrition Problem

[Estimated read time: 4 minutes]

Nothing hurts quite like a breakup, but it's just a part of life.

funny otter meme draws parallels with how to calculate customer churn

Turns out, breakups are a part of doing business, too. Customer attrition, also called customer churn, is a measurement of how many customers stop doing business with you over a given period of time. Of course, losing customers is more than just an emotional matter -- acquiring new customers costs up to seven times as much as retaining your existing ones. To truly understand how much customer churn is affecting your business, you'll need to calculate your customer churn rate, understand how many people are in your customer base, and determine what they are worth to you.

For example, if your average customer spends $1000 in a year, your customer base consists of 10,000 people, and your annual churn rate is 30%, that's $30 million walking out the door every year. Sure, you could find some new customers to help offset this loss, but remember that the cost of acquiring new revenue is significantly higher than keeping your current customers coming back.

How to calculate customer churn

So, how do you determine what your churn rate is? Historically, this metric has been used by subscription-based businesses, who have an easier time measuring how many customers have churned. They typically compare the number of subscribers they had at the beginning of the month to the number they had at the end of the month to calculate the percent change in their customer retention.

Yet, even with a metric as simple as subscriber count to work with, there is not a concrete, industry-wide definition of churn rate. In fact, a case accusing Netflix of artificially inflating their retention numbers was thrown out of court for this very reason -- the judge recognized there is more than one way to calculate customer churn.

Now that other types of businesses have begun to use customer churn rate as a key metric, the issue has become even more complex. For instance, how would an e-commerce site know what its customers plan to do in the future?

In industries that don't operate on a subscription basis -- think retailers, CPGs, restaurants, travel brands and the like -- each business must determine what qualifies as a "churn event." For example, let's look at a CPG brand trying to determine how many of their repeat customers have stopped using their hair care products. The brand knows that their repeat customers, on average, make a purchase every 45 days. In this case, any customers who have not made a purchase within that time frame would be classified as "churned." The CPG could repeat this analysis for each of their products to calculate an overall churn rate and better understand their customer retention outlook.

Depending on your brand and products, you may define "churn events" differently. Some companies choose to compare customer churn month to month, quarter to quarter, or year to year. Some measure churn in terms of individual customers lost, while some measure it in terms of revenue. How you decide to calculate customer churn is up to you -- what matters is that you're measuring it.

One caveat: Customer churn is one metric out of many, and it's best to take a holistic view of your customer experience. For more on this topic, check out Are Your Call Center Metrics Lying to You? 4 Questions You Should Be Asking and How to Measure Customer Engagement: The Impact of Service Metrics.

How to reduce customer churn

Now that you understand how potentially devastating customer churn could be for your business, it's time to strategize. First, you'll need to understand why customers leave.

Customers may cease doing business with you for a variety of reasons, but the research tells us that customers value the experience more than the product or service itself, and 90% of consumers would actually pay more for a better customer experience (CX). When trying to reduce churn and increase customer retention, improving CX is a great place to start.

The first step to improving your customer experience is defining your service differentiatorRead this whitepaper and take this self-assessment to determine the right course of action for your business. When implementing your strategy to improve customer retention, you'll also need to evaluate whether you have the right people, processes, and technology in place to ensure a great end-to-end customer experience.

Astute Solutions provides the customer engagement software used by some of the world's largest brands. Schedule a personalized demo to see how our tools could help your brand improve the customer experience and increase customer retention.

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