What is churn rate its calculatation and reduction

What is churn rate?

Churn rate is one of the most important indices for a company, as it measures how many of its customers are abandoning its products or services. Here, we will explain how to calculate and reduce this rate.

The abandonment rate, customer loss or Churn Rate, is a metric that represents the percentage of consumers that your company lost in a given time . Its result has a direct influence on the income of your business: the bigger it is, the less income you get.

Keep in mind that calculating the churn rate does not specifically reveal the reason for customer abandonment, but it is an indicator that there is something to improve. Thus, this metric serves to alert you about the status of your company and the satisfaction of your customers .

The abandonment rate or ratio is defined as the proportion of users who stop using a company’s services, interrupt an action that they carried out continuously over time or do not complete a planned task. The abandonment rate is inversely related to customer engagement , so companies are interested in reducing them as much as possible.

It is a generic conception that encompasses more than one different concept, since it could be said that there are several dropout rates. As a general rule, the abandonment rate is calculated as the percentage resulting from dividing the number of clients lost in a period of time and the number of clients they had at the beginning of it.

Why do I need to understand the concept of churn rate?

Understanding what churn rate is and how it works is understanding the impacts customers are having on your business and how services can improve from their experience.

This means that all activities carried out by the company are influenced by the churn rate , but some areas are more impacted than others.

1-Having high churn impacts the company financially

This is the main and most delicate impact on an organization, because all the processes carried out depend on good corporate financial management and a balanced cash flow.

If the institution is losing customers, it also loses revenue . And one of the biggest mistakes she can make is not keeping that in mind when neglecting churn rates.

2-High churn affects the company’s image

Another sensitive point for organizations that have a high rate of cancellations is the image they convey to customers.

Those looking for a product or service usually do research and ask for referrals. Imagine coming across a company that only heard complaints.

What is the impact of a high churn rate for companies?

The main negative effects of a high abandonment rate are:

  • loss of income;
  • deterioration of the image or reputation of the company;
  • demotivation on the part of internal customers , that is, employees.

How to calculate customer churn?

Although the churn rate has a very simple calculation to make, it is a rate feared by companies, especially by professionals who are responsible for customer success, the customer success team.

That’s because it’s a challenge to come across high churn. Ideally, the volume of new customers should exceed the number of cancellations .

The calculation is easy: just divide the total number of customers who canceled the service by the total number of customers in the period in which you want to measure and multiply the result by one hundred. See the formula below:

As an example, imagine that the company closed 20 new contracts during the month of May. However, of those 20, two canceled during the same month. The account would be as follows:

Churn rate = 2 / 20 x 100 = 10. 

That is, the churn rate of this company is 10%. 

Here, we did a simulation to find out what percentage of cancellations during the month.

However, it is important for the company to define exactly in which periods the calculation should be carried out, whether per month, semester or year, for example.

From this, it is essential that this monitoring is done closely.

What is the difference between churn and revenue churn?

While the churn rate identifies how many customers have canceled, the revenue churn measures how much revenue was lost with the cancellation of these customers.

Revenue churn — also called MRR Churn, which stands for Monthly Recurring Revenue — is a very simple calculation.

Using the previous example, with two cancellations, suppose that one contract was for BRL 200.00 and the other for BRL 100.00.

To find out how much was lost in revenue, just add the two contracts, which, in this case, would amount to R$ 300.00.

Now, imagine when multiple customers cancel in the same month and have high value contracts? A big loss!

Revenue churn is also very interesting in cases where the company needs to identify whether a particular product or service is really focused on customer satisfaction .

For example, a telephone operator that launches more economical service packages and has a high cancellation rate.

With the churn rate and the revenue churn, it is possible to identify that that specific product is causing many cancellations and, in the monthly amount, leading to a certain financial loss.

Then, the company must evaluate whether it pays to launch a more economical plan, but one that has high cancellation rates and brings little revenue.

Is there an ideal churn rate?

No, there is no exact churn rate , as this is very relative from business to business.

It depends on the size of the company, the segment and niche in which it operates, the customer profile, the average ticket , the country’s financial situation and many other aspects.

However, there are experts who indicate that the ideal rate should vary between 5% and 7% for most businesses, but they reinforce what we said: it is impossible to estimate an exact value for each market . As we like to give examples, here we quote one more to facilitate understanding.

The B2B segment, of companies that sell to other companies, usually has the lowest churn rate.

One of the reasons this happens is because this is a very segmented business, less sensitive to fluctuations and, generally, based on large annual contracts.

However, take note of our tip: the ideal rate is the lowest possible , and there is no doubt about that.

By the end of this article, you will certainly have understood how it is possible to reduce this percentage that is so important for the company!

What drives customers to cancel?

In general, there are many factors that lead customers to cancel contracts and services.

After all, it is very difficult to find a business that pleases 100% of its customers in 100% of the requirements.

So much so that a survey conducted by Zendesk found that 68% of customers are irritated when their calls are transferred between sectors.

This is one of the main complaints among thousands of companies surveyed. However, the most important thing is to understand what your customers’ main reasons are, what drives them to leave, and look for solutions so that the vast majority of them stay.

Check out some of the most common indicators and measure which of them may be a reality in your organization:

  • poor quality of service delivery;
  • changing customer needs;
  • bad service;
  • service that no longer adds value;
  • delivery delays;
  • expectations that were not met;
  • the price is high for the customer‘s reality;
  • lack of attention to details that are important to the customer;
  • the customer went bankrupt;
  • the customer was attracted to another company;
  • financial crisis ;
  • interruption or termination of operation.

Did you realize how many of the reasons that can lead a customer to cancel don’t depend on you or your company?

There are situations where there is not much to do and the solution is to try to negotiate the return of those that are more financially advantageous or really focus on new customers.

However, in the vast majority of cases, what leads the customer to cancel is some service provided in a way that they do not like and that often forces them to accumulate this dissatisfaction for a long time until they decide to cancel.

How to identify if the company’s churn is bad?

For many businesses, as technology evolves, more competitors appear.

This is a reality from which there is no way to escape, but it is also a positive point for companies to be always attentive to offering innovation, better care and products or services of increasingly better quality.

All of this makes the market more competitive and leads the customer to have a sharper critical sense to identify which companies really provide good services and which ones to invest their money in.

Therefore, metrics such as churn rate become increasingly important to be monitored with due attention.

And to know if the organization is heading towards an abyss or towards the right path, it is necessary to carry out market research and bet on benchmarking to understand how the churn rate of its competitors is and how it can improve internally.

If it is found that the percentage rate for this segment is x and that of your company is well above the ideal, it is time to act and identify possible obstacles that could impact your business and lead to a more complex situation.

How to reduce churn rate?

Did you understand the market, did the math and came to the conclusion that the internal churn rate is really high?

The first step is to identify what are the reasons that are driving your numbers down , that is, to understand why customers are canceling in order to avoid further losses.

However, there are also some measures that can be taken to recover these terminations and prevent the dissatisfied customer from leaving for good. We selected some.

1-Measure customers who are most likely to leave

In many cases, the customer always shows signs that he is not enjoying or not satisfied with some part of the service.

A practical situation: have you ever noticed when you go to download a company’s app on your cell phone or look for their profile on social networks and evaluate customer comments?

It is very common to find questions such as “the interface is very good, but when I need assistance, I cannot get it” or “I like the service, but the fees are very high”.

These tools are excellent sources for studying the satisfaction or dissatisfaction of your audience. Therefore, carefully evaluate the main complaints and prevent new churns.

2-Invest in a team focused on customer success

The customer success (CS) team is responsible for the customer’s success and this makes it the closest sector to its audience, being an indispensable area to avoid the increase of churn in the company.

These professionals aim to preserve the client and, consequently, maintain a healthy revenue in the company.

This is the department in charge of identifying the public that is dissatisfied — and the reasons that may lead to the customer’s departure —, understanding why this happens and trying to reverse a possible cancellation .

In addition, the CS are the professionals responsible for accompanying the entire customer journey .

This journey is so important to loyalty that, according to the aforementioned Zendesk survey, more than 70% of them expect teams to collaborate with each other.

According to the report, when a customer contacts the company, he wants to have the best experience possible.

No matter who he’s talking to, he doesn’t want to be transferred so that someone else understands his problem.

In this sense, having a team focused on solving your demands is paramount.

It is HR’s role to choose the best talents to compose this team, always keeping in mind the skills and knowledge necessary to offer the best service and ensure the success of customers.

3-Listen to complaints and suggestions and make decisions based on that

Identifying the main customer dissatisfactions or questions requires using this information in favor of the business and not neglecting it.

That saying that the customer is always right is well outdated, but that doesn’t mean that your considerations shouldn’t be taken seriously. On the contrary!

The satisfaction of your audience is the thermometer of how well the business is doing and has a chance of thriving.

Customers even have valuable contributions to the business and, often, companies do not know how to listen to them. Analyze what is being said and outline the next steps based on this feedback.

How to avoid high churn rate in the company?

It is important to note that, even if the customer has not yet canceled, if he is not using your product or service, there is an indication that something is not going well.

Something is going on and it is possibly one of the reasons we listed earlier.

It is at this exact moment that the company cannot fail to identify the customer‘s reasons; this is the first step to change your plan , offer the best service and avoid an actual cancellation. Below, we list other measures that can help reverse this situation.

1-Make a good first impression

Everyone has a great chance of being seduced when they realize that their problem will be solved in the best possible way, with good service and, consequently, a good experience.

Creating the best first impression for those who are getting to know the company is essential at this stage and creates a good image.

2-Line up what will be delivered

The previous tip should be very aligned with this one. It’s no use promoting the best experience on the business card, but not offering the same after the sale is closed .

Believe me, a frustrated expectation is one of the main ingredients to increase the churn of any company.

3-Take satisfaction surveys

It is very difficult to think of growth strategies without taking into account the customer’s opinion, understanding what is relevant to him and how his satisfaction with the company is. Satisfaction surveys are the best tools for this.

However, it is worth mentioning that knowing your audience is also essential , as it will be possible to plan how these evaluations will be conducted with them: whether by email, SMS, by filling in physical reports, through social networks, among other methods. .

4-Pay attention to what the customer says

Earlier we talked about the signals that the customer gives throughout the relationship with the company, right?

A clear example of this is when a person no longer needs a landline or a faster internet than they already have, tries to change the plan with the operator and fails.

Even worse is the scenario where companies try to change to a contract that has nothing to do with his profile. So he gets annoyed, but doesn’t cancel right away.

Over time, this customer gets to a point where he can no longer afford something that does not satisfy him and terminates the contract because he is dissatisfied with the service and service.

So listen to what your customer has to say and focus on meeting their needs before they go to the competition.

Show the value of the work performed by the company, in which ways he can enjoy the services and have the best experience and, above all, create a relationship of trust and closeness .

5-Recognize mistakes and resolve them

If you’ve come this far, you’ve already understood how important it is to pay attention to the processes carried out by the organization and, above all, to understand the voice of the customer, right?

To resolve internal deficiencies, use efficient systems to diagnose what the errors are.

This involves understanding which plans were poorly designed, in which processes the company is failing and who is not collaborating with the goal.

So, take action to change the scenario . But, before any measure, it is necessary to have concrete data, and technology is an excellent ally at this moment.

Finally, to reduce the company’s churn rate, know your audience in depth, this is one of the most important steps to avoid high cancellation rates in your company.

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