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Customer Churn: What It Is, Why It Matters, and What You Can Do About It

There's one universal truth about any business: if you want to be profitable, you need customers. Ideally, your customer retention rate would be at 100%, but that's not the world we live in. In reality, customers come, they go, and they're eventually replaced with new ones.

However, if you're experiencing more going than coming, it might be time to pay more attention to your customer churn rate. Here's what it is and how you can fight it.

What we'll cover

  1. What customer churn is
  2. Why you should pay attention to your churn rate
  3. Calculating your churn rate
  4. How to reduce customer churn

What is customer churn?

Simply put, customer churn refers to the loss of customers regardless of the reasons customers no longer want to do business with you. Usually, businesses track it on a monthly basis as a percentage of lost customers compared to the total number of customers.

Active churn vs passive churn

There are two types of customer churn: active churn and passive churn. Active churn happens when a customer actively cancels their subscription or stops purchasing from your business. These are the customers who have found a better alternative, experienced poor customer service, or no longer find value in your product or service.

On the other hand, passive churn occurs when customers no longer engage with your brand, but haven't explicitly canceled their subscription (yet). They might be inactive users who have simply forgotten about you or lost interest over time.

Why your churn rate matters

One of the main reasons why you should care about your churn rate is because acquiring new customers can be much more expensive than retaining existing ones. By reducing customer churn, you can save money on acquisition costs and increase revenue by focusing on customer loyalty and satisfaction.

new vs repeat customers

In addition to that, high churn rates are often indicative of underlying issues with your product or service. If customers are consistently leaving, it's important to identify the root causes and address them as soon as possible. This could involve improving the quality of your offerings, enhancing customer support, or streamlining processes that may be causing dissatisfaction.

What's more, monitoring your churn rate allows you to measure the success of retention strategies you're implementing. By tracking changes in your churn rate over time, you can determine if these are effective or if adjustments need to be made.

How to calculate your churn rate

To determine your churn rate, start by defining the time frame for which you want to measure it. This could be monthly, quarterly, or annually, depending on what makes sense for your business.

Next, count the number of customers at the beginning of the chosen time frame. Then, track how many customers have canceled their subscriptions or stopped using your product during that same period.

Divide the number of lost customers by the total number of customers at the start and multiply it by 100 to get a percentage value – this will be your churn rate.

Churn Rate = (Lost Customers / Total Customers) * 100

Regularly tracking and analyzing your churn rate can help you spot trends and patterns that indicate areas for improvement. By identifying common reasons for customer attrition, you can take steps to address them before they drive more customers away.

How to reduce your customer churn rate

Whether active or passive, customer churn ultimately has a negative effect on both your revenue and growth potential. And while passive churn Five things you can do to reduce customer churn.

1. Figure out why customers are leaving

The first step towards reducing customer churn is to understand why it is they're leaving in the first place. You can do this through customer surveys, feedback forms, and analyzing customer data. By identifying the root causes of churn, you can address them directly and make necessary changes to improve your customer retention rates.

2. Focus on customer satisfaction

Providing a positive customer experience is crucial in retaining customers. This involves making it easy for customers to do business with you, providing excellent customer service, and addressing any issues or concerns promptly. Consistently delivering a great experience will keep customers satisfied and less likely to leave.

3. Encourage customer loyalty

Rewarding loyal customers can encourage them to stay with your business. Consider implementing a loyalty program that offers perks such as discounts, freebies, or exclusive access to new products or services.

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4. Be proactive

Don't wait for a problem to arise before reaching out to your customers. Instead, be proactive in engaging with them regularly. Send targeted emails with relevant content tailored specifically towards their interests or provide educational resources that add value beyond just selling your product.

This strategy is especially useful when it comes to passive churn. By keeping yourself top of mind for customers, them forgetting about having a subscription becomes less likely. What's more, as much as 40% of passive churn happens because of failed payments. Whether it's an expired card or a glitch in the payment process, you can easily resolve it by simply sending a reminder.

5. Listen and improve

When it comes to reducing active churn, listening what your customers have to say about your product goes a long way. Active churn happens due to dissatisfaction and unmet expectations, so use all customer feedback as an opportunity for improvement. Make necessary adjustments based on their suggestions and communicate these changes transparently.

Final thoughts

In the business world, dealing with customer churn is a constant challenge. And while it's inevitable for some customers to leave, high churn rates have a significant negative impact on your bottom line. At the end of the day, preventing customer churn is all about keeping them happy. Inspiring trust, providing value, and listening to what customers say are the basics for creating a business that remains profitable in the long run.

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Patricija Šobak's profile image
Patricija Šobak puts her talent in spotting questionable grammar and shady syntax to good use by writing about various business-related topics. Besides advocating the use of the Oxford comma, she also likes coffee, dogs, and video games. People find her ability to name classic rock songs only from the intro both shocking and impressive.