Say you spend $100 on marketing to convert a prospect into a buyer, who then purchases $50 in goods or services but never returns. That’s customer attrition, and it’s costly. Show
Strong customer retention requires not only knowing how many buyers are leaving but why, what it costs to replace them and calculating the odds that you could get them back with some targeted outreach. Without this information, it’s difficult to know whether your offerings are meeting customer needs. Monitoring customer attrition is a best practice for any business. It can help organizations understand a particularly relevant form of ROI, or return on investment—return on customer acquisition investment (ROCAI). In this article, we’ll share lessons and advice relevant to companies across industries. What Is Customer Churn or Customer Attrition?Churn, or attrition, is the rate at which customers stop purchasing your products or services measured across a specific time period. It’s a critical KPI that all businesses should track. It could mean, in the example above, that your products have only temporary value. In the case of a recurring revenue or subscription business model, that competitive offerings have higher appeal, or that your customer service is sub-par, for example. Statista found that, in 2018, U.S. cable companies experienced the highest rate of churn, at 28%, followed closely by retail at 27% and financial firms at 25%. Travel companies fared best, at 18%. If we take 20% as an average, companies are losing one of every five customers they worked so hard to acquire. Customer Retention vs. Customer AttritionRetention rates reveal how many customers renewed their subscriptions or continued to purchase products over a specified time period; attrition rates help understand how many opted out of your products or services. A high churn rate limits the rate at which a company can grow, because it means it must continually spend to acquire new customers. The analogy is a hamster on a wheel—without retention, you won’t get anywhere. You spend a lot of money and effort finding prospects and convincing them to try your goods or services. It makes sense to use every available tool to not only retain buyers but to predict when they might want to buy even more of what you’re selling; in other words, to make them loyal customers. Why Is Customer Churn Important?It’s conventional wisdom that acquiring a new customer is significantly more expensive than retaining and growing an existing customer. But don’t take the analysts’ word for it. Here’s a back-of-the-envelope way to calculate your cost to acquire a new customer: CAC Worksheet To determine your rough per-customer acquisition cost (CAC), decide on a time period, like a month or quarter; add up all the costs of sales and marketing, including loaded salaries and contractors; external services and internal tools used by your marketing and sales teams; and the cost of running paid search and social ads, or advertising in other media like radio or display.
Then, see how many new customers or subscribers you gained during that time span. If you believe there is a lagging relationship between marketing efforts and new customers, you may want to factor in a specific attribution window like one week or one month. Once you have both numbers, use this formula: TOTAL SALES & MARKETING COSTS / NEW CUSTOMERS = CAC Churn rate is important because for every customer you acquired then lost, that spending needs to happen over again just to keep buyer numbers level. That is, the amount a customer spends must equal over time the amount you spend to acquire a customer, or else you’re losing money on each customer. A high churn rate means you’re a hamster on a very expensive wheel. What Causes Customer Attrition? Why Do Customers Leave?These are a number of reasons customers opt out; some are voluntary, some are passive or involuntary. Maybe a B2B buyer’s company was acquired and no longer needs your service, or a consumer may have had a change in lifestyle that made your product unnecessary. While it’s well worth reaching out to all leavers, it’s the voluntary ones you need to worry about, because they also have the potential to become active detractors. Voluntary attrition factors include traditional reasons customers leave—poor service, they didn’t perceive enough value, they shop based only on price or availability and haven’t developed loyalty to your brand. While the root causes of attrition are unique to each customer and company, some generalities across industries include:
Calculating Customer Churn RateAll companies have churn, with some industries experiencing more than others. A commodity services business, like a cellular provider, will measure churn differently from a high-end retailer. Getting a sense of how many customers are leaving is the first step; then you can begin to chip away at the why. You also may not value all customers equally in your calculation. A customer who leaves in the first 90 days of a subscription, or after one purchase, shouldn’t carry the same weight as losing a client who’s been with your company for years or represents a high customer lifetime value and thus contributes to profitability. Customer Attrition FormulaOnce you set the moment and metric of attrition for your company, the formula for customer churn rate is pretty simple: Divide the number of customers who left during a certain period by your total number of customers during that period. Churn/attrition = Customer Attrition ExamplesDefining the moment of attrition isn’t as straightforward as it may seem. Let’s look at churn for a Software-as-a-Service (SaaS) company. A month-to-month customer hasn’t officially churned until the subscription period ends. Unless you prorate, the moment of cancellation is not the moment of churn, as the customer is paying until the end of the month. Consider Cents Bookkeeping Software. Three of the firm’s 10 customers failed to renew their subscriptions in January for February. If those customers are counted as churned customers in February’s calculation, the churn rate is 30%. On the other hand, let’s look at a retail establishment. It’s much trickier to calculate churn rate for a business like Scents Discount Perfumes, which has both a physical store and an ecommerce site. A business like Scents might use a transactional churn metric such as repeat purchase rate, where it looks at the length of time since the last visit or the length of time in between purchases. What Is a Good Customer Churn Rate?The quick answer is “zero,” but that’s not practical. And since there is no GAAP definition of “churn” or “retention,” companies use different ways to determine these metrics. That makes it challenging to compare and benchmark within and across industries. We’d argue that the important part of “customer churn rate” is “customer.” As discussed, you need to value customers differently in churn-rate calculations. There are a number of methodologies that model the distribution of customer lifetimes in a statistically sound way for each individual business. Customer Churn Rate by IndustryLet’s use our SaaS provider as an example, where renewal rates help the business determine its churn rate. Seventy percent is a foundational renewal rate for SaaS companies; 80% is competitive, 90% is best-in-class and 95% is transformative. Here, and in many types of “as a service” firms, renewals are the ultimate measure of success. Renewal rates are the inverse of attrition rates and indicate how satisfied customers are with your product. High renewal rates predict a longer customer lifespan and more revenue for years to come—those customers may even purchase premium services, increasing their value to your business over time. Renewal rates may be calculated based on the count of customers or the value of contracts. For retailers and other product companies, analysts suggest that an annual churn rate between 5% and 7% is average and that anything over 10% should drive efforts to better retail customers. How to Reduce Customer ChurnNow that you know your churn rate, you can start to dig into the reasons customers are leaving. Is it because they aren’t getting enough perceived value or desired support? Or are your products and services not meeting their needs? What changes might get them to continue to buy products or renew subscriptions? Figuring that out is not just marketing’s job. The finance team can weigh in on pricing, while sales leaders need to regularly speak with customers and feed insights back to the business.
8 Strategies to Reduce Customer ChurnHere are some steps to increase retention.
Predicting Customer AttritionUsing historical data and assumptions as well as this bucket of performance indicators, organizations can build predictive models that play out customer churn possibilities and put tools in place to automate certain actions—such as alerts for a-risk customers. Today, companies have a lot of options when it comes to predicting and preventing customer churn. Businesses that depend on recurring revenue, for example, can use software to automate renewals and billing and easily keep track of multiple subscription plans, pricing schedules and promotions. Other companies can use CRM solutions to collect data on customer accounts, such as billing, orders and service requests. If customer “touches” seem to be dropping off, the system can trigger proactive outreach efforts. There are steps every business can take to reduce customer churn—but all of them start with collecting and analyzing data. The payoff is having a single view of the customer, order and item data with which to deliver better customer experiences and minimize attrition. When a salesperson does not follow through and follow up on a sale what is lost?According to IRC Sales Solutions, only 2% of sales are made during the first point of contact. This means businesses stand to lose potentially 98% of their sales leads if they do not follow up.
Is the process of identifying prospects who have a need for your product and should be contacted?Prospecting is the first step in the sales process, which consists of identifying potential customers, aka prospects. The goal of prospecting is to develop a database of likely customers and then systematically communicate with them in the hopes of converting them from potential customer to current customer.
What should a salesperson do first to answer a customer's objection?Understand their concerns
Instead, acknowledge what they've said and clarify the objection in order to understand the underlying issue and get some useful context as to whether the problem can be solved, and if so, how. This is key to helping you address the actual concern on your customer's mind.
In which step of the sales process would potential customers be identified?Prospecting
The first step in the sales process is prospecting. In this stage, you find potential customers and determine whether they have a need for your product or service—and whether they can afford what you offer.
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