Churn Rate is a primary factor in determining sales goals, projecting cash flow, and managing business growth. To determine a sound customer acquisition strategy it is necessary to examine the average lifetime value of a business’s customers. Understanding and accounting for churn rate will ensure stability at scale.
“Churn rate represents the number of customers that will end their contracts over a given amount of time. Correctly identifying when new customers must be retained to replace the lost once ensures continued growth.”
– Generating Repeat Customers
While average customer lifetime and customer life cycle are typically defined by time, it provides greater insight to view churn rate as a proportion of customers and their associated revenue loss on a per month basis. This way, the exact figure of future gains lost, and their inherent need to be accounted for in cost savings or additional sales, can be shared across departments.
Churn rate is a good indicator of everything from customer dissatisfaction to necessary tweaks to customer relationship management and a potential increased emphasis on creating customer dependence to extend average customer lifetime.
Customer dissatisfaction can cause an increased churn rate. However, if cancelling the service or breaking a contract comes with high barriers, churn rate can improve (caused by high customer forced retention) while customer dissatisfaction increases. In this case the short-term business health appears to rise, but the long-term reputation for the business will ensure its future failure.
Customer Relationship Management (CRM) can greatly affect a business’s churn rate. Managing client relationships and the techniques used to measure monthly support time including client emails, calls, meetings, and work result in either transparent working relationships or unhappy customers. Client contracts should clearly state the monthly time allocated to support services and the tracking method used to manage such interactions. After each client interaction a confirmation should be sent to the client stating the number of minutes/hours used, their current monthly total, and either their remaining time or monthly overage and associated charges. Creating a transparent working relationship will minimize client confusion, and thus, client dissatisfaction.
Creating customer dependency can include a number of services or products. One such strategy we implemented at CNSLT.us was the development of proprietary technology allowing for i) mobile, trackable redemption of coupons (CNSLT.bz), and ii) instantaneous customer reviews at both hotels and restaurants to ensure customer satisfaction and loyalty (CNSLT.in). As a result of building your own barriers, you can minimize clients not renewing contracts (or breaking them) and increase returning customers after departures. The result of measuring the churn rate with the number of returning customers is referred to as gross churn.
By determining what the majority of customers’ reasons for returning are, a business will be able to highlight its differentiating factor (value add) to be used in future sales and marketing.
Note: While featuring a business’s differentiating service or product properly will increase sales, I would caution making it available as a discounted loss lead product where the future, full list price will cause current clients to leave the service and only return upon future sales – circumventing ever remitting payment for the true selling price.