If you run a startup, it doesn’t take being a growth specialist to understand the negative impact that “customer churn” — also known as “customer attrition” can have on your bottom line.
It’s every marketer’s nightmare. And while not all customer attrition is bad (not all customers are a good fit for your business), your ability to proactively prevent existing customers from slipping through the cracks within your sales funnel can boost your business.
Everything — from your business’ growth rate to your Customer Lifetime Value and CAC Payback Period — is directly tied to your customer churn rate, which is why it’s one of the initial hurdles that startups must scale (no pun intended) very early on.
You can do everything else – build your minimum viable product, and pull off marketing masterstrokes, but you’ll hardly have a sustainable business model until customer attrition is reduced to its lowest ebb. KPMG’s Global Customer Experience Excellence Report also finds that customer retention is the primary driver of a company’s revenue.
Ready to start chipping away at customer churn roadblocks on your way to growing and scaling efficiently? Here’s the lowdown on what customer churn means, why it matters, plus a few CRM-led strategies to help you cut down on churn.
What does churn mean, and why is it a big deal?
Customer churn is the ratio of the customers that you have lost within a specific period relative to the number of customers that you had at the start of that period. In plain terms, it’s a metric that tells you how fast you’re losing customers.
To illustrate, if you had 1,000 paying customers at the beginning of the first quarter and lost 100 of them along the way, that’s a churn rate of 1 out of 10 customers or 10%.
Why does it matter? Well, consumer data reveals that retaining existing customers costs five times less than what it costs to acquire new ones; and that selling to them has a success rate of as much as 70%, compared to only 20% for new leads.
Plus, this research from Bain & Company tells us that as little as a 5% increase in our customer retention rates can dramatically increase your bottom line by around 25% to 95%.
Considering the extensive similarities between both markets, it’s expected that these trends are as true in Europe as they are in the United States where the data was collected. From the available data, we can agree that it is much cheaper, easier, and profitable to keep your existing customers around.
So, regardless of how many new customers you bring in, you’d be leaving a significant amount of money on the table from all that lost customer lifetime value, if churn is high.
What does a high attrition rate mean?
“Customer attrition” and “customer churn” — meaning the same thing — are often used interchangeably. The harsh reality is that some customers will always leave, for various reasons; sometimes, due to no fault of yours. For instance, some customers will likely not be a good product fit, or involuntary churn (credit card fails)
But there’s an acceptable range, outside of which it becomes clear that you have an attrition problem. There’s no universally defined range of attrition rates, as it differs between industries. But for startups, it’s best practice to keep it within the 5-7% range yearly so it’s always easy for your marketing department to compensate for the loss with new customer acquisitions.
If you notice a surge in attrition rates, then it likely means that one (or more) of the following is happening:
- Your customers are not satisfied with the quality of your products or service;
- Your customer service is poor; or
- Your products or services are not competitively priced.
Of course, plenty of other factors could cause high attrition; you’ll probably need a deep audit to figure out which ones pertain to your business. That said, these three factors prominently feature among the most common causes of attrition.
There are four ways to calculate customer churn, but the widely used method is to simply divide the number of customers who have left your company (churned customers) by the total number of customers you have to give you a percentage that represents the portion of your customer base that has churned. (customer churn rate).
Of course, there are other ways to measure customer churn, and you may want to use a different method depending on your specific business and goals. For example, the second formula looks at customer churn from a slightly different perspective; this formula divides the number of customers who have left by the average number of customers you had during that period to give you a more accurate picture of how many customers are actually leaving your service over time.
What are the different customer types?
All the volatility in your customer churn rates can be traced back to one variable: customer satisfaction. As long as your customers are satisfied with the service that they receive from you, the likelihood that they would leave you for your competitors will remain close to zero.
With this in mind, customers are grouped into the 3 main classes on the satisfaction scale. Here, we will explore these stages and what steps can be taken to halt the churn of customers in each stage.
Customers in this category think your products or services fell below their expectations. To curb churn in this category of customers, you may:
– Collect feedback
There’s no way to learn that your customers feel unsatisfied without hearing back from them. It might be a problem with your product or with the quality of your customer service and the conduct of your staff. This is why a very important aspect of every transaction is the survey at the end asking how they feel about the service they just received.
– Improve your products or services
Once you’ve determined that your customers think your services are beyond the pale, you must immediately fix the issues. That’s the fastest way to prevent any more customers from becoming dissatisfied too.
– Offer apologies and compensation
Finally, you show customers some empathy with apologies, compensation, and incentives — anything to make them feel heard and that you are truly concerned about their success with your product.
Here, you have a pool of happy customers who have derived maximum utility from your products or services. For them, the value received was on par with their expectation.
At first glance, this is great, and there’s probably not much else to sweat about. But with the intense competition out there, other competitors probably offer equally satisfactory products and services. A few steps to take are:
– Optimise for indispensability
The only way to truly lock down customer loyalty is to provide an unrivalled service; truly better than what any of your competitors offer. Surely, this doesn’t mean patenting your products, but your offerings must be designed to be indispensable for your customers.
– Institute proactive customer service
Proactiveness means acting to prevent an unwanted event before it happens. In this context, it means engaging your customers randomly to find out if there’s anything they are struggling with; before they fall into the dissatisfied class.
The final class of customers is those whose expectations you’ve not only met but exceeded. Already, you have hit a home run with these people. But the worst mistake startups can make is to rest on their oars. A strategy is still required to prevent churn for customers in this class.
– Offer loyalty and referral points.
Since these customers are already delighted with your services, you can excite them even further with such little gestures as loyalty and referral points. These can be made into fun activities to make their interactions with your business even more worthwhile.
– Cultivate a community
Building a community of your customers is another way to keep your delighted customers loyal to your business. It’s a key feature of human nature to want to feel part of something. Creating a community taps into this primal desire. It helps improve the customer experience, and it inspires customer loyalty. It’s a win-win.
Reduce customer attrition rates using a CRM
If there’s anything that has been well-established, customer churn arises from some sort of customer dissatisfaction. To varying degrees, every cause of dissatisfaction can be, in turn, traced back to the absence or improper implementation of a personalisation program.
With so much market competition these days, personalisation offers businesses a new way to build a sustainable competitive advantage. The best way to reduce customer attrition is by adopting a CRM.
With a CRM, you can:
- Get access to accurate information and segment your customers into sub-groups, based on their shared characteristics so you can communicate with them more promptly and effectively. With Efficy CRM, contacts can be segmented by location, purchase history, behaviours and more. Efficy’s opportunity tracking feature also lets your team track the status of each sales opps to gain context and perform the scheduled tasks or interactions needed to boost chances of conversion.
- The optimal complaint management feature in Efficy CRM allows your support team to intercept and respond to their problems as early as possible, boosting customer loyalty; since it makes little sense to fix what’s not broken, they’ll hardly see the need to consider your competitors.
Stop customer churn in its tracks using Efficy
Since — let’s face it — customers come and go, customer attrition rates may never dwindle to the 0% mark. However, they must be kept low enough to preserve your bottom line, and startups must pay attention to this metric for their growth.
And while there are no defined ranges of acceptable rates, you can constantly evaluate your performance by benchmarking your attrition or churn rates against your competitor(s) or the industry average.
Efficy is a top-flight European company providing 360-degree intelligent solutions for personalisation and customer relationship management to some of the best-known names across Europe. From CRM software and email marketing to marketing automation, and more.
We have everything you need to reduce churn and get the best returns on your sales and marketing efforts. To see how Efficy can help you keep your customers satisfied, request a free demo today.
Find out how Efficy is the best option for your business!