What is Churn Rate?
Suppose you decide to buy a subscription for a movie app. But after spending a week on it, you realise that there aren't many movies on it which you would like to watch. So, what do you do? You decide to cancel your subscription with the app. And when you do that, the app loses a customer. This loss of a customer is what is called the churn. And when it's collectively calculated, it is called the churn rate for the businesses.
For example, if a company has about 1,000 customers at the start of a month, but by the end of the month they lose 50 of them, then their churn rate for that month would be:
(50/1000) x 100 = 5%
When a business loses a lot of its customers, then it means their churn rate is high. The more customers a business loses, the higher is their churn rate. Churn rate metrics directly affect the growth, revenue, and sustainability of the businesses. Therefore, in order to be successful, they need to focus on bringing it down.
There are two type of churn rates: one is customer churn rate, and the other, revenue churn rate. Both represent losses.
Why Should We Measure Churn Rate?
Churn rate metrics show the overall health of a business. They provide insights into the customer's satisfaction, and product-market fit. Following are some of the reasons which show why churn rate measurement is important:
- Customer Retention: It allows the businesses to pinpoint the issues which make the customers leave. This awareness can be helpful in coming up with strategies to retain the customers.
- Revenue Impact: When the churn rate is high, businesses lose their opportunity of generating revenue. This directly affects the overall profitability of a business. That's why it's important to measure the churn rate from time to time.
- Forecasting Growth: Businesses can predict the potential of their growth, and revenue generating opportunities if they constantly monitor their churn rate. They cannot flourish if they continuously lose their customers.
- Identifying Weaknesses: When businesses keep an eye on their churn rate, they become more aware of their shortcomings. They can evaluate the experiences of their customers, pricing of their products and services, as well as, their product's market.
- Improving Customer Lifetime Value (CLV): By focusing on reducing the churn rate, businesses can boost the loyalty of their customers. These regular and long term customers become a constant source of generating revenue for the businesses.
For Relevic, measuring the churn rate is crucial. It helps in tracking the retention of customers. It makes sure that customers derive continuous value from its campaigns and their optimization.
What Are the Challenges for Managing Churn Rate?
Churn rate helps the businesses know about their overall performance. But, managing it effectively can be a challenge for them because:
- Identifying Root Causes: It is not possible to know as to why a customer is deciding to leave. There can be various reasons behind it. Some may leave due to entirely personal reasons such as, pricing, lack of perceived value, or due to poor customer service. When the exact reason is unknown, it's hard to manage the churn.
- Customer Feedback: Not every customer leaves feedback upon their discontinuation. Therefore, their reason always remains a mystery. This makes it hard for the businesses to bring down their churn.
- Market Competition: Sometimes customers like to switch to the alternatives. In a highly competitive market, whoever offers better prices or features takes the lead. Under such circumstances, it can be hard for a business to manage their churn.
- Engagement Issues: The low engagement from the customers can also lead to their churn. And, unfortunately, businesses cannot identify these disengaged customers until they actually leave. Due to this, it becomes very difficult for the businesses to control their churn.
- Reactive Measures: Once a customer has left already, the businesses can focus on the churn. So they can only try to win them back, rather than focus their strategies on improving their retention while they are still there.
What Are the Best Practices for Reducing Churn Rate?
Following are some of the best and effective strategies that can help in reducing the churn rate:
- Improve Onboarding: Make sure the customers easily understand the use of products or services quickly. If they are satisfied right away, then they are likely to stick around for a long time.
- Enhance Customer Support: One of the best ways of keeping the customers around is to offer them 24/7 support. Be available to them through chat, emails, and phone in order to address their issues. This way their dissatisfaction can be timely tackled.
- Monitor Customer Engagement: Keep on tracking the engagement metrics to identify the inactive or disengaged customers. Send them personalized messages and offers to spark their interest and re-engage them.
- Gather Feedback: Try to encourage the leaving customers to leave their feedback. Make them fill forms or take their exit interview to assess what is causing them to leave.
- Implement Loyalty Programs: To avoid churn, offer discounts, perks, and rewards to the long-term customers. This will build their loyalty with the business and make them stay.
- Offer Flexible Pricing: By providing the customers with multiple payment options, businesses can persuade them to stay. Offering them monthly based subscriptions, or allowing them to access the exclusive content can be a great practice in this regard.
- Analyze Churn Patterns: Keep an eye on what is resonating with different segments of the customers. Divide them on the basis of their usage, past behaviours, demographics, and their purchase patterns. This will help you in understanding the trends, and you will be able to take targeted actions.
Customers' lifetime value can be increased by following these practices. These can be helpful in developing retention, and reducing the churn.
How to Calculate and Analyze Churn Rate?
Churn Rate Formula:
Steps for Analysis:
- Segment Your Customers: To calculate and analyze the churn, first of all, divide your customers into two segments: new and old one. Then see which ones are leaving more. This can help you figure out the churn rate.
- Analyze Timing: Consider the timing of the churn when it typically occurs. See whether it happens after a certain period of time, or does it happen mostly at the end of a trial?
- Monitor Revenue Churn: By monitoring the revenue churn, it's easy to track the lost recurring revenue that happens due to cancellations or downgrades.
- Track Engagement Metrics: Keep a track of the engagement metrics. They can help you in timely identifying the users which are likely to leave. A regular study of metrics can help you to understand which products are being used more, how often they are being purchased, and which users are logging in often.
Relevic’s tools can help the businesses in tracking the churn. They do so by analyzing the performance of the businesses' campaigns, and the engagement of the users with them. This helps in determining the rate of their retention.
Examples of Churn Rate
- SaaS Example: A Dropbox service also tracks its churn rate. It helps them to monitor their monthly subscription cancellations. For example, If 100 users cancel the subscription in a month out of 10,000, then their churn rate is 1%.
- Streaming Service Example: A streaming platform like Netflix also starts measuring its churn when users start cancelling their subscription with the app. They see to it whether they are dissatisfied with the content or pricing. For example, if 500,000 users leave out of 50 million subscribers, then their churn rate is 1%.
- Telecom Industry Example: Telecom industries also track their churn often. Since there's high competition, they need to evaluate their services if their customers start leaving and switching to their competitors.They monitor whether its due to poor service quality or high cost.
For detailed churn rate analysis, tools like Mixpanel, Relevic, and HubSpot offer valuable insights into customer retention and engagement patterns.
