Customer attrition or churn is a big negative for any business.
Not only does it signal that customers are dissatisfied with your service and don’t want to do business with you again, but it also negatively affects your bottom line as it means you have to attract even more new customers.
An effort that can cost up to 5 times more than simply retaining an existing customer.
In this post, we’ll look at why customers churn and how to reduce this.
What is Customer Churn and Why is It Important?
Customer churn is an important metric for businesses looking to increase their lifetime customer value (LCV).
A study by Bain and Company showed that a 5% increase in customer retention could increase the customer value by up to 95%.
Similar studies have shown that repeat customers become more profitable over time.
Image source: Forrester
This increase in profitability can be attributed to customers not only buying more but also to a decrease in service, support and acquisition costs per customer (it costs 7 times more to attract a new customer than retain one).
Image source: Customer Lifetime Value
Not only are repeat customers more profitable (approximately 23% more than others) but they also spend 67% more than new customers and are 60-70% easier to sell to as they are 50% more likely to try a new product or service you market to them.
Customer churn is the percentage of customers that stopped using your company's product or service during a certain time frame. You can calculate churn rate by dividing the number of customers you lost during that time period -- say a quarter -- by the number of customers you had at the beginning of that time period.
For example, if you start your quarter with 400 customers and end with 380, your churn rate is 5% because you lost 5% of your customers.
The high cost of customer acquisition means that most customer relationships are unprofitable early on. Only after the costs of serving loyal customers fall and the volume of their purchases increase do businesses start to see a return.
That’s the good news: repeat customers are more profitable. The bad news is that retaining customers can be as difficult if not more difficult than attracting new ones.
So to help your customer retention efforts, let’s first look at why customers leave and then discuss how to get your existing customers to stay.
Why customers churn.
In a study conducted by consulting firm Oliver Wyman, they determined that churn events are sudden moments of clarity when customers’ perceptions of their service change.
These epiphanies result from a series of “triggers” – an event that conditions a customer to dislike their service provider. According to Tom Springer, businesses often point to the last event before the customer leaves, when typically, customers only leave after a long period of eroding the trust that results from a series of “triggers”.
The reasons customers churn fall into three main categories:
1. Customer dissatisfaction
Events that cause customer dissatisfaction like poor customer service, product reliability issues, or billing problems are the main cause of customer churn and have been found to accelerate a customer’s decision to leave.
Image source: Business2Community
A study of customer switching behaviour in the service industry found that 44% of customers changed service providers because of core service failures.
2. Low switching costs
Switching costs are anything that might prevent your customers from moving to alternative products or services. The lower the switching costs, the more likely customers will churn when they encounter other triggers.
3. Service usage
How often customers use your product or service is the most popular behavioural predictor of churn, especially for SaaS companies.
According to Flexera, a third of all SaaS licences go unused. The lower the usage, the higher the probability of customer churn.
4. Customer-related factors
Not all reasons for churn are directly related to your product or service, some are as a result of changes with your customers.
For instance, location-based services will churn if customers move out of their service area. Others might see customers leave due to changes in budget, management, organisational structure or other environmental or political factors.
How to reduce customer churn
1. Reduce churn by asking your customers if they plan on staying
There was a field test done to help a TV subscription company reduce their high churn rate...
In the test, three alternative marketing actions were applied:
- Giving free incentives,
- Organising special customer events and
- Obtaining feedback on customer satisfaction through questionnaires.
The customer satisfaction questionnaire produced the best results, a phenomenon is known as the ‘mere-measurement effect’, which states that merely measuring the intent of a person to engage in behaviour makes them more likely to act on it.
Simply put, the simple act of measuring a person’s intent to buy a product will increase the likelihood of them buying it in the future.
2. Focus on Reducing the Root Causes of Customer Churn
Considering that churn often results from a chain of events, fixing one link in the chain at a time will only extend the period of time it takes for a customer to get fed up and leave.
Instead of fixing one broken link, you should focus on finding - and fixing - the underlying problem(s).
Using the Net Promoter Score (NPS) survey and the subsequent follow-up questions, you can identify what you’re doing right and what you’re doing wrong after every customer engagement.
These insights provide valuable data points that can then be used to identify the root causes associated with a number of issues your customers are experiencing.
In the communications sector, companies have found that improving their NPS relative to their competitors correlates with reduced churn.
3. Excel at Customer Interactions from the Start
Most businesses direct their churn prevention activities to the end of their customer journey to “bribe” customers into staying by offering large discounts or extending their services.
Although these initiatives work at delaying an immediate exit, they’re costly and ineffective over the long term and don’t solve the problems that lead to customer churn.
Instead, you want to interact with your customers at every stage of the journey. Think about that first encounter - how will you make a good impression? Then think about the middle part and the end.
Taking the time to create a great initial experience goes a long way toward delighting customers early on and depositing goodwill in the equity bank.
You, ideally, want these first interactions to be stellar. It should be personable and effective. It should also be fast and efficient so that customers can start experiencing the advantages from using your products or services as soon as possible. After all, their success is your success.
For instance, you can create an awesome step-by-step introduction or an onboarding video to explain your service and process to potential customers or create interactive guides to lead customers through the activation journey at their speed.
Let’s look at two great examples of first contact:
According to SmartKarrot, HubSpot “offers one of the best customer experiences for a B2B brand. Their proactive support includes the use of chatbots to connect with customers. HubSpot welcomes users and takes them through their product. Customers can find what they need and also know where to ask any questions they have. You can save the customer support team’s time and encourage open communication.
Chatbots automatically help you answer questions and direct customers to helpful content like articles, blogs, etc.”
Another company that values client interactions from start to finish is Bell Canada. The company is focused on resolving customer issues before it even becomes a problem through several quick, self-help processes and mechanisms such as how-to videos and self-help tutorials.
A good first interaction also ensures customers are more willing to be patient when things do go wrong (in fact, research shows that 78% of customers will forgive a mistake if they experienced good customer service) and primes them to expect a positive outcome when issues do arise.
4. Turn Your Customers into Advocates by Delighting Them at Key Moments
Customer churn is like an avalanche. It’s easier to stop in the beginning.
Initially, after one or two bad experiences, you can still keep your customers happy by managing those interactions well. Still, after a series of poor interactions, it becomes much harder and more expensive to fix.
It’s easy to sit back when your churn numbers are low and say that your customers are happy and that the churn you see is because of unruly customers with unrealistic expectations.
It’s also normal to think that if your customer satisfaction scores are reasonable, then there are no problems as long as you don’t annoy your customers.
Unfortunately, that neutral position does nothing to build goodwill or excite your customers. It should also be no surprise that customers who said they were satisfied were also the ones who left often.
The reason for that is that the bar for satisfaction is pretty low. Just because you don’t mess up doesn’t mean your customers will brag about you to their friends and colleagues.
Businesses that exceed their customers’ expectations and continually strive to delight are the ones that turn their customers into raving fans.
“We see our customers as guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better” - Jeff Bezos
This can be done by turning important touch points along the customer journey into moments that delight and surpass their expectations. For instance:
- Deliver services proactively by informing existing clients about new deals, services, features, etc.
- Set up a referral programme and reward customers for promoting your brand
- Engage with customers on social media to build stronger, more authentic connections
- Make each and every customer feel like a VIP via personalised communications and bespoke offers
- Provide real-time support and feedback via phone or live chat (the medium preferred by 79% of customers). It’s simple but highly effective as expertise and support is one of the key drivers of customer loyalty.
Image source: Reve Chat
- Make sure your customers are actively using your product - and follow up with those who aren’t to find out how you can help
- Surprise them with free gifts (for instance, free storage on the cloud) or new features.
5. Give your Employees the Tools and Incentives They Need to Rapidly Address Customer Feedback
Businesses often have the right tools to fight customer churn but that does little to stop customers from leaving.
The key lies in the hands of your highly engaged workforce. Employees that have access to the right data, offer fast customer feedback and are part of a customer-centric culture are best able to prioritise customer needs and keep them from defecting to your rivals.
Image source: Medium
Successful companies, like Apple and Nokia, encourage cross-functional collaboration to make structural improvements that lead to great customer experiences.
People on the front lines greatly influence the quality of the customer experience. So companies that take a customer-centric view often change their processes to give employees greater decision-making autonomy.
It’s clear that customers leave for various reasons and that it’s often a result of a series of triggers rather than any specific event.
This makes it difficult to identify any single action that might prevent your customer attrition. Instead of finding a silver bullet to prevent churn, you should invest in improving your overall customer experience and creating moments to “wow” your customers.
This, along with building a customer-centric culture and empowering your employees to prioritise your customers’ needs, goes a long way to customer success.