Customer Churn Meaning
Customer Churn, also called customer attrition, is when customers stop using a particular product or service or stop dealing with the business. A subscriber loss leads to revenue loss if the company cannot regain an equal number or more new customers to replace the loss.
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During every business’s life cycle, there are problems related to customer churn. However, it is essential to understand that retaining old or existing customers is less costly and easy than gaining new ones at any level. Therefore, a company should always find innovative ways to gain customer loyalty and identify risks and indicators to stop customer loss.
Table of contents
- Customer Churn Meaning
- Customer Churn Explained
- Reasons
- Types
- Examples
- How To Reduce?
- Customer Churn Vs Revenue Churn Vs Retention
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- Customer churn is when a company starts losing its customers because they stop using its product or service.
- There is a considerable subscriber and revenue loss, which is very difficult to regain unless an equal or more subscribers start buying its products or services.
- It is easy and cheap to retain existing customers through product innovation and service quality improvement.
- A company should do customer churn analysis by identifying early signs and risks of losing customers and taking preventive measures before it is too late.
Customer Churn Explained
Customer churn, also known as customer attrition, is a stage in business that loses buyers or subscribers of products and services due to a lack of innovation, service satisfaction, high price, competition, etc.
It silently destroys a business process if it is not taken care of at the correct time. The cost of regaining the lost consumer base is very high. It involves a lot of analysis and research, which is time-consuming and expensive. Thus, predicting customer churn before it happens is critical in any business so it does not lose the market.
The acquisition cost and the competition level of markets are rising day by day. As a result, every business must do customer churn analysis from time to time to increase profitability, expand and grow.
Gaining new customers involves generating new leads, following up, and converting them to sales, which is not only a long process but also more challenging than retaining existing ones. The business has already earned the loyalty and trust of existing consumers. The company should frequently calculate the customer churn rate to understand the areas that need improvement to remain competitive in the market.
Customer attrition helps companies identify their weaknesses and provides ideas for improvement, a continuous process in the current frequently changing and technologically advanced world.
Reasons
There are various reasons for customer churn, as follows:
- Lack of professionalism – Customers want to deal with a company that understands their needs and values them. It is crucial that the business professionally deals with clients and gives them the best experience.
- Poor onboarding experience – If clients have a terrible experience while opting for any product or service, it creates an awful impression. The business must provide the clients with a satisfactory onboarding experience.
- Better competing product – There might be a better product available in the market that is similar but less costly or easy to opt for, etc. Thus, the customer tends to switch products and go for a competitor.
- Lack of flexibility – Technological innovations are happening continuously in the ever-changing market. Every business should be able to upgrade itself to stay ahead of the competition. Otherwise, there is a possibility of customer attrition.
- Fall in growth rate – Due to the rise in raw materials prices, lack of resource supply, and high overhead cost, businesses might experience a fall in growth rate, leading to a loss of revenue, and profit leads to a rise in price, which means losing customers.
- Poor product quality – Poor product quality is a significant reason for the high customer churn. If the product quality does not meet standards and clients are not satisfied after using them, there is a strong possibility of losing them to competitors.
Types
Let us look at the different types of customer churn:
- Voluntary churn/ active churn – In this type of churn, the clients voluntarily choose to detach from a service or product. It might be due to high prices, unsatisfactory features, poor customer service, etc. Therefore, it is necessary for the business to continuously look for product upgradation, analyze competitors, include new, exciting and useful features, and give customers the best after-sales service.
- Involuntary churn/ passive churn – In this type of churn, a customer may leave the product or service of a business without any firm intention to do so. It mostly happens in the software industry or for products that involve the use of information. The reason for churn is not business related. For example, some new software versions may have come into the market, making the old version outdated and thus losing customers. In addition, some products need the customer’s name, address, phone number, card expiration date, account number, etc., which might have changed, resulting in customer loss for the business.
Examples
Some examples will help us understand the concept better.
Example #1
Star Industries Ltd. is a leading wooden furniture company headquartered in New York City, New York. Let us assume it gets around 25 customers every month, and each product is priced at an average rate of $150. For the next three months, the revenue generated is as follows:
(25 x 150) + (25 x 150) + (25 x 150) = $11,250.
Now, let us assume that the company takes a long time to deliver the products to the purchaser after payment. It often needs to catch the delivery date. Customers are growing increasingly dissatisfied, leading to attrition, which we take at 20%. The new revenue earned by the company is as follows:
[(25 x 80%) x 150] + [(25 x 80%) x 150] + [(25 x 80%) x 150]
= [20 x 150] + [20 x 150] + [20 x 150]
= 3000.
The above example proves that attrition can drastically reduce revenue and affect the company’s growth.
Example #2
A survey on customer loyalty shows that one-third of US customers lack loyalty towards their brand and 38% of the participants feel they are eager to switch to competitors.
The study conducted by TechSee, a company engaged in augmented reality and visual technology, shows that product satisfaction tops the list when it comes to analyzing the customer churn of a company. Almost 43% of people canceled their purchase or switched to another product due to unsatisfactory experiences during or after purchase.
Consumers are becoming increasingly intolerant of poor quality of service. It is necessary to take this trend seriously, or it will become challenging to retain customers and survive the competition.
Example #3
Another research by SugarCRM, a software company that produces Sugar, a cloud-based application, shows that the tendency of customers to switch brands is alarmingly rising, and most companies need to be more competent to handle it.
The study points out that the main reasons behind customer churn are a lack of stability at various organizational levels and the inability of outdated Customer Management Systems to meet the actual purpose. Thus, an entity must address the above issue urgently.
How To Reduce?
There are ways and means to reduce customer churn, which are listed below:
- Prevention is essential – It is always better to try and prevent any problem than search for a solution later. A company should be able to identify the problem areas that might lead to the loss of clients.
- Find strategy according to the problem – Some businesses may face customer-related issues due to competition or lack of quality service. Others may lose customers due to operational problems. The solution should be based on the type of problem.
- Product innovation – It is important to keep introducing the latest product and service changes to survive in the market.
- Churn prediction – Predicting customer churn is necessary because it will help identify the cause and effect of churn in business and prevent it.
- Good customer service – It is vital to give the customers a good experience, from opting for the service or purchasing the product to after-sales service.
- Customer research – Understanding the target market is necessary to survive the competition. Thus, proper research and identification of target customers are essential.
- Quick problem resolution – Time is valuable for everyone. Therefore, a business should pay attention to the time consumed while solving client-related issues. If the solution is time-consuming, then there is every chance that clients may switch to competitors.
- Customer feedback – A business should make it a routine to take customer feedback regarding the products and company management to understand how likely a consumer will continue for the long term or leave.
- Create competitive advantage – The company must create a position of competitive advantage for itself. The entity may do it through bundling (creating a package of products with other applicable features), unbundling (separating different processes in the value chain to cater to a specific market), competitive pricing, technology, innovation, etc.
- Use of social media – Social media plays a vital role in today’s world. Any business should use it to reach a broader range of customers and identify the target market. Search engines like Google and Amazon and social media sites like Facebook look for customer preferences through search and online purchases, which will help predict customer churn and control.
Customer Churn vs Revenue Churn vs Retention
Customer churn is when businesses lose customers due to competition, lack of innovation, changing customer preferences, etc. Revenue churn measures the loss of business subscriptions due to downgrading or canceling service. Customer Retention is the ability of an entity to prevent any churn or attrition related to revenue, customers, or employees.
The differences between them are mentioned below:
| Customer Churn | Revenue Churn | Retention |
|---|---|---|
| Business loses customers. | Business loses revenue. | Businesses can prevent loss in revenue, customers, or workforce. |
| A low rate is reasonable. | A low rate is reasonable. | A low rate is terrible. |
| A high level indicates customer dissatisfaction. | A high level indicates the business could be performing better. | A high level indicates the business is growing. |
| It is calculated by dividing customers lost by the total no of customers multiplied by 100. | It is calculated by dividing revenue lost by total revenue multiplied by 100. | It is calculated by dividing the number of staff remaining at the year’s end by the number of staff who were there at the beginning multiplied by 100. |
| It monitors how many customers remain. | It monitors how much revenue the business is earning. | It monitors how many employees, revenue, or customers the business can withhold. |
Frequently Asked Questions (FAQs)
Customer churn prediction is the process in which the entity should first understand the customers, their needs and preferences, and their experience. Then, that information is combined with numerical data like the amount spent on the products, the number of visits, etc., to predict the behavior and choice. This process helps to understand the risk drivers and the churn benchmark and design a plan of action.
It is the rate at which an entity loses its customers. It is a percentage of subscribers who no longer deal with the entity or buy its products and services. It is calculated as follows:
Churn Rate =No. of Customers lost/Total no. of customers X 100
A zero churn rate is best because the entity is not losing customers. But in the real market, this is impossible. Therefore, the entity should compare its rate with the industry rate to understand whether it is in a better or risky position.
Recommended Articles
This article has been a guide to Customer Churn & its meaning. We explain its reasons, types, examples, and comparison with revenue churn and retention. You can learn more about it from the following articles –
- Customer Base
- Customer Lifetime Value
- Churn Rate Formula
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