Regardless of whether you’ve heard of such a key performance indicator as attrition rate, or customer churn, before, all businesses and their customers take part in its formation every day. Would it be positive or negative? The answer is not that straightforward and depends on many adjacent factors like customer satisfaction or specific business features. Nobody’s insured against the loss of loyal customers, not even the almighty global corporations. To achieve sustainable growth and prosperity, the company’s owners and managers need to study all sides of the problem and interpret it correctly. So let’s first formulate a definition of customer churn or turnover, and then find out what rate is considered good and how to stop clients from abandoning the ship forever.
Defining Customer Attrition
Customer churn, also referred to as attrition, defection or turnover, occurs when new or loyal customers of the company cease using its services or purchase its products. Different companies have different approaches to the classification of churned customers. However, all of them assume a certain period within which the customer has not brought in a single conversion or purchase. Businesses whose income is directly dependent on long-term relationships with customers should be the first to monitor their clients’ attrition values. What could the end of client-business interaction look like? Although the result is always about the same thing, depending on the business specifics, it can have the following painful consequences:
- Deleted account;
- Canceled subscription;
- Premature termination of a long-term service agreement;
- Voluntary decision to turn to another service provider;
Try to define what customer turnover is for you. Analyze statistical data and identify “permanently lost” customers. When certain actions are quantified as those described above and things are getting clear, it’s time to do some math!
How to Calculate Attrition Rate
There is more than one way to measure attrition. Since the nature of business processes differs from company to company, managers may decide to focus on gross or net turnover. In the first case, they count the total number of churned customers and profits over a certain period, whereas net attrition is calculated taking into account the influx of new customers and profits over the same time. So let’s look at how companies can approach the calculation of customer turnover:
- Measuring the number of clients lost;
- Expressing customer churn as a percentage;
- Determining loss in recurring business value;
- Calculating the percentage of loss in recurring value.
The classic gross turnover rate formula is pretty simple and applies to the first two points:
The number of customers churned by the end of the period divided by the total number of clients at the beginning of the period.
However, new customers might have been gained by the end of the same period, which would also be useful to reflect in our formula – let’s make it a bit longer:
In this case, our attrition rate would be lower, as the company has done a good job bringing 1,250 new customers to 40,000 existing ones in just 1 month. Both formulas can be helpful in business and show the situation from different angles. But what about the last two points where calculations are based on revenue, not customers? To apply this approach, companies typically estimate a monthly recurring revenue, which is a predictable revenue the company can count on over a given period. Let’s take a look at the revenue churn formula:
This formula is not as simple as the previous ones, because both positive and negative values can be obtained as a result. Try to guess what result would satisfy demanding managers? The lower, the better! Let’s say the company’s revenue expectations were $300,000 at the beginning of the month, but by the end of the period, the number dropped to $250,000. If we calculate gross revenue churn, we will see how the customer’s downgrading affected the expected revenues, and the result will be positive, that is, bad. But what if existing customers bring in a substantial amount of $ 60,000 within the same period? This is where the above net revenue churn formula comes in handy:
NRC = ($300,000 – $250,000) – $60,000 / $300,000 =
-$10,000 / $300,000 = -3.3%
The result is negative, which means that the company has managed to offset losses in the monthly reoccurring (expected) revenue by existing customers’ upsells. As you can see, different businesses find their own way to carry out turnover rate calculations. Due to this, it is hardly possible to answer the question of what is a good or bad attrition rate – it all depends on the industry and measurement method that companies choose for appropriate situation assessment. E.g., SaaS companies report 5-7% attrition rates, while the average rates for European phone carriers are between 20-38%. In any case, companies are not willing to share statistics on customers they’ve lost, so nothing is known for sure. By the way, there are two more complementary metrics for reflecting the full cycle of customer interaction: retention rate and acquisition rate. The former will help you see the percentage of customers retained over a certain period, and the latter refers to the number of customers gained over the same time. All three metrics give 100%.
Why Is Attrition Tracking Important?
Customer attrition rate can safely be called one of the KPIs (key performance indicators) that managers need to focus on to make sure they take the correct strategic steps. Like it or not, serving existing customers is much cheaper than gaining new ones (as statistics show in many industries). If you detect customers turning their backs before it’s too late, you have a chance to identify the problem and avoid heavy acquisition expenditures.
If you use the formulas above and get extremely high customer turnover rates, this may point to the following major problems:
- Fundamental mistakes in your business offer;
- Poor customer relationships management;
- Customer experience failures;
- Technical problems with the services or products you sell.
Of course, it’s worth calculating turnover rate on a regular basis. If you don’t really like what numbers tell you, you can always try to take some steps that seem most rational and observe how they change the weekly or monthly statistics. Sooner or later, you will find the levers that could ensure higher retention and customer lifetime value.
By analyzing customer churn rate, you enjoy a lot of benefits. First of all, you will only be able to determine overall business losses if you know how many clients leave you and what their average lifetime value is. Secondly, you can calculate new sales needed to compensate for the losses. Thirdly, if you compare attrition and retention rates, you can spot emerging trends and understand why customers tend to leave or continue relationships. You may be dealing with passive or active (voluntary or involuntary) attrition. It would be helpful to know the reason why your clients abandon your services, wouldn’t it? Knowing that users prefer another service or just stop being interested in your offer, you can take completely different ways to resolve the existing problem.
How to Reduce Customer Attrition in Business?
There are many ways to optimize churn rate, and they are all good both individually and combined. The time has come for the fun part – top ways to optimize your stats. Our professional outsourcing contact center has drawn up a list of the most effective methods, backed by our own experience of working with clients worldwide:
Love at First Sight
Newly acquired customers are unlikely to be looking for alternatives to something that makes a good first impression immediately. The primary task for your business is to hook newcomers in the first 5 minutes of acquaintance with your service or product. During this time, they need to find what they were looking for and be rewarded with the first results. “Wow! Our relationship is going to be even more fruitful over time! Perhaps I won’t look anywhere else and stop at this option!” – that’s what comes to the minds of customers impressed by the first successful experience of interacting with a new brand’s product. Experience and statistics show that there is a direct correlation between the first experience and further commitment. The better the start, the stronger the relationship will be.
Show That You Care about Customers!
Don’t let your clients feel abandoned. Provide them with fast and competent customer service so that they can feel you are taking your obligations seriously. For example, when Simply Contact handles inbound calls, waiting in line takes seconds, not minutes or hours.
Want to know which aspects of customer service are the most frustrating for real customers? Then take a look at some fresh survey data collected by Zendesk :
- 42% of respondents hate having to explain their problems again and again to multiple agents.
- 52% of those surveyed will share their one-time poor service experience with relatives and friends, and 35% will no longer deal with the company.
- This may seem unfair, but only 8% of respondents said they would share their exceptional experience on customer review sites or social media.
- The relevance of the above point is enhanced by the fact that as many as 60% of respondents trust and are guided by other customers’ reviews.
Another important aspect to take into account is proactivity. Reach out to users before they can encounter a problem and report it. This will give you an advantage, as you put out the fire long before it ignites. After all, it is much more expensive to gain new customers than to provide quality service to existing ones and ensure long-standing fruitful relationships.
Keep Exceeding Expectations of Your Customers.
As noted above, it is extremely important to make an explosive first impression of your offer, but it is also important to be able to deliver on a promise. You need to present your products in the best possible ways, but at the same time be honest with your clients so that they don’t feel tricked. Many experienced companies agree that dissatisfaction caused by the company’s failure to meet expectations is one of the main customer churn reasons.
If you promise mountains and marvels, there is a good chance that you won’t lose long-acquired loyal customers, but things are more complicated when dealing with new customers. It all starts with the first cold call, the first interaction. In pursuit of higher salaries, your sales agents may cross the line and oversell your services. Provide your sales team with clear instructions and don’t let your agents go beyond the actual resources and capabilities you have.
Customer Feedback Matters!
Don’t forget that any private business works for the client, so it is ludicrous to believe that a professional opinion of company managers is the only possible truth. If you listen to your customers, you’ll be able to respond timely and prevent a drop in customer attrition rate. Identify those clients who are standing on the edge and are about to take a step into the abyss. Sometimes it’s important to read between the lines. For example, if more and more users are complaining about high rates, they may just need to be given more time. You could come up with some kind of trial period so that users could adequately evaluate all the opportunities you provide and realize what they are paying for. In any case, be ready to meet your clients’ needs and provide them with working solutions that could make their lives easier. Even a small change in the company’s policy or its product can show users that their opinion will always be taken into account in further relationships.
Find Out Why They Churn and Stop Them
Knowing only attrition definition and formulas to calculate it is not enough. If you want to ultimately influence customer churn rate and not just measure it (don’t forget we are not doing the math for fun!), you need to find “the root of evil” and cut it off. Wipe those tears and ask the leaving customers to say a few words before they go. The most important thing here is to make sure the clients have enough opportunities to say goodbye. Immediately after unsubscribing, provide them with a short questionnaire or send them a farewell email asking them to briefly explain the reason for leaving, always in a polite manner, and with no threats! All you have to do next is to identify the most frequent churn reasons and take prompt action to fix the situation.
What If You Let Them Go?
This is not a joke. There is an opinion that sometimes it is more cost-efficient to let some customers churn than to spend a lot of money on retaining them. Imagine that you measure attrition rate and find out that a certain customer group is at risk. There is every likelihood they will turn to competitors, but before offering them super-favorable conditions, do some calculations and make sure the game is worth the candle. In many industries, not all users are equally important – that’s the way things are in real life.
Of course, this is not the case for businesses like fast food or content streaming, but often, you have a core group generating the main income steadily and actively promoting services wherever possible. Such loyal customers stay with the company for a longer time and have a much higher value, so they are worth spending effort and money on. When dealing with customers’ attrition rate, try to count how much money they bring in, how likely they would accept your generous incentive, and whether it is financially sound. Proceed to the stage of customer attrition optimization only when you know the answers to all three questions. Anyway, be creative, responsive, and measure customer turnover rate regularly to keep your business safe and healthy!