Getting new customers to your business is great.
Losing existing customers is not-so-great.
To be an effective marketer and drive a profitable business, you need to understand the ratio of customers who are leaving your business over a specific time period, to ensure that the methods you use to get new customers offset those losses.
Customer churn rate is the percentage of customers who leave your business over the course of a specific time period – usually monthly or annually.
Calculating customer churn rate
Calculating your customer churn rate is pretty straightforward. For any given time frame, divide the number of customers you lost during that time frame from the total number of customers you had at the beginning of that time frame. A key here is not to include any new sales you had in that time frame.
For example, if you started the year with 100 customers, and lost 10 of them by the end of the year, your annual churn rate would be:
10 lost customers / 100 total customers = 10% churn rate
Even if you added 50 new customers in that year, you wouldn’t include them in your annual churn rate.
What churn rate does and doesn’t tell you
Many companies use customer churn rate as a measure of their company’s overall success. A low churn rate may show that customers like your products and services, and they aren’t willing to go anywhere else to get something similar. It is usually a great sign that the company is healthy and customers are happy.
A high churn rate may show that a company is in trouble. If a large portion of customers are leaving your business, you are probably having to work harder to gain more customers to fill the revenue gaps those churned customers left.
However, a temporary high churn rate may not be a terrible sign. Remember, customer churn rate is not a revenue churn rate. Sometimes, as a business shifts its focus toward higher paying customers, it may lose some lower paying customers.
So while the churn rate may go up, the company may be gaining larger revenue clients to replace lower paying clients.
Marketing’s impact on churn rate
Marketing is usually laser-focused on new business. However, the easiest sales you can make are to existing customers. That includes keeping existing customers.
Making a small impact on customer churn rates can have a big impact in overall revenues for a company.
Are your marketing activities primarily focused on new business acquisition but not on retaining existing customers? If so, it may be time to take a step back and look at the impact your marketing can make on your company’s overall churn rate.
About Sketchalytics
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