Understanding why customers do—or don’t—purchase more goods or services is essential to success for any company. Gaining this insight begins with analyzing how many clients are taking their business elsewhere. Then, you can dig in to find commonalities among leavers, identify opportunities to improve and avoid losing additional customers.
What is Customer Churn Analysis?
Customer churn, or attrition, is the rate at which clients opt out of purchasing more of a company’s products or services. Customer churn analysis is a method of measuring this rate.
At a high level, churn analysis simply tells you what percentage of your customers don’t return compared with the percentage who conduct repeat business. By digging deeper into these numbers, you may be able to identify trends that can avert failure or take an already successful product or service to the next level.
Methods to measure customer churn include calculating this KPI over various timeframes and trending those results; high-performing firms also measure the financial results of customers leaving and then benchmark those numbers against key performance indicators (KPIs) critical to the business’s profitability.
Is any customer churn OK?
Some churn is to be expected. However, churn rates higher than your company or industry average can indicate a problem with pricing, service, product quality, delivery or some other aspect of the customer experience.
- Customer churn analysis helps businesses understand why customers don’t return for repeat business.
- Churn rate tells you what portion of your customers leave over a period of time.
- It’s often useful to look at churn by product, region or other granular factors.
- Businesses with ERP systems may be able to generate customer churn analysis reports using prebuilt dashboards and automated reporting tools. Others will need to do some manual number crunching.
Customer Churn Analysis Explained
Customer churn analysis is a way to understand the number or percentage of customers who don’t purchase additional products or services. For example, say you sell software on an annual subscription basis and have 1,000 customers on Jan. 1, 2020, but on that same date in 2021, just 800, or 80%, have renewed. Your churn rate would be 20%.
If you earn a profit of $10 per customer per month, in this example, churned customers cost the business $2,000 per month and reduced profits from $10,000 to $8,000. Whether a company can survive ongoing 20% churn depends on how efficiently it adds new customers and how well it manages its profit margins.
Let’s look at the streaming TV industry, where Netflix and Hulu are competitors. Market watcher Park Associates reports that Netflix lost about 9% of its subscriber base over a recent 12-month period compared with about 50% churn at Hulu. If Hulu could learn from what’s turning its customers off and cut its churn rate by a couple of percentage points, it would become more competitive.
Customer Churn Analysis Basics
To calculate your customer churn rate and turn that information into meaningful results, it’s important to closely track customer sales and retention metrics. While small businesses may be able to come up with this data manually, larger businesses need more robust systems to track customer results. When paired with an ERP, you can quickly analyze customer churn on a regular basis. In any case, you’ll need access to data about current and past customers so you can build out churn models and begin to understand why some clients stay and others drop off.
Managing churn doesn’t stop at analysis: Once you spot trends and tease out insights, it’s time to follow up with an action plan designed to lower churn and increase the value each new customer brings to your business.
How Does Customer Churn Analytics Work?
To perform a customer churn analysis, you’ll need a database of customer information and a spreadsheet or other program to dig into the data. You may be able to export stats relevant to customer churn such as churn rate and customer renewal rates directly from various ERP modules to save time and improve accuracy.
While you can and should conduct a high-level churn analysis for all customers, to get meaningful insights, you’ll want to break that data down by product, region, client segment or other granular metrics specific to your company. That will give your team insights into where and potentially why you’re losing customers.
Say you own a salon chain with seven locations and an average 5% churn. If one site spikes to 10% or more across a few months, it’s clear that there is an issue at that shop. Or, for a software-as-a-service (SaaS) provider that sells multiple software solutions, when one has a much higher churn rate than others, you’ll want to evaluate whether the application needs improvements, or if it’s time to adjust pricing and packaging. When you resolve problems, you should see your churn rate decline.
How to Calculate Customer Churn
To calculate customer churn, you’ll need two stats: the number of customers at the start of the period and the number at the end. The delta is the number of customers that left your service or stopped buying your product.
How do you calculate customer churn
Follow this formula to calculate the total churn rate for a month, quarter or year:
Churn Rate = Number of Lost or Cancelled Customers / Ending Total Customer Count
To better understand what that means, here’s an example. Let’s say a subscription business starts 2021 with 100,000 customers and ends the year with 120,000 customers. That’s a 20% growth rate on the surface, which shows the company is doing something well.
But if the company lost 40,000 customers and grew only due to spending more on new customer acquisition, that indicates a problem. This is why customer churn analysis can be so useful to managers and executives.
In this case, the churn rate is calculated as:
40,000 lost customers / 120,000 ending customer count = 33%
If the company could cut that churn rate in half, its year-end results would have been even better.
Why is Analyzing Customer Churn Important?
Customer churn is important because it’s more expensive to acquire a new customer than to sell more to an existing client. In fact, this is one metric that can make or break a business: If you do a better job keeping customers around, you should see your average customer lifetime value increase, making every future sale even more valuable and ultimately improving your unit margins.
In fact, the best use of company resources is often to gain an increase in recurring subscription revenue or reliable repeat business versus investing more in new customer acquisition. Keep loyal customers for many years and you’ll have a much easier time growing and weathering financial rough patches versus having to spend to bring in new customers to replace those who left.
Churn rates need to be assessed in context: That 33% we mentioned may be in line with the industry average, or it may be much better or much worse. If yours is a vertical industry where churn data is available publicly or through an industry trade organization, it’s well worth benchmarking your results against those of competitors.
High-performing companies often set a below-industry-average target churn level; track their metrics over time, perhaps using a KPI scorecard; and act promptly to address blips before they become unfavorable trends.
When to Analyze Churn
While your ERP may calculate customer churn every day in the background, doing a formal customer churn analysis too often can blur the effects of improvement efforts. To gain the most from customer churn analysis, it’s best to monitor it on a recurring basis.
Many companies choose to update their customer churn metrics on a monthly or quarterly basis. Enterprises may employ financial planning and analysis professionals to do specialized churn analyses on a more frequent or alternating basis. For example, a company with three main product lines could update all those churn metrics every month or rotate them, so each gets a quarterly refresh.
How do you detect churn?
It’s a good idea to keep track of every customer that unsubscribes, cancels or leaves, even when you are not actively involved in a churn analysis. Elizabeth Yin, Co-founder of Hustle Fund, serial investor and Founder of ad-tech platform Launchbit, advises using a technique called cohort analysis to calculate customer retention, which will also detect churn.
First, get a feel for which cohorts—or groups of customers with shared characteristics, such as when they subscribed to your product or where they shop—are leaving. Then use surveys and personal outreach to get insights into what’s driving those cohort members away so you can take proactive steps to retain them.
Benefits of Analyzing Customer Churn
Why devote effort to customer churn analysis when you could spend the time on a long list of other projects? Here’s a snapshot of benefits that accrue from analyzing customer churn.
A business sells its products or services to make money. The ultimate goal of a customer churn analysis, then, is to increase profits by lowering customer attrition. If more customers stay around for a longer period, you should see revenues increase and profits follow.
Improve the customer experience
One of the worst reasons to lose a customer is an easily avoidable mistake, like shipping the wrong item. Understanding why customers churn can help you learn about their priorities, identify your own weaknesses and improve the overall customer experience.
Also referred to as “CX,” customer experience is your customers’ perception or opinion about their interactions with your business. Their view of your brand is shaped throughout the buyer’s journey, from their first interactions to post-sale support, and has a lasting impact on your company, including your bottom line.
Optimize your products and services
If customers are leaving because of specific problems with your products or services or delivery methods, you now have opportunities to improve. Not only will acting on these insights decrease customer churn, it leads to a better overall product or service that earns you more future growth.
The opposite of customer churn is customer retention—a business’s ability to keep its customers and continue to generate revenue from them. Strong customer retention allows a business to increase the profitability of existing clients and maximize their lifetime value (LTV).
If you sell a service that costs $1,000 per month, keeping a customer for three additional months means you’ll bring in an additional $3,000 in revenue per customer without spending on acquisition. The scale and dollar amount vary by business, but the concept is universal: Repeat business is profitable business.
Customer Churn Analysis Examples
Here are examples of customer churn for a midsize subscription service and a large manufacturing company.
Example: Midsize business
Online publisher Investors’ Insights sells subscriptions to its daily newsletter for $50 per month. It currently has 20,000 customers and makes $1 million in monthly revenue. Over the last year, the company lost 1,000 customers.
The annual churn rate would be:
1,000 / 20,000 = 5%
Example: Large B2B product company
A large pool toys manufacturer sells its products through 700,000 resellers around the United States. Last month, it added 15,000 resellers and lost 9,000.
Monthly reseller churn rate:
9,000 / 700,000 = 1.3%
Predicting and Analyzing Customer Churn with Software
As a company grows, manually evaluating customer churn becomes difficult. Yet it’s important to regularly calculate and track churn metrics over time so you can spot and ameliorate problems.
ERP software will help your teams analyze and understand your company’s churn rate from various perspectives while forecasting future churn for planning purposes. A strong churn analysis program can help you model out future capital needs, make a workforce management plan and inform other essential business decisions.
Whatever you do, don’t let customer churn analysis go by the wayside for too long. You could find a problem that’s easy to fix and quickly add another zero to your monthly revenues. When you effectively employ customer churn analysis, you should find your way to profitable long-term results.