What Is Customer Churn Rate? Its Impact and Benefits for Businesses

Vũ Khôi

Author at Wotech Electronics Blog

What is customer churn?

Customer churn is a business term meaning the departure of customers. Customer churn rate, then, is the percentage of customers who leave within a given period.

In business, if customers are not satisfied with the services and products you provide, they will leave — in other words, they will stop engaging or doing business with your company.

How to calculate customer churn rate

Customer churn rate is a percentage calculated from the number of customers who leave and the total number of customers in a specific period.

The number of customers who leave is the total count of customers who terminated their contracts or stopped using a company's services within a given period, while the total number of customers is the total count of existing customers during the period surveyed.

Example: At the end of February, company A had 5,000 existing customers in total, 200 customers terminated their contracts, and 100 customers stopped using the product. Company A's churn rate is therefore:

(200+100)/5000 = 3/50 = 6%

The impact of customer churn rate on businesses

This is a painful problem that every business faces. There are 2 main impacts that SimERP wants to highlight in this section:

First, financial loss. Clearly, the more customers leave, the more a company's revenue and profit decline — sometimes by a large amount. Moreover, according to Forrester, the cost of acquiring a new customer is 5 times the cost of retaining an existing one. In particular, the cost of acquiring a new loyal customer is 16 times the cost of retaining a current loyal one. So if you lose existing customers, your business loses a sizable chunk of revenue and also spends heavily on attracting new ones.

Second, revenue will grow when the customer churn rate is low. The more customers a business retains, the higher its profit. According to a Harvard University report, on average, for every 5% of customers retained, profit increases by 25% to 95% — figures we would never have imagined.

According to Superoffice, the surprising thing here is that more than two-thirds of businesses have no concrete measures or strategies for preventing customer churn despite its significant impact. So below, SimERP will introduce some simple and effective measures for customer retention.

8 customer retention solutions you need to know

Analyze the causes

Businesses need to find out why the churn rate is rising, because every problem has a root cause. It may be that customers no longer need the product, that the company made errors during production, or that the customer service team's attitude was poor. Once the cause of the problem is identified, managers need to devise measures and directions to resolve it.

Devote more time to existing customers

Sometimes, because interaction between you and your customers is so sparse, they forget that your business sells the product they need. So try to spend more time on existing customers — for example, sending messages or giving gifts on meaningful holidays. They will certainly be impressed and feel more valued by your business.

Educate customers

In many cases, customers have used a service or product for a long time yet still do not fully understand the features and benefits they can receive. So provide information to customers, and supplement and improve the knowledge of those who have limited direct contact with your company's service staff — for example, customers in remote areas or the countryside.

Encourage customers

To stimulate customer demand, businesses can offer special policies such as discounts, promotions, or buy-one-get-one-free deals. This is a very effective solution that attracts a large number of buyers and is used by many businesses.

Improve product quality and customer service

In philosophy (the study of how human society develops), the interests of a business are always aligned with the interests of its customers. Conversely, customers will turn their backs on the products and services a company provides.

For example, if customers want an expensive, high-quality computer that can handle many tasks, but during production you cut some features for the sake of profit, your business will certainly suffer heavy losses, and quite a few customers will leave. Today's customers are increasingly sophisticated, with many sources for researching products and their benefits. So be sincere and honest, and create products of good quality.

Measure the satisfaction index

"Track your Net Promoter Score" means measuring how satisfied customers are and predicting whether they will continue using the product or service, as well as recommend it to family, friends, and acquaintances. This index has been around since 2003 and is applied by nearly 65% of the world's top 500 companies (according to Bain and Company). The scoring scale is classified as follows:

• From 0 to 6 points: customers are considered detractors (people who criticize and bad-mouth the business)

• From 7 to 8 points: customers are considered passives (people who are indifferent and may leave the business for a better one)

• From 9 to 10 points: customers are considered promoters (supporters who refer new customers to the company).

Customer Effort Score

The Customer Effort Score (CES) is an index used to determine the amount of effort customers had to put into using a product and the likelihood that they will continue paying for it. Customers rate their own experience on a 7-point scale, from "Very difficult" to "Very easy."

Prioritize loyal customers

To encourage loyal customers to keep using the product, businesses need preferential policies for them. For example, offering bigger discounts than for new customers, or additional promotional items on subsequent purchases.

The benefits of reducing customer churn rate

Know when to change

Feedback from customers who are not satisfied with the products and services a company provides will make its operations and organization better. Knowing how to change and correct mistakes is how a business keeps climbing in this harsh environment.

Reduce business risk

The churn rate reflects the quality of the products and services a business is providing. Selling to and retaining existing customers is easier and faster than winning new ones, so keeping this rate from climbing high helps reduce revenue risk.

Understand your target market better

Surveys on the churn rate help a business understand its customer groups better and find out why they no longer use the product. From there, it can focus on potential customer groups and spend less time on those with no demand.

It lays the groundwork for market expansion

Attracting new customers and retaining existing ones are always top priorities for businesses. Knowing how to reduce the churn rate gives a business more experience in the marketplace and lets it leverage its other strengths in the future.

Conclusion

Customer churn rate has a major effect on a business's operations and on how long it can survive in the market. Managers and team members alike need to work hard to reduce the churn rate and successfully retain customers.

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