Customer churn is an important metric for businesses looking to increase their lifetime customer value (LCV). A study by Harvard Business School showed that a 5% increase in customer retention could increase the value delivered from customers by up to 95%.
Similar studies have shown that repeat customers produce twice as much gross income as new customers and that an investment in marketing activities related to reducing churn produced higher ROI than activities related to improving conversion rates or acquiring new customers.
Customer churn refers to the percentage of customers that ended the use of your company's product or service during a set period of time. It's typically calculated by dividing the number of customers you lost in a quarter by the number of customers you started that quarter with.
The high cost of customer acquisition means that most customer relationships are unprofitable early on and only after the costs of serving loyal customers falls and the volume of their purchases increase do businesses start to see a return.
In this blog, we are going to look at a model for determining why customers leave and 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 are as a result of 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 that took place before the customer leaves, when typically customers only leave after a long period of eroding 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.
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 refer to anything that might prevent your customers from moving to alternative products or services. The lower the switching costs, the more likely customers are to 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.
Location-based services will see churn if their 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 results of this field experiment?
It showed that profits vary enormously with respect to the selected retention action. The customer satisfaction questionnaire produced the best results, a phenomenon known as the ‘mere-measurement effect’.
The mere-measurement effect states that merely measuring the intent of a person to engage in a behaviour makes them more likely to act on it.
Simply put, the mere act of measuring a person’s intent to buy a product will increase their subsequent purchase behaviour, if they hold a positive attitude about the product.
2. Focus on reducing the root causes of customer churn, rather trying to solve individual problems.
Considering that churn often results from a chain of events, fixing one link in the chain at a time would merely extend the time before a customer finally got fed up and left.
Instead, finding the underlying cause of a number of problems would resolve a number of problems simultaneously.
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 a few interactions from the start in order to build equity with the customer.
Most businesses direct their churn prevention activities to the end of their customer journey in order 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.
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.
This ensures customers are more willing to be patient when things do go wrong 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 but after a series of poor interactions, it becomes a lot 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 do see is because of unruly customers with unrealistic expectations.
It’s also normal to think that if your customer satisfaction scores are reasonable then as long as you don’t annoy your customers there are no problems.
Unfortunately, that neutral position does nothing to build goodwill or excite your customers. It should also be no surprise then that a lot of the time customers who said they were satisfied were also the ones who left.
The reason for that is the bar for satisfaction is pretty low. Just because you don’t mess up doesn’t mean your customers are going to 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.
This can be done by turning important touch points along the customer journey into moments that delight and surpass their expectations.
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 the right data and 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.
Successful companies encourage cross-functional collaboration in order to make structural improvements that lead to great customer experiences.
People on the front lines have a great influence over 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 a variety of reasons and that it’s often as a result of a series of events rather than any specific trigger.
This makes it difficult to identify any single action that might prevent your customer attrition. Instead of trying to find a silver bullet to prevent churn, you should invest in improving your 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 creating customer success.