The Most Overlooked Business Health Metric That Has Big Implications

by Laurie Heller

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What do butter and your customers have in common? Both of them churn. Too much of one increases your cholesterol level and the other could kill your business. Easy to guess which is which.

What is a churn rate?

Put simply, customer churn defines the number of customers who leave your business in a given period. It shows you how well your company is doing in retaining current customers and maximizing their revenue opportunities.

How do you calculate churn rate?

Take the number of customers that churned divided by the total number of customers at the beginning of the period measured. And voila, you have your churn rate (calculated in a percentage format).

Why is churn rate Important?

When you talk to most marketers, they'll tell you that it takes a lot to acquire a new customer. Which is exactly why our hearts break if and when we find out all our hard work went to waste.

Try this stat on for size: It’s 5-25X more expensive to acquire a new customer than it is to retain an existing customer. And if that’s not enough, a tiny 5% increase in customer retention can potentially increase revenue by 25-95%. Soooooo yeah. It’s time to listen up.

Here are five spectacular ways to reduce your churn rate:

  1. Monitor it quarterly and annually. Make sure you are evaluating groups who signed on with the company at the same time. In addition - if you have multiple products be sure to break your analysis down by product suite.
  2. Invest in an NPS score platform. A Net Promoter Score® (NPS), measures customer experience and predicts business growth. Essentially, it allows you to monitor where companies are along their journey and capture qualitative feedback as to “why” they’re unhappy.
  3. Make sure customer feedback doesn’t sit in a silo. Product, marketing, sales and customer success all need to know where the company stands. This can help cut down on costs, improve product and help customer success empathize and proactively reach out to customers with updates.
  4. Look at the industry and/or source of the client. Let’s just say 40% of your customers who churn are from marketing campaigns directed at the retail vertical. This is a HUGE red flag that should tell your marketing team to turn off its campaigns to the retail vertical and meet with product, sales and customer success to find out what is going on. The last thing anyone wants is to waste precious marketing dollars on bringing in customers who will bail. By just focusing on cost per acquisition and lead, chances are you’re being a tad too myopic
  5. Track and report the reasons why it happens. This seems like a no-brainer but from our experience, too many companies forget to do this and instead rely on data from #2. While the two are usually correlated, sometimes other things pop up that are worth noting like new compliance issues or business-critical integrations that weren’t part of your NPS. Being able to track both is helpful.

Finally, it’s important to understand that certain churn isn’t always a bad thing. Sometimes as your business grows, you realize a certain vertical or customer size isn’t always the most profitable or make the most sense for you and/or your customers. As contradictory as it may sound, this can be a positive vs a negative and potentially free your employees up to shift focus on more desirable outcomes.

Losing customers is the perfect way to cause another kind of churn. The one that happens in your stomach.

The Favorite Co.


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