Say you spend $100 on marketing to convert a prospect into a buyer, who then purchases $50 in goods or services but never returns. That’s customer attrition, and it’s costly.
Strong customer retention requires not only knowing how many buyers are leaving but why, what it costs to replace them and calculating the odds that you could get them back with some targeted outreach. Without this information, it’s difficult to know whether your offerings are meeting customer needs.
Monitoring customer attrition is a best practice for any business. It can help organizations understand a particularly relevant form of ROI, or return on investment—return on customer acquisition investment (ROCAI).
In this article, we’ll share lessons and advice relevant to companies across industries.
What is Customer Churn or Customer Attrition?
Churn, or attrition, is the rate at which customers stop purchasing your products or services measured across a specific time period. It’s a critical KPI that all businesses should track.
It could mean, in the example above, that your products have only temporary value. In the case of a recurring revenue or subscription business model, that competitive offerings have higher appeal, or that your customer service is sub-par, for example.
Statista found that, in 2018, U.S. cable companies experienced the highest rate of churn, at 28%, followed closely by retail at 27% and financial firms at 25%. Travel companies fared best, at 18%. If we take 20% as an average, companies are losing one of every five customers they worked so hard to acquire.
Customer Retention vs. Customer Attrition
Retention rates reveal how many customers renewed their subscriptions or continued to purchase products over a specified time period; attrition rates help understand how many opted out of your products or services.
A high churn rate limits the rate at which a company can grow, because it means it must continually spend to acquire new customers. The analogy is a hamster on a wheel—without retention, you won’t get anywhere.
You spend a lot of money and effort finding prospects and convincing them to try your goods or services. It makes sense to use every available tool to not only retain buyers but to predict when they might want to buy even more of what you’re selling; in other words, to make them loyal customers.
Why Is Customer Churn Important?
It’s conventional wisdom that acquiring a new customer is significantly more expensive than retaining and growing an existing customer. But don’t take the analysts’ word for it. Here’s a back-of-the-envelope way to calculate your cost to acquire a new customer:
Then, see how many new customers or subscribers you gained during that time span. If you believe there is a lagging relationship between marketing efforts and new customers, you may want to factor in a specific attribution window like one week or one month. Once you have both numbers, use this formula:
TOTAL SALES & MARKETING COSTS / NEW CUSTOMERS = CAC
Churn rate is important because for every customer you acquired then lost, that spending needs to happen over again just to keep buyer numbers level. That is, the amount a customer spends must equal over time the amount you spend to acquire a customer, or else you’re losing money on each customer. A high churn rate means you’re a hamster on a very expensive wheel.
What Causes Customer Attrition? Why Do Customers Leave?
These are a number of reasons customers opt out; some are voluntary, some are passive or involuntary. Maybe a B2B buyer’s company was acquired and no longer needs your service, or a consumer may have had a change in lifestyle that made your product unnecessary.
While it’s well worth reaching out to all leavers, it’s the voluntary ones you need to worry about, because they also have the potential to become active detractors. Voluntary attrition factors include traditional reasons customers leave—poor service, they didn’t perceive enough value, they shop based only on price or availability and haven’t developed loyalty to your brand. While the root causes of attrition are unique to each customer and company, some generalities across industries include:
- Poor customer service: Companies today need to compete on more than price. Consistently positive user experiences foster brand loyalty and customer lifetime value. But only one truly negative experience may wipe out years of goodwill. Direct-to-consumer (D2C) retailers are blazing new ground in customer service, as are ecommerce companies. Both offer a wealth of insights and ideas.
- Product or service failure: There’s a truism that people don’t buy a product, they hire it to do something. A tutoring service’s job is to help students master new skills. A car’s job is to get the driver and passengers where they need to go safely and in comfort. If a customer abandoned your company, your product or service didn’t do its job to the buyer’s standards. Period.
- Inconsistency: Customers want their desired items to be available no matter where they choose to shop. Ideally, inventory is available both online and in-store with options to ship to home, pick-up in-store or even curbside. If items aren’t available at their nearest store or if there are shipping delays for home delivery, guess what? The customer will look elsewhere.
- Lack of accommodations: A loyal customer expects an enhanced experience, including accommodations for special needs and requests. Interestingly, a recent study by the Wharton School of Business showed that certain practices contribute disproportionately to loyalty damage. The No. 1 most disliked practice: Asking a customer to pay for shipping to return an item purchased online. Top desired accommodations include insider access to exclusive content and information, cash back or loyalty points program and access to a personal shopping history.
- Lack of empathy for the customer: Customer empathy means cultivating a deep understanding of the needs and feelings of the people who buy your goods and services. Empathetic sales leaders take into consideration the risks of buying a complex product or service, and empathetic R&D leaders develop products that are a joy to use. Oh, and a variety of studies show that empathetic companies outperform their peers. If you lack empathy, you likely not inspiring customer loyalty.
- Eroding brand loyalty: All of these factors are contributing to a seismic shift in brand loyalty among consumers. If you don’t track your Net Promoter Score, the holy grail of gauging customer loyalty for at least two-thirds of the Fortune 1000, according to Forbes, you may not even know your churned customers are down-voting your company. Fortunately, the Wharton study shows customers whose problems are resolved to their complete satisfaction are almost as loyal as those who are problem-free.
Calculating Customer Churn Rate
All companies have churn, with some industries experiencing more than others. A commodity services business, like a cellular provider, will measure churn differently from a high-end retailer. Getting a sense of how many customers are leaving is the first step; then you can begin to chip away at the why.
You also may not value all customers equally in your calculation. A customer who leaves in the first 90 days of a subscription, or after one purchase, shouldn’t carry the same weight as losing a client who’s been with your company for years or represents a high customer lifetime value and thus contributes to profitability.
Customer Attrition Formula
Once you set the moment and metric of attrition for your company, the formula for customer churn rate is pretty simple: Divide the number of customers who left during a certain period by your total number of customers during that period.
# of customers lost in a period / (customers at start of period + customers gained in period)
Customer Attrition Examples
Defining the moment of attrition isn’t as straightforward as it may seem. Let’s look at churn for a Software-as-a-Service (SaaS) company. A month-to-month customer hasn’t officially churned until the subscription period ends. Unless you prorate, the moment of cancellation is not the moment of churn, as the customer is paying until the end of the month.
Consider Cents Bookkeeping Software. Three of the firm’s 10 customers failed to renew their subscriptions in January for February. If those customers are counted as churned customers in February’s calculation, the churn rate is 30%.
On the other hand, let’s look at a retail establishment. It’s much trickier to calculate churn rate for a business like Scents Discount Perfumes, which has both a physical store and an ecommerce site. A business like Scents might use a transactional churn metric such as repeat purchase rate, where it looks at the length of time since the last visit or the length of time in between purchases.
What Is a Good Customer Churn Rate?
The quick answer is “zero,” but that’s not practical. And since there is no GAAP definition of “churn” or “retention,” companies use different ways to determine these metrics. That makes it challenging to compare and benchmark within and across industries.
We’d argue that the important part of “customer churn rate” is “customer.”
As discussed, you need to value customers differently in churn-rate calculations. There are a number of methodologies that model the distribution of customer lifetimes in a statistically sound way for each individual business.
Customer Churn Rate by Industry
Let’s use our SaaS provider as an example, where renewal rates help the business determine its churn rate. Seventy percent is a foundational renewal rate for SaaS companies; 80% is competitive, 90% is best-in-class and 95% is transformative.
Here, and in many types of “as a service” firms, renewals are the ultimate measure of success. Renewal rates are the inverse of attrition rates and indicate how satisfied customers are with your product. High renewal rates predict a longer customer lifespan and more revenue for years to come—those customers may even purchase premium services, increasing their value to your business over time. Renewal rates may be calculated based on the count of customers or the value of contracts.
For retailers and other product companies, analysts suggest that an annual churn rate between 5% and 7% is average and that anything over 10% should drive efforts to better retail customers.
How to Reduce Customer Churn
Now that you know your churn rate, you can start to dig into the reasons customers are leaving. Is it because they aren’t getting enough perceived value or desired support? Or are your products and services not meeting their needs? What changes might get them to continue to buy products or renew subscriptions?
Figuring that out is not just marketing’s job. The finance team can weigh in on pricing, while sales leaders need to regularly speak with customers and feed insights back to the business.
4 Strategies to Reduce Customer Churn
Here are some steps to increase retention.
Exceed customer expectations: How? Dig into the data available for most industries based on studies that track evolving consumer preferences. One study showed that, when they enter a store, generations view their interactions with staff very differently. Among Gen Z, 42% are annoyed by increased interaction by retail associates. Millennials (56%), Gen X (44%) and baby boomers (43%) all prefer more in-store interactions. Keep up-to-date on what your customers want now.
Be responsive: You need to set goals for customer service response times and track against this metric. Best-in-class wholesalers, for example, respond to customer questions, issues and concerns in less than six hours. Restaurants, in contrast, better respond to complaints in real-time lest they pay the price on Yelp or other customer review sites. Automation can both improve customer satisfaction and reduce costs. For example, chatbots on ecommerce websites can quickly and inexpensively answer lower-tier customer queries, freeing up your support reps to solve more complex problems.
Identify at-risk customers: For software companies, watch for a drop-off in runtime or new functionality that hasn’t been adopted. See if there’s a pattern—it could indicate a problem with the features or that the company isn’t marketing new functionality very well. For product companies, the baseline method is “RFM” or recency of last purchase, frequency of purchases and monetary value of the customer. There are variations on this formula as well.
Monitor and analyze customers: Just as you might perform exit interviews in the workplace, engage in dialog or focus groups with former customers over the phone, via a survey or even with a chatbot. Make changes based on what they say.
Develop a marketing plan for high-risk customers: First you need a way to trigger alerts on potential leavers. We mentioned tracking NPS metrics. For services, monitor usage data, and product companies need to, at minimum, look at RFM for high-value customers. Alerts must be automatically escalated to a customer service specialist who is empowered to reach out with, for example, a special offer for “our most valued customers.”
Streamline the customer onboarding process: No matter your industry, there are a few areas where good onboarding can go bad. First, define a process for the handoff from sales to the product or service-delivery team. Ad hoc emails won’t do—you need a checklist of checkpoints, with SLAs for completion. Personalize the onboarding process to the extent possible. Clearly communicate all the support options available. Offer content and self-help channels like community forums and FAQs. And check back at regular intervals.
Proactively communicate and engage: Give your loyalty programs a boost. Finding ways to forge deeper engagement is a must for both B2C and B2B companies. Gallup research found that compared with average customers, more engaged B2C customers return a 23% premium in terms of share of wallet, profitability, revenue and relationship growth. These customers see the brand as always delivering on what they promise, the perfect company for them and a brand of which they are proud to be a customer. The same extends to B2B companies: Customers that see their partners as trusted advisers have 50% higher revenue/sales, 34% higher profitability and 63% lower customer attrition.
Evaluate churn reduction tactics’ success: It’s time to track retention metrics. An effective way to calculate customer retention rate is through a technique called cohort analysis, which tracks each customer segment over a period of time. Continue to monitor your core KPIs: churn rate, customer acquisition cost, lifetime value, NPS and RFM.
Predicting Customer Attrition
Using historical data and assumptions as well as this bucket of performance indicators, organizations can build predictive models that play out customer churn possibilities and put tools in place to automate certain actions—such as alerts for a-risk customers.
Today, companies have a lot of options when it comes to predicting and preventing customer churn. Businesses that depend on recurring revenue, for example, can use software to automate renewals and billing and easily keep track of multiple subscription plans, pricing schedules and promotions.
Other companies can use CRM solutions to collect data on customer accounts, such as billing, orders and service requests. If customer “touches” seem to be dropping off, the system can trigger proactive outreach efforts. There are steps every business can take to reduce customer churn—but all of them start with collecting and analyzing data. The payoff is having a single view of the customer, order and item data with which to deliver better customer experiences and minimize attrition.