Customer churn rate comes up a lot in conversations about growth and sustainability in business. This blog will demystify churn and explain its significance, as well as find out how to reduce it. We'll also discuss how churn can affect various industries and how B2Metric can help manage it.
1) What's the Customer Churn Rate?
A churn rate measures the percentage of customers who stop using a product or service over time. The churn rate formula is calculated by dividing the number of customers lost during a certain period by the total number of customers at the beginning of the period, then multiplying the result by 100.
This metric is simply a measure of how many customers are leaving your business or "churning" away.
2) How to Calculate It?
You need two key figures:
1. During a specific period of time, the number of customers who stopped using your product or service.
2. At the beginning of that period, the total number of customers.
Churn Rate = (Number of Customers Lost during a Period / Total Number of Customers at the Start of the Period) x 100
3) Why It Matters?
Customer churn is more than just a statistic; it is an indicator of customer dissatisfaction, changing needs, or competitive pressures.
- Revenue Stability: Businesses may experience revenue instability as they continually seek to replace lost customers with new ones because of high churn rates.
Research done by Frederick Reichheld at Bain & Company shows that increasing customer retention rates by 5% increases profits by 25% to 95%.
- Cost-Efficiency: New customers cost more than retaining old ones, so high retention rates are necessary for cost-efficiency. The reduction of churn results in significant cost savings.
- Customer Lifetime Value: Long-term success comes from loyal customers spending more. According to research, current customers spend 67% more on average than those who are new to your business.
- Brand Reputation: Having low churn rates attracts new customers and enhances reputation.
4) 5 Types Of Customer Churn
Various factors define why customers leave a product or service. We'll focus on these five types of customer churn:
1- Voluntary Customer Churn:
Customer churn is when customers decide to leave a company on their own. There are a lot of reasons for this, like dissatisfaction with the product, finding better alternatives, or changing needs. These types of churn are initiated by customers.
2- Involuntary Customer Churn:
Involuntary churn, on the other hand, is beyond the customer's control. It happens due to external factors such as payment issues, technical glitches, or other unforeseen circumstances. Customers may be unaware of this churn until it's too late.
3- Non-Renewal Customer Churn:
Churn is when customers don't renew their subscriptions or contracts with a company. Especially in industries where customers have periodic renewal decisions, this type of churn is common.
4- Downgrade Customer Churn:
The downgrade churn happens when customers don't engage or buy less expensive stuff. Customers might switch to cheaper subscriptions, downgrade their usage, or look for more cost-effective options.
5- Policy Non-Renewal Customer Churn:
Policy non-renewal churn is a big problem in the insurance industry. It happens when policyholders don't renew their insurance policies. It could be because of better insurance deals, changing coverage needs, or dissatisfaction with premium increases.
- These five churn types provide valuable insights into customer attrition, but each business or industry has its own unique ways of expressing churn. Businesses can develop tailored strategies for customer retention and growth by understanding these types of churn. We will discuss this issue later in the blog.
5) Differing Churn Types Across Sectors
Customer churn rates vary by industry, reflecting the nature of customer departures. Churn types by sector:
1- Telecommunications Sector - Customer Churn:
Customer voluntary churn is common in telecommunications. There are a lot of options for phone and internet services, so it happens a lot. People switch providers a lot to get better prices, better offers, or better service. Voluntary churn is common because switching providers is so easy.
2- SaaS (Software-as-a-Service) Industry - Customer Churn:
Non-renewal churn is common in SaaS. Most SaaS subscriptions have periodic renewal cycles, usually monthly or annually. If these subscriptions come up for renewal, customers can keep them or cancel them. Non-renewal churn occurs when customers don't renew their subscriptions for a variety of reasons, including changing business needs, budget constraints, or dissatisfaction.
3- E-commerce Sector - Customer Churn:
Customer churn can happen in e-commerce due to payment processing issues or shipping issues. The credit card of a customer may expire, causing a payment failure and cancellation. Furthermore, shipping issues like delays or damaged products can lead to customer dissatisfaction.
4- Financial Institutions - Customer Churn:
Customer churn may go down for financial institutions. Customers do this when they reduce their investments or switch to a cheaper product. You can move your money from a high-fee investment account to a lower-fee account or downgrade to basic banking.
5- Healthcare Sector - Customer Churn:
There's a lot of voluntary churn in the healthcare industry, due to patients changing facilities or providers. Patients may switch primary care physicians or healthcare networks for various reasons, like insurance changes, relocation, or better options. The voluntary churn in healthcare underscores the importance of patient satisfaction and the need for providers to offer exceptional service.
6- Insurance Sector - Customer Churn:
Policy non-renewal churn is a common form of customer churn in insurance. Policies usually renew every year. Churn happens when policyholders don't renew their insurance policies at the end of the term. Different reasons can lead to this, like finding a better insurance deal elsewhere, changing coverage needs, or not liking premium increases.
6) How To Reduce Customer Churn Rate
Companies must develop strategies tailored to the types of customer churn they face and the dynamics of their respective industries.
- Identify Churn Types:
In each industry customer churn types and reasons differ. In order to set up a strategy for customer churn, companies must first recognize their pain point.
With predictive churn analysis, we model past user movements according to the user's churn definition and report users who are likely to be churned in the future according to this definition.
At the same time, we analyze what these users who may churn do within the application and provide information such as which actions of the churned users make the decision to churn. Information about the percentage probability that a user will churn on which date is also provided.
This churn modeling can be trained in the desired date range via schdule and current churn statuses can be examined. And by comparing this model's predictions with the real results and improving the points where it made wrong decisions, it makes a much better churn prediction for its next prediction.
Categorize customers based on behaviour, preferences, and churn risk. It's a necessity to understand the customers who are at risk and close to churn.
With B2Metric IQ Analytics features, we are able to provide many functionalities for customer segmentation.
- Personalize Retention Efforts:
You should tailor your retention strategies to different customer segments.
We've already mentioned that retaining users rather than acquiring new ones is easier and more cost-effective and brings companies a ton of ROI. Using B2Metric Customer Retention, you can easily retain your users and increase revenue and ROI.
- Enhance Customer Experience:
Companies must improve their campaigns, products and services according to changing customer needs.
- Proactive Engagement:
As we mentioned before, companies must determine their at-risk customers and set a strategy to keep them. Personalization is also critical at this point. Personalized campaigns and offers are effective ways to reengage customers.
B2Metric IQ Analytics platform provides a better understanding of customer journey and gives predictive analytics at easy-to-use dashboards. IQ Analytics' various features can segment customers by their actions and give predictive analytics, doing that helps companies increase retention rates, customer engagement and loyalty and decrease customer churn rate.