Customer churn refers to the percentage of customers that ended the use of your company's product or service during a set period of time. It's typically calculated by dividing the number of customers you lost in a quarter by the number of customers you started that quarter with.
Customer churn -- also known as customer attrition -- refers to the rate at which customers who purchase or subscribe to your product or service offering end their relationship with you and stop bringing in revenue for your business.
Let's say, for example, that you started the quarter with 500 customers and lost 25. That would leave you with a churn rate of 5%.
In most cases, this number is noted as a percentage, but as Nadav Dakner of InboundJunction suggests you should state the number in a way that makes the most sense for your business.
In his article for Kissmetrics, Dakner notes the following as alternative ways to demonstrate customer churn:
Reasons for customer churn can be personal and unique to each customer, but they usually fall under a few common categories:
Price is a common objection for salespeople and customer success managers alike. If customers find a more cost-effective solution to the problem they want to solve, they may churn. This is why it's important to establish value and customer onboarding and education so customers feel that the purchase is worth the cost.
Poor product/market fit is a common reason for customer churn and speaks to the need for close sales and customer service alignment. If salespeople are hustling to hit quota and aren't incentivized to sell to good-fit customers, the result will be churn within a few months of purchase when the customer realized they can't achieve their goals using your solution.
If the user experience with software or applications is buggy, glitchy, or otherwise difficult for them, they'll be less likely to use it on a regular basis and build expertise with it, making it more likely that they'll stick around.
Finally, if a customer's experience connecting with other aspects of your brand — your marketing content, social media channels, customer support team, and account managers -- isn't positive, they may be likely to churn. Customers want to feel welcomed and valued by communities they support, and if they don't have positive experiences interacting with your company, they won't want to stick around.
While these factors typically cause customer churn, there are few different types of churn you should be aware of as well. In fact, you might be surprised to find that some churn is actually good for your business.
Revenue churn is slightly different than customer churn, but it's still important to consider when you're analyzing this metric. Revenue churn is the amount of revenue that's lost within a given period. This doesn't necessarily mean you're losing customers, but rather you're not making as much money from your customer base as you did before.
This can happen if customers downgrade to a cheaper subscription or version of your product. While they're still shopping at your business, they're spending less money than they did before. This is a metric that your customer success team will want to keep a close eye on especially as they monitor your most loyal customers.
Every business has its competitors and there's always going to be some customers that will leave you for another company. It's not ideal, but it happens and you can't spend all of your time worrying about it.
It's more important to focus on why these customers are leaving you for your competition. Are they a bad fit for your business? Or, is it something you're doing that's pushing them away?
Once you can figure out the cause, you'll know which customers you should work to keep, and which ones are going to leave your business anyways.
For some businesses, it's common for customer churn to take place at the beginning of the customer journey. That's because these companies typically don't offer an onboarding program that teaches the customer how to use the product or service. That means it's up to the customer to figure out how the product works and how it can meet their needs.
If you're purchasing rice, you'll probably just need a set of directions printed on the side of the box. But, if you're paying thousands of dollars for software that runs your business, you might expect a bit more from your software provider. In these cases, you may even be provided with an onboarding specialist who can teach you how to use the product and how to personalize it for your short- and long-term needs.
Customers crave personalized experiences, which means most will expect your brand to create new features or products that solve their needs. If you have a diverse customer base, some may be disappointed when you roll out a new product or feature that feels irrelevant to their goals. While this new product may be great for the majority of your target audience, there may be a lingering segment that feels your brand is going in a different direction than what they expected.
This is a type of customer churn that isn't always a bad thing. If your brand is in fact going in a new direction, then that may come at the expense of some customer churn. Just be sure to actively monitor your churn rate to ensure it doesn't rise higher than what you initially anticipated.
If you're a B2B business, then you may have customers that go out of business or merge with another company. Most of the time, these instances are unavoidable and are part of working in a B2B environment. This is where your customer acquisition strategy becomes important as it balances out your customer churn rate.
Similar to a "bad fit" customer, some people may not align with your brand values. For example, if your company prides itself on providing eco-friendly products, you may come across some people who don't value this manufacturing process. Instead, these customers are more focused on a lower price point and fast delivery process than they are on buying “green” products.
So, do you give in and conform to these customers? Or, stand strong with your brand values?
If you give in, you may save these customers in the short term. Sure, they'll be happy at first, but what happens when a new competitor undercuts your price and forces you to move further away from your eco-friendly values? Do you continue to drift from what originally made your brand successful?
Customers power your flywheel, but, just like a car, it's important to put the right fuel into your engine. If you conform too much to the wrong segment of your target audience, your brand will suffer over the long haul. Instead, lean into feedback from your most loyal customers, as they'll share a vision that aligns with your brand's values.
As your company grows, it changes, too. Your customer base gets bigger, you hire more employees, and you can offer more products and services that appeal to a larger audience.
This type of change is great for your business, but it can sometimes come at the expense of customer churn. For instance, let's say you originally offered a free product that you now realize customers would be willing to pay for if it was packaged with another set of products. While this change will lead to more revenue, you may end up losing customers who only wanted the free product. Now that they'll have to pay for it, they'll move on to another company that doesn't charge them.
This is another example of natural customer churn. Yes, you're losing customers at first, but you're replacing them with new ones who will pay more for your product or service.
With churn coming in many shapes and sizes, it can be difficult to recognize what's natural churn, what's negative churn, and what isn't churn at all. To make sure you're aware of all types happening at your business, read on to learn how you can identify a pattern of customer churn.
The first step to identifying customer churn is determining what churn means for your company. Depending on your business model, churn may mean the customer cancels a subscription, uninstalls your app, or doesn't return to purchase your product after a certain period of time.
Whatever it is for your business, you'll need a set of metrics to monitor customers that are at risk of leaving your company. That way, you can set clear benchmarks for when you think a customer is about to churn. Once a customer falls below any of those benchmarks, you can reach out to see if there's anything you can do to make them happier.
You can document and track these metrics with HubSpot's free Customer Service Metrics Calculator, which can help you identify when your churn is getting to an unacceptable rate so your company can course correct.
Sometimes customers will tell you directly when they're unhappy. For example, if you send them an NPS survey after a customer service case, customers will provide feedback about their experience with your brand. And, this feedback is both quantitative and qualitative, so you can easily identify which customers are upset with your business and see why they feel that way.
Rather than waiting for customers to tell you how they feel, you can dispatch your customer success team to find out for you. It's this team's job to monitor individual accounts and reach out to users who are unhappy with their product or service. That way, your team can immediately clear any roadblocks for customers instead of having them reach out to your support team.
Most customer success teams will check in regularly with their customers. Even if they don't have a problem to solve, these meetings are great sitreps that provide up-to-date information for how the user is feeling. As more trust is developed during these conversations, customers will be more likely to voice any concerns that may have with your business.
Proactive customer service means your business is actively trying to identify and solve problems before they affect the customer experience. During this process, it's common to uncover points of friction that you may not have been aware of before. By correcting these issues, you can see how they influence your churn metrics and whether or not they were a significant cause of customer churn.
Another handy resource you can leverage is your community forum as well as third-party review sites. Community forums are where your customers come together to talk about your products and services. If you notice the same users bashing your products again and again, then you know these people are at a higher risk of churn than those who are posting positive comments.
The same goes for third-party reviews. The people who give your company the lowest ratings are the ones who are most likely to leave your business. If you can, reply to these reviews and see if you connect with the customer through one of your company's customer support channels.
Now that you know what customer churn looks like at your business, let's talk about what you can do to reduce it.
For a lot of businesses, solving for churn means identifying a pool of customers that are most likely to cancel, and refocusing your efforts to keep them on board.
However, Sunil Gupta, the Edward W. Carter Professor of Business Administration at Harvard Business School, suggests that this strategy is lacking.
Rather than redirecting time and resources to retaining any customers on the brink of churning, Gupta recommends businesses focus their attention on the most profitable customers on the brink of churning.
"If I offer an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for me? The traditional method is focused on reducing churn, but we contend the goal should be maximizing profits, rather than only reducing churn," explains Gupta.
In addition to refocusing your efforts towards the most profitable customers, Gupta suggests you consider the likelihood that a customer will respond to your re-engagement initiative -- whether it is a phone call, email, or larger promotional package.
By reaching out to your customers before they need you, you're demonstrating that you're invested in helping them get the most out of your product or service.
But not any old outreach will do. The type of message or resource you send to them should be directly tied to their product or service usage.
For example, if someone signs up for your product or service and you notice that they aren't leveraging all of what's available to them, you might send them a friendly nudge.
After signing up for SEMrush, I received the following email, encouraging me to check out a whole bunch of features I hadn't explored yet:
By surfacing these features early, SEMrush was able to ensure that I wasn't overlooking the tool's capabilities -- helping to keep me both interested and active.
Getting started with a new product or service can be overwhelming. And if a customer can't figure out how to navigate your product or service right out of the gate, they'll likely lose interest -- fast.
To ease the transition, it's helpful to set up a new customer onboarding process or roadmap to guide new customers through your product or service's features, functionality, and process. This approach makes it easier to manage customer expectations while giving you complete control over the pace at which you're surfacing more information.
Customers that feel empowered to achieve success with the help of your business are less likely to leave, so it's important that you're constantly monitoring and iterating on your onboarding process, keeping an eye out for snags or blockers.
Looking for inspiration? Here are a couple of onboarding emails I received from Grammarly -- after signing up:
Welcome Email
Notice how the welcome email introduces a bunch of popular features to help warm me up to the tool.
New Products + Features Update
This email, sent about a week after I signed up, details all of Grammarly's latest updates and improvements. By sending this to new users, Grammarly is able to communicate its commitment to improvement, while introducing a handful of new ways for users to use its services.
Give customers a reason to stick around by offering them something special -- a promo, discount, loyalty program, etc. This small effort can go a long way when it comes to showing your existing customers how much you value their business.
When determining when to surface these incentives, there are a few things to consider. For one, you'll want to think about the customer's timeline: If they are approaching the end of their contract and you're worried they might not renew, providing a discounted renewal rate could be the push they need to stick around.
Another thing to consider is the customer's needs. If you predict that a customer is going to cancel after realizing that your product or service isn't what they were looking for, incentivize them to stay onboard while you work on building out a feature or strategy that will help them accomplish their goals.
The latter is a strategy that the folks at Baremetrics employed after receiving feedback from customers who were ready to cancel due to a lack of features.
"We'd offer a discount on their next month of service to tide them over while we finished up what it was they looking for," explains Baremetrics' Founder Josh Pigford.
The impact? This small effort helped them save 15% of the accounts that were ready to cancel.
Customer frustration, which can ultimately lead to customer churn, surfaces when there is confusion around a product or service or a lack of effective support around a particular issue.
But those concepts are vague. And getting to the root of the specific issues plaguing your business requires you to take the time to collect feedback early and often.
Depending on your business needs, creating a customer feedback loop can be as easy as setting up a survey or feedback form and sending an email. Let's check out a few examples of how this has been done by brands in the past:
Dollar Shave Club
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Wayfair
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PayPal
These surveys and rating requests show the customer that you're committed to getting better -- that you're always improving.
Another way to source feedback and insights surrounding your customers' experience with your product or service? Live chat.
If you have a live chat feature enabled on your website, you can monitor those conversations to surface trends, FAQs, and common roadblocks that could be preventing your customers from seeing the full value of your product or service.
If you're waiting until a customer leaves your business, you're already too late to do anything about it. Instead, you should be using data before customers churn in order to build strategies to proactively prevent it.
No matter how much effort you put into the steps above, churn is a part of any business, and it will happen. The key is to use your churned customers (and your happy customers) to predict key signs of customer happiness and customer dissatisfaction so you can engage with customers and salvage the relationship before they churn.
First, start with analysis. When are customers most frequently churning? Is it 30, 60, or 90 days after they first start using your product or service? Does churn happen if customers go a specific number of days without using the product or service? Figure out how and when churn occurs for your typical customer.
Then, get feedback as outlined in Step Five above. Are customers leaving for specific reasons? What are their objections that led them to cancel or stop purchasing? Figure out why churn usually occurs.
Then, put these trends together so you can forecast churn before it happens, and reach out to those at-risk customers with tailored incentives and offers to re-engage them.
For example, here's an email my colleague, Sophia Bernazzani, received after taking a few SoulCycle classes in a row, then didn't book any others for three months:
SoulCycle most likely determined that a three-month gap in workout class attendance signaled churn, so they offered her a free class -- which got her back in the door for a few more classes.
Market conditions are constantly changing -- and as new software and technologies enter the space, the needs and demands of your customers will inevitably shift.
Businesses focused on what's next -- trends, technology, and product advancements -- position themselves in a good spot in terms of avoiding disruption or "the next big thing."
And while keeping your product or service on the cutting edge is important, it's also important that your customer success and support efforts remain relevant. To ensure your competitors aren't lapping you, make note of their customer success initiatives.
Are they responsive to questions on social media? Do they have live chat enabled on their website? Do they have an extensive knowledge base?
Taking cues from their strategy can help your business better serve customers and retain their loyalty.
Of course, a great way to reduce churn is to provide excellent customer service. Your service reps should be empowered to solve for the customer when they're working on fixing an issue or answering a question. This might mean that they have to spend money to make things right with a customer.
Many of the big companies that you think about like Amazon or Zappos are huge companies because they focused on customer service from the beginning.
Offering excellent customer service is a great way to stand out among competitors and reduce customer churn.
Customers are loyal to brands that have built a community around their products, service, and customers. This means that your marketing team can work on community management by engaging with customers, creating a Facebook group, or even planning events for valuable customers.
When you create a community, customers tend to stay more loyal and it will reduce the likelihood that they'll churn when something goes wrong.
Another great way to reduce customer churn is to employ customer success managers that make sure all your most valuable customers are taken care of.
Customer success managers will give customers tips on how to get the most out of your product or service. Additionally, they're the main point of contact for your valuable customers so they can reach out to someone directly instead of waiting on hold for a frontline customer service rep.
Churn can really take a toll on your business -- but only if you allow it to. Reroute your company's trajectory today by applying the tips we outlined above.