A company’s churn is an important indicator of what their customer loyalty looks like and can provide valuable insights into the company’s health and potential growth over time. The speed of your churn is what’s called your churn rate. Let us explain what churn rate is, how you calculate it and why it’s important for you to keep track of!
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What is churn rate?
The number of customers that stop buying a product or service from a company during a specific timeframe is what’s called churn rate. To measure your churn rate is a common practice for companies working with subscription-based services, but it’s obviously something every company benefits from tracking! Your churn rate can be measured in different ways, it all depends on what’s most relevant for your company and its industry.
A high churn rate is an indication that the company isn’t delivering on their promises to their customers, which leads to the customers leaving them. It could have to do with the price being too high, competitors having better quality or offering a better customer experience, the reasons could be many! On the other hand, having a low churn rate means companies get to keep their customers over time and increase their revenue along the way. Happy customers usually tell others about it!
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This is how you calculate your churn rate
You can calculate your churn rate by finding out the number of customers you’ve lost from your company during a specific timeframe and dividing it with your total amount of customers during the same timeframe and multiplying it with 100 to arrive at a percentage. The formula for calculating your churn rate would look something like this:
Churn rate = (Lost customers / Total number of customers at the start of the period + Customers you’ve gained during the period) x 100
As an example, if a company have 1 000 customers in total during the time period and lost 150 customers, the formula will look like this:
Churn rate = (150/1000) x 100 = 15 %
In this example the company would have lost 15 % of their customers during the period, in other words they would have a churn rate of 15 %.
It’s important to understand that there’s multiple ways of calculating your churn rate, it all depends on what kind of company you’re running. Some companies calculate their churn rate on their total revenue instead of the number of customers they have. Maybe it’s not important to have a high number of customers but more important to have the right kind of customers? It’s also possible to have different churn rates in different customer segments, customers with high purchase power versus customers with lower purchase power for instance. Think about what data would be best for your company to keep track of so you can calculate the churn rate that matters to you the most.
Why it’s important to know your churn rate
There are multiple reasons why it’s important to keep track of your churn rate as a company, here’s a few examples:
- Customer loyalty: Your churn rate is a direct measure on your company’s ability to keep your customers. A high churn rate is an indication that your customers don’t see the value in what you’re offering. By tracking your churn rate you’ll be able to identify what it is that makes your customers end their relationship with your company. Once identified, you’ll be able to take the necessary steps to reverse the trend.
- New customers costs money: To constantly hunt for new customers costs more time and money than keeping your current customers. It’s called CAC or Customer Acquisition Cost and it’s a measurement of the total cost to get a new customer to you company. Stop hunting new customers constantly and focus on building up your current customer relations instead. By increasing every customers value (CLTV or Customer Lifetime Value), it’ll be easier to increase your revenue and grow as a company.
- Customer satisfaction: Your churn rate can be used as a measure of how satisfied and loyal your customers are. If they’re not happy with your product or your service, you’ll see it when they choose to leave your company. By tracking your churn rate and combining it with an NPS survey, you’ll be able to see what areas you should improve upon.
Your churn rate shows the health of your company
Your churn rate is in other words an important measurement to keep track of to see the health of your company. A high churn rate shows if you have hidden issues such as a faulty product, bad customer service or too high price. It can also be a signal that your competitors have changed their offer and are luring over your customers at a higher rate than ever before. If you don’t figure out the main reason behind your high churn rate, you risk losing revenue, reputation and your position in the market.
By continuously monitoring your churn rate you’ll be able to identify patterns and trends over time and take the necessary measures needed. It can be everything from improving your product and price to actively working with your customer service and sales representatives to create a better customer experience.
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A CRM system makes it easier to increase customer loyalty
In other words, it’s not hard to see why it’s important to actively work on reducing your churn rate. A CRM system can help with increasing your customer loyalty. By centralizing your data you’ll improve the way you communicate with your customers and create the groundwork for better internal routines, which makes it easier to provide a great customer experience. A CRM system provides companies with the tools needed to identify problems before they arise and to work proactively with lowering their churn.
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