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Managing your money

Understanding customer retention and churn

Change happens quickly at the moment. So it pays to keep a close eye not only on your numbers, but also on the factors that shape them.

Monitoring customer churn, or the rate at which you lose customers, is crucial. In a time of constant readjustment, keeping customers can be the difference between a steady source of revenue and an erratic one.

But like any relationship, customer relationships require nurture and care. If you get it right and pay your customers the attention they deserve, the relationship will be a healthy and long-lasting one.

Why is customer churn important?

Customer churn is important because of the vital knowledge it gives you about your business. Without knowing how many customers you’re losing, how can you tell how satisfied people are with your product or service?

What’s more, it’s easier to keep customers than it is to attract new ones. The stats vary, but even the lowest estimates suggest that acquiring new customers costs five times more than retaining existing ones.

So either way, you only stand to gain by measuring how long customers stick with you. Digging deeper and really understanding why customers leave requires more work, but the act of tracking how many do so is the critical first step.

How do I calculate churn rate?

It’s up to you how granular you want to get with customer churn. But tracking churn rate, the percentage of your customers who leave during a given time period, is fairly straightforward.

To calculate it, first you need to designate a specific time period and figure out the total number of customers you’ve gained and the number of customers you’ve lost during that same period.  To get your churn rate, you divide the number of customers you’ve lost by the number you’ve gained and multiply the resulting decimal by 100%.

There are simple tools out there too, that you can use to automatically calculate your business’ churn rate.

How do I prevent customer churn?

Bad customer service is one of the biggest reasons why customers part ways with a product or service. To retain customers, your business has to provide an excellent experience every step of the way.

Take IKEA, which has been keeping customers coming back for over 75 years. Why? Because it works to meet customers’ needs online, in-store and at home. From mattresses to meatballs, IKEA’s little touches make the difficult task of furniture shopping that bit easier.

Regular businesses obviously operate on a much smaller scale, but this can work to your advantage. Like the shopkeeper who knows every customer by name, small businesses have a smaller pool of customers, who they can properly get to know and strive to improve for.

In fact, small businesses already have a leg-up on larger firms at an industry level too, as they typically operate less in sectors where switching is more common, like energy or banking. So make your business indispensable in a way that large businesses can’t – be there for your customers, listen to their needs and act on what you learn.

If a customer is about churn because they’re in financial trouble, that needn’t be the end of your relationship. See you what you can do to keep them as customer, whether its postponing payments or an instalment plan that works for both of you.

Customer service in the age of coronavirus

The long-term impact of this crisis on customer retention remains to be seen. But many businesses have been quick to adapt in the short-term, changing their offering to keep the money coming in, often against insurmountable odds.

Fortunately most of us are happy to tolerate initial teething issues. If a delivery comes late or our experience isn’t as seamless as usual, we’re willing to give the company the benefit of the doubt. But still, this patience runs out eventually. Plus consumers tend to be more careful with their money in a downturn, as we’ve seen in previous recessions. This period will likely be no different.

As many businesses remain closed, they’ve also had to adjust to a reality where they can’t interact with their customers in person. In the absence of these face-to-face interactions, technology is the next best thing. Getting your business’ story out there, as it twists and turns during this difficult time, can encourage customers to stick with you.

Ultimately, the same principles apply now as they would during less turbulent times. Invest in your existing customers rather than going after new ones. And most of all, soak in every learning that you can from your interactions with customers, so that your business continues to improve.

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