Combat Customer Churn

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Every business owner works hard to add new customers to the company roster. Customer acquisition is a key component of an owner’s role, but attention must also be  paid to customer retention. It’s critical that business owners/ leaders develop a customer retention strategy for the organization—and implement it!

Depending on which study you believe and the industry you’re in, acquiring a new customer costs anywhere from 5 to 25 times more than the cost of retaining an existing customer.  Consider the time and resources utilized to recruit even one new customer, to say nothing of prospects whom you pursue and do not win.  It’s much more cost-effective and efficient to keep the customers you already have happy.

The phenomenon called churn refers to losing customers and the metric that measures the rate at which customers are lost, as compared to customers on the roster, is known as the customer churn rate. “Customer churn rate is a metric that measures the percentage of customers who end their relationship with a company in a particular period,” explains Jill Avery, senior lecturer at the Harvard Business School. The churn rate is measured during any month, quarter, or year, depending on the industry and the product or service that your company supplies.

In other words, if your business begins the quarter with 400 customers and ends with 380, the customer churn rate is 5%, since 20 of the 400 customers no longer do business with the company.  Avery goes on to say that many business owners/ leaders prefer to monitor and report churn rate’s opposite: customer retention rate, or how many customers remain. Both calculations tell the same story.

Changes in a company’s churn rate could signal that something is working well (if the number goes down) or needs addressing (if the number increases).  When you notice that an unexpected number (or percentage) of customers whom you’d expect to be more than just one-offs instead decline to do business at least intermittently, it’s time to take action and stanch the hemorrhage. The usual culprits are customer service failing,  products/ services that are not fulfilling customer expectations, or the presence of an aggressive competitor.

Churn is more than a metric to occasionally monitor. The future of your business depends on understanding why customers might leave and knowing what you can to do to retain those who may be ready to jump ship.  Avery advises that “Looking at churn rates by customer segment illuminates which types of customers are at risk and which types may need an intervention. It’s a nice simple metric that tells us a lot about when and how to interact with customers.”

Likewise, it’s important to study your customer acquisition channels. They don’t all yield equal results, so examine each to learn if customers coming through a specific channel have a higher churn rate than others.  Acquisition channels failing to deliver the best customers as you and your team define them will be discovered, so you can decide whether or not it’s worth continuing to fund that channel, or instead shift resources to channels that more consistently deliver the premium customers.

According to InsightSquared, a Boston marketing and sales analytics company, reducing customer churn by 5 % can increase profits by 25 % to 125 %. InsightSquared also found that 70 % of customers it polled leave not because of the product/ service purchased, but because of poor customer service. Further, 91 % of unhappy customers will not do business with your company again.

Other common issues to address include a lack of customer engagement or support, poor product-market fit and the user experience. It is essential to identify company weaknesses and shore up any products/ services that need to be better attuned to trends in market preferences, customer service protocols, or customer engagement that builds loyalty.

A mistake that business owners/ leaders make is to look at churn as simply a number, rather than as an indicator of customer behavior.  Questions to ask include:

  1. What is the company doing to cause customer turnover?
  2. What are customers doing or thinking that causes them to leave?
  3. How can we better manage customer relationships and diminish the churn?

That said, a high churn rate can be the result of poor customer acquisition efforts. “Many firms are attracting the wrong kinds of customers. We see this in industries that promote price heavily up front. They attract deal seekers who then leave quickly when they find a better deal with another company,” Avery says.

Finally, there is no standard acceptable churn metric. Avery cautions, “The truth is that what’s acceptable varies widely by business model and is largely dependent on how quickly and efficiently a company can acquire customers and how profitable customers are in the short and long-term. Some business models thrive despite high churn rates and others rely on low.”

Instead of fixating on a certain number, smart managers look at the churn rate of prior years and ask themselves what they might improve. “It’s really a metric that shows how well you’re managing your customer relationships, and you can usually always improve your performance in that area,” Avery says.

Before you assume you have a retention problem, consider whether the problem instead turns on customer acquisition.  Avery concludes, “Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you.”

Thanks for reading,

Kim

Photograph: 1950s, photographer and location unknown

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