What is churn analysis, and what can it do for your business and sales team?
Customer churn is one of the unfortunate issues virtually every company will face.
No matter how amazing your product or service is, there’s a good chance some will end up abandoning your company. In fact, the average churn rate in most industries is around 21%. This means for every 10 customers you have, you’re likely to lose 2 eventually.
Customer churn isn’t just frustrating, it can also be expensive. The cost to acquire new customers is much higher than retaining existing buyers. That’s why so many companies invest so heavily in customer retention and loyalty strategies.
Fortunately, with a churn analysis, businesses can start to determine not just how many customers are leaving, but also why they might decide to jump ship.
What is Customer Churn?
To answer the question “what is churn analysis”, we first need to define customer churn.
Essentially, customer churn is the percentage of companies that stop buying your product or service within a certain time frame. Companies can calculate their customer churn rate by dividing the number of customers lost during a period, by the number of the customers they had to begin with.
For instance, if you started a quarter with 500 customers and end it with 450, your churn rate would be 10%. Evaluating the number of users churned during a specific time period is valuable.
It helps companies define whether they need to improve customer service, enhance the customer journey, or implement new strategies to reduce churn rates.
Ideally, your churn rate should be as close to 0 as possible, but it’s worth noting that some churn is expected for most industries.
Why Is Customer Churn Rate Important?
While dwelling on lost customers and opportunities might not be a lot of fun, churn analysis can be very useful. Examining your customer churn rate, and your retention rate, will help you to determine whether you’re living up to the expectations of your buyers.
By analyzing customer churn, you can determine whether problems are evident in your business processes that need to be fixed. Looking at churn rate in different stages of the customer journey, or after implementing different sales plans, can provide useful insights.
You might learn you need to invest more heavily in retention and loyalty strategies to increase customer lifetime value, or upgrade your customer service strategy. Even improving your retention rate by as little as 5% can be enough to increase profits by 25%.
What is a Churn Analysis?
A churn analysis is the evaluation strategy companies use to understand and calculate their churn rate. At a high level, an analysis will simply tell business leaders what percentage of customers didn’t return to your business during a certain period of time.
However, by digging deeper into the numbers, teams can start understanding why customers chose to leave the company in the first place. Conducted strategically, churn analysis can provide insights into what kinds of customers are most likely to leave your business, as well as what strategies might help you to improve your retention rates.
High-performing businesses usually perform churn analysis and cohort analysis on a regular basis, to monitor and benchmark how customer behavior might be changing. There are also analytical tools available that can help businesses to compare their churn rate to that of their competitors.
How to Conduct a Churn Analysis
Conducting a churn analysis can be a relatively straightforward process, particularly if you have access to analytical tools in your business. To begin the calculation, you’ll need two statistics: the number of customers you had at the start of a period, and the number you had at the end.
You can conduct a churn analysis on a monthly, quarterly, or annual basis, depending on your needs. Some companies also choose to go deeper with their churn analysis strategies, looking at specific segments and customer groups.
Once you have the numbers you need, you can define your churn with the following formula:
Number of lost customers / initial customer count = churn rate
It’s important to look at other contributing factors when examining your final customer count too.
For instance, you might start a month with 100 customers, and end it with 90, but if you lost 40 customers during that time, and only regained 30 with high-cost marketing and sales strategies, there’s still an issue. It’s also worth looking at why churn is happening.
For instance, ask yourself:
- Did the churn happen early in the buying journey, or later on?
- Did a customer proactively cancel your service, or just fail to renew?
- Has a customer completely left your business, or swapped to a cheaper product?
Why Does Churn Analysis Matter?
A thorough churn analysis goes beyond simply calculating your churn rate. It helps you to identify pain points and issues throughout the customer journey. When you analyze customers with a churn analysis, you begin to spot reasons for customer attrition.
Examining the point (time) when a customer churns, their reasons for churning, and other factors will allow you to:
- Identify your weaknesses: Churn analysis can reveal patterns that showcase the reasons for customers leaving your business, such as price sensitivity or product adoption issues. It also shows how customers engage with your product throughout their lifetime.
- Uncover opportunities: Analyzing customer churn is the first step to reducing churn, and increasing customer lifetime value. If you can uncover what causes customers to leave your business, you can come up with strategies to resolve those issues.
- Predict future churn: Looking at churn from the past can help you to reduce customer churn in the future. If you can predict how much churn you’re likely to see in the future, you can implement more strategic processes to retain your customers.
How to Reduce Customer Churn
While some churn is common in any business, every company should be actively working on reducing their churn rate, and increasing retention rates. While the exact strategy you use to reduce customer churn will depend on the insights you draw from your analysis, the following tips can help:
- Focus more attention on your best customers: Rather than just offering incentives to customers who might consider churning, focus on retaining your existing loyal customers. Show your customers you care about them, and they’ll be less likely to churn.
- Analyze reasons for churn: Use insights into your churned customers as a way to understand why your customers are jumping ship. Analyze how and when churn happens in the customer lifecycle, and use the data to your advantage.
- Offer excellent service: Focus on proactively delivering excellent services to your customers. Look for ways to keep customers engaged with specialized and personalized offers. Communicate and follow up with leads regularly.
It’s also worth noting you might be able to use your churn analysis to predict when customers might be likely to leave your company, so you can get one step ahead. If you know a customer is likely to churn, you can invest more effort into re-engaging them with offers and deals.
Managing Churn with Churn Analysis
Churn analysis is an important tool for any business. It’s crucial to gaining a clear understanding of your target audience, and why they might choose to abandon your business. While it’s easy to focus your attention as a company on attracting new customers, it’s worth remembering your existing clients are crucial to your success.
Investing in tools like ERP software and analytical systems can help you to keep a close eye on your churn rates over time, so you can act quickly when retention drops.
If you need help learning about the different types of analysis that can benefit your business, join the Hard Skill Exchange! Learn from experts about how you can reduce churn, improve retention rates, and increase customer lifetime value.
