Churn rate: definition and tips for reducing customer attrition
Churn rate, or attrition rate, is a crucial indicator for any company seeking to assess customer loyalty. It measures the proportion of customers who stop using a product or service over a given period.
Understanding and optimizing this rate can significantly influence your company's profitability and growth. In this guide, you'll find everything you need to know to reduce churn and build customer loyalty.
What is the churn rate?
Definition of churn
Churn measures the percentage of customers, users or subscribers you lose over a certain period. It's an essential metric for analyzing the effectiveness of retention strategies. It has a direct impact on sales and growth, especially for subscription-based businesses.
What are the different types of churn?
Churn, or customer attrition, can be categorized in several ways. Understanding these distinctions is crucial to developing effective retention strategies:
- Voluntary churn occurs when customers actively choose to leave. It is usually caused by dissatisfaction with the service, a better offer from a competitor, or a change in needs.
- Involuntary churn occurs without any deliberate decision on the part of the customer. It could be a billing problem, expired bank cards, or the death of the customer.
- Contract churn occurs at the end of a fixed-term contract. It is particularly common for B2B companies or subscription-based services such as SaaS software.
- Partial churn is when customers reduce their commitment without leaving completely. This can include reducing the number of services or the amount spent.
- Seasonal churn is a predictable fluctuation in attrition linked to specific periods. It is common in certain sectors such as tourism or retail.
- Hidden churn occurs when customers stay, but no longer actively use the product or service. This entails a high risk of future churn if unaddressed.
By tailoring your efforts to each type of churn, you can significantly improve your customer retention rate, support your long-term growth and optimize the customer lifetime value of your user base.
What is an anti-churn campaign?
An anti-churn campaign aims to reduce the number of customers who leave. This includes specific actions to increase loyalty, such as personalized offers or improved customer service.
The aim is to turn at-risk customers into active customers. In subscription-based models, these campaigns are essential to maintain a good retention rate.
We'll take a closer look at the different strategies for reducing churn below.
How do you calculate customer churn?
Formula for calculating monthly and annual churn
The churn rate is often calculated on a monthly or annual basis, but it can be calculated over any desired period.
The formula consists in dividing the number of customers lost during the given period by the total number of customers at the start of the period, then multiplying the result by 100 to obtain a percentage.
In other words, monthly churn is calculated as follows:
(number of customers lost during the month / number of customers at the beginning of the month) * 100
For example, if you had 200 customers at the beginning of the month and lost 25 during the month, your churn rate would be 12.5%.
For annual churn, apply the same method, but over a twelve-month period.
For example, if you start the year with 1,000 customers and lose 100 over the course of the year, the annual churn rate would be 10%.
Calculate loss of income due to churn
Revenue churn measures the loss of revenue due to the loss of customers.
To calculate it, divide the monthly recurring revenue (MRR) lost to churn over a given period (month or year) by the total MRR at the start of the period. Then multiply the result by 100 :
(MRR lost over the period / MRR at start of period) * 100
For example: if you lose €5,000 in MRR on an initial MRR of €100,000, the revenue churn is 5%.
What is a good attrition rate?
What we consider to be a good churn rate across all industries
Although there is no consensus on the question, it is generally considered that a good churn rate for any industry is between 2% and 8%.
These figures should be taken with a grain of salt, as average churn varies widely depending on your company's sector, size and stage of development.
Your ability to reduce churn indicates good customer retention and effective management of your business, which has a direct impact on your long-term growth.
Examples of average churn rates by industry
To properly assess your performance in terms of customer retention, you can't rely on generalized figures. Each business sector has its own specificities, which vary the average reference churn rate.
Here are just a few examples:
- In telecommunications, the annual churn rate is generally between 12% and 24%.
- In banking services, their annual rates are around 5% to 15%, due to a more stable customer relationship.
- The SaaS sector generally targets an annual attrition rate of 5%.
When is a high attrition rate normal?
A high attrition rate may be considered normal or acceptable in certain specific contexts:
- Start-ups and early-stage companies: Start-ups and early-stage companies are still adjusting their product or service to better meet market needs. A SaaS start-up in its first year of operation may have a churn rate of 10-15%, as the company is still adjusting its product to the market.
- Short-cycle services: Some services or monthly subscriptions, such as streaming subscriptions or monthly product boxes, may naturally have higher attrition rates. Customers may sign up for a short period to take advantage of a special offer or test the service, then decide not to renew.
- Seasonal variations: In some sectors, customer fluctuations may be normal at certain times of the year. For example, a home meal delivery service may see a higher churn rate in summer, as customers cook more at home during the vacations.
- Highly competitive industries: In highly competitive industries, customers can often switch supplier to take advantage of better offers. As we saw earlier, a cell phone operator can have an annual churn rate of 12-24% without this being considered abnormal.
- Single-use or infrequent products: Some products or services are used on a one-off basis or for specific events. For example, a wedding planning application may have a high churn rate (up to 80-90% after use), as users no longer need the service once their wedding is planned.
- Companies undergoing a pivot or major change: Companies undergoing major transitions may experience a temporarily high churn rate. A software company moving from a licensing model to a SaaS model may see temporarily high churn (15-25%) during the transition, as some customers prefer the old model.
In such cases, continuous monitoring and periodic adjustments are essential to understand the reasons behind high attrition rates and implement appropriate strategies.
What are the risk factors for attrition?
Customer dissatisfaction
Dissatisfaction often occurs when there is a negative gap between customer expectations and reality.
You need to measure customer satisfaction regularly to identify problems quickly, as a dissatisfied customer is more likely to turn to the competition. What's more, negative online reviews can damage your reputation if not dealt with quickly.
To reduce this dissatisfaction, personalize your communications and be attentive to customers' evolving needs. Dealing proactively with complaints can reverse negative perceptions and improve loyalty.
Poor customer service management
Customer service management is crucial to your business. If your customers feel neglected, they'll look elsewhere.
Long waiting times and automated responses can frustrate customers. They'd rather be heard by a real person who understands their concerns than face a scripted robot. Sometimes, simple empathy can make all the difference.
Failure to resolve customer issues on first contact is also a key factor in churn. According to a study by the SQM Group, 40% of customers turn to a competitor because their problems were not resolved at first contact with their original supplier.
So it's essential to invest in training your staff and giving them all the tools they need to ensure effective communication and rapid resolution of customer problems.
Poor product or service quality
Product or service quality has a direct impact on customer satisfaction. A defective product or poor service encourages customers to seek better alternatives.
Customer loyalty is partly based on the perceived value of your offer, but it is above all influenced by its actual value. Offering a product that meets customer expectations reduces the risk of customer attrition.
Competition and the market
Competition is a major factor in customer attrition. Your competitors may offer more attractive or innovative products. Analyzing your product's positioning in relation to the market will help you identify your strengths and weaknesses.
So it's vital to keep abreast of market trends and competitors' strategies, so you can adapt your strategy accordingly.
Our tips for reducing your churn rate
Identifying the reasons for churn
To reduce churn, the first and most important step is to identify the reasons why your customers leave your company.
Use analysis tools and organize surveys and interviews to gather data on attrition behavior and understand where the problem lies.
By understanding what motivates these departures, you can adjust your offers and organization to improve the customer experience.
Predicting customer departure risks
Predicting customers at risk of churn is essential for implementing preventive measures.
Use churn prediction models based on analysis of existing data to determine which customers are at risk.
Batvoice's speech analytics technology enables you to do just that, by analyzing your contact center calls and detecting and alerting you to any risk of attrition.
In this way, you can apply a proactive customer retention strategy and turn potential detractors into brand advocates.
Listen to the voice of the customer
Your customer knowledge shouldn't be taken for granted - you need to keep it up to date. Constantly listening to your customers will help you adjust your services to their evolving needs.
To do this, you can collect online feedback and analyze the information contained in your various customer interactions.
Also integrate regular customer feedback systems into your retention strategy, such as surveys or feedback sessions, to build trust and improve the customer experience.
Improve your First Contact Resolution (FCR) rate
Excellent customer service often translates into a high first contact resolution rate.
To achieve this, you first need to identify recurring problems in your customer journey. Then, you need to detect and prioritize customer requests at high risk of churn.
Don't forget to train your team well in recurring customer problems, so that they can resolve them more quickly and efficiently.
We talk more about this in our article sharing our tips for improving FCR.
Hiring the right people
Recruit people who are passionate, competent and able to represent your brand positively in your sales, operations and customer relations centers.
Well-trained and motivated employees are more likely to deliver excellent service, which improves customer loyalty.
How can speech analytics help you limit your churn?
Speech analytics uses artificial intelligence to analyze the thousands of hours of telephone conversations in your call centers. This technology can even analyze emotions to detect anger and irritation.
Your customers may be expressing frustrations or recurring problems over the phone that are impossible to identify and quantify by hand. But with speech analytics software like Batvoice, you can accurately measure the reasons for churn, and be alerted to at-risk customers.
By identifying recurring problems and being alerted to potential customer departures, you can make targeted improvements to your services, reducing churn and boosting customer satisfaction.
