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Churn Rate definition


Churn Rate with hologram businessman concept (© ankabala / Fotolia.com)

Churn Rate with hologram businessman concept (© ankabala / Fotolia.com)

Churn rate refers to the amount of subscribers or customers that cut ties with a business during a specified period of time. It’s important for businesses to keep a close eye on churn rate because it can drastically affect their business. In this article, we will dive deeper into churn rate by explaining how it can be calculated, its importance, and how business owners can handle it.

Churn rate is a metric that measures the rate a business is losing its subscribers or customers. These customers are said to have “churned”. Depending on the type of business you run, churn can refer to the cancellation of a subscription, the closure of an account, a buyer’s decision to shop with a competitor, or not renewing a contract with your business.

Why Churn Rate is Important

Churn rate can be a highly defining metric, as it can help to shed important light on a business’ growth. In order for a company to realize significant growth, its acquisition rate (number of customers attained) must be higher than its churn rate.

A change in churn rate can help companies understand how their customers are responding to changes in their business. For example, a sudden increase in churn rate might indicate that customers are dissatisfied with new pricing policies or products that are being offered.

Time and time again, it has been found that it is much more cost-effective for businesses to retain existing customers than to acquire new ones. Therefore, understanding your churn rate and developing an effective strategy to prevent churn can help to ensure your efforts for retaining existing customers are working.

The Impact of Churn Rate

In the simplest terms, churn refers to a deceleration in growth. A high churn rate will have a direct impact on:

  • Expenses
  • Revenue
  • Net income

If a business ignores its churn rate and doesn’t take measures to prevent it or counteract it, there is a huge risk that the business can end up going under.

How to Calculate Churn Rate

The formula for calculate churn rate is as follows:

(number of churns within a certain time period) : (number of customers at the start of that period) x 100 = percentage of churn rate

For instance: 10 customers lost : 100 customers to begin with x 100 = 10 percent churn rate.

While the churn rate metric is best suited for SaaS businesses, it can certainly be modified and adapted to eCommerce businesses and customized for the specific goals that you are setting out to achieve. However, no matter what type of business model you are working with, you have to have a clear definition of what an active customer is and when it is that you consider a customer has been lost.

Statistic: AT&T's wireless customer churn rate from 2007 to 2016* | Statista
Find more statistics at Statista

Ways to Reduce Churn Rate

Reducing churn rate is an on-going process, not a one-time action. The manner in which you can reduce churn rate depends largely on how your specific business defines active and inactive customers. It also depends on the problems that you can identify as the main causes of churning.

For eCommerce businesses, the methods for reducing churn rate that appear to be offer the best results include the following:

  • Perfecting merchandising tactics. Once an eCommerce stores sets out to identify the cause of churn rate, they will likely fin that there isn’t a single factor that is leading to customer attrition. Rather, it is usually a collection of factors that build up over a period of time. Improving – nay, perfecting – merchandising tactics and actively promoting to customers that already exists can drastically improve churn rate. Why? – Because this ensures the existing customer base that they are using the best products out there, and moreover, that they are getting the best prices.
  • Build loyalty for your brand. Branding plays a key role in retaining customers. When people have an emotional connection with a brand, they are less likely to walk away from it. This is true even if they have received poor products or services in the past. To reduce churn, focus on developing a strong bond with customers. This can be done by developing and offering reward programs and sending valuable messages through marketing.
  • Use Marketing Automation. One of the best ways you can highlight the benefits of your products, increase your customers’ desire for those products, and ensure existing customers return is with marketing automation. Things like welcome emails, onboarding emails, and reactivation campaigns can be extremely effective for reducing customer churn rate. You can also implement tactics that respond to customer actions; for example, an email can be automatically sent out to customers that have abandoned their shopping carts, or who haven’t completed creating their wish lists.
  • Offer exceptional customer support. A happy customer is a customer that your business can retain. Your existing customers will be much more satisfied when they receive excellent support. You can offer support through email, online chat, by phone or by email. It’s a simple yet highly effective way to reduce churn rate because customers see that you are making every effort possible to ensure they are satisfied.

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