Competition has never been so fierce and as a result, customer retention, customer churn analysis, and winback strategies have captured the attention of a growing number of businesses and industries.
Understanding customer churn essential for long-term business growth. It’s well known that it costs more to acquire a new customer than to retain a current one. But did you know that depending on the industry it can range anywhere from 5 to 25 times more costly? What may not be as widely known is that even a 5% increase in customer retention rates can increase profits by a whopping 25% – 95%.
All this leads us to customer churn (aka customer attrition) and its necessary intersection with customer winback.
Churn Rate: What it is and Why it’s Important
A critical measure of business health, churn rate is the percentage of customers or subscribers who stop doing business with a company during a certain period of time. This measure is especially valuable to subscription-based businesses, and industries where customers can easily switch providers.
By knowing your churn rate, you gain a deeper understanding of the business’ financial health and its long-term viability. Essentially, companies with a high churn rate are losing a significant number of customers – which typically indicate problems. Whereas companies with low churn rates are retaining more customers than they are losing, suggesting customer loyalty.
While a churn rate of zero is optimal, the reality is… churn happens. What’s important is knowing why churn is happening and taking the appropriate measures to stymie the flow of customer losses. However, to do this you need to know what your churn rate is and how it compares with industry averages and the stage/size of your business. For instance, the ideal churn rate for startups or SMBs ranges between 10% and 15%, whereas the range for established enterprises is between 5% and 7%.
How to Calculate Churn Rate
Before diving into the churn rate formula, it’s important to note that churn rate includes both customers that switch providers, as well as those terminating service without switching.
To calculate churn rate, take the number of customers during a specific period (monthly, quarterly, annually), divide it by the number of customers at the start of that period, and multiply by 100 to get a percentage. For instance, let’s assume that at the start of the predetermined period you had 1,000 customers and lost 120 by the end of it. Therefore, your churn rate would be 12% for that period.
120 / 1,000 = 0.12 x 100 = 12%
Let’s dig a bit deeper by exploring gross revenue churn rate and net churn rate.
Gross Revenue Churn Rate:
This calculation enables you to determine the revenue lost due to customer churn during a specific period. The figure, however, does not take into consideration new customer acquisitions.
- Determine the period (monthly, quarterly, annually).
- Identify the total revenue at the beginning of the period.
- Divide the churned revenue during the period by the revenue in the previous period.
- Multiple that number by 100.
For example, your monthly recurring revenue (MRR) for April was $40,000. During May, you determined your churn revenue was $5,000, your gross revenue churn rate for May would be 12.5%
$5,000 / $40,000 = 0.125 x 100 = 12.5%
Net Churn Rate:
This figure measures how much revenue is lost during a specified period, while also considering new business. A positive net churn rate indicates overall growth, while a negative net churn rate suggests a decline in your customer base and revenue.
We’ll use the above gross revenue churn example, MRR for April was $40,000 and total churned revenue for May was $5,000 to illustrate net churn rate. Additionally, we’ll incorporate $3,000 expansion revenue received in May. For the month of May your net churn rate would be 5%.
$5,000 – $3,000 = $2,000
$2,000 / $40,000 = 0.05
0.05 x 100 = 5%
Let’s now look at how to conduct a customer churn analysis and discuss why it’s important.
Understanding Customer Churn Analysis
Churn analysis centers around examining customer behavior data and using the data to identify customer attrition signals before churn occurs. There are two sides to customer churn analysis. First, the information accumulated provides the data needed to identify the reasons customers are leaving, enabling you to implement proactive measures to reduce the flow of attrition. On the flip side, you gain the ability to identify patterns that can aid in understanding why customers continue using your products or services. Both provide opportunities to improve your products, services, pricing, customer care, etc.
Determining churn patterns requires analyzing various metrics like a decline in usage, delayed or non-payments, reduced feature/functionality adoption, customer feedback, etc. Acquiring this intelligence can be accomplished using the following 5 step process.
Step 1: Collect and organize data such as demographics, purchase history, website behavior, etc.
Step 2: Determine the period and criteria for identifying customer churn. See section ‘How to Calculate Churn’ for the formulas.
Step 3: Identify patterns in customer behavior and customer feedback. This can be accomplished in a number of ways such as customer surveys and interviews. Once you have this information, segment the customers with similar churn traits to identify trends and patterns.
Step 4: Leveraging the data from step 3, dig a bit deeper into the exact reason(s) for customer attrition.
Step 5: Take proactive measures to reduce churn. Once you know why customers are leaving, you can use these insights to implement strategies that are directly aligned with the reason(s) customers are churning.
An Ongoing Approach
Given the amount of data companies have at their disposal, you most likely have everything needed to conduct ongoing churn analysis. Here are some tips to ensure you’re receiving the insights needed to reduce churn and improve customer loyalty.
- Ensure data is clean, accurate, and up to date
- Collect and integrate data from all customer touchpoints
- Use advanced analytics techniques like machine-learning algorithms, predictive modeling, and cluster analysis
- Identify trends by customizing the churn analysis based on customer segmentation
- Use the actionable insights received to build a customer retention strategy
- Leverage A/B testing to determine the effectiveness of your customer retention strategies
- Integrate churn analysis into overall business functions like product development, pricing strategies, marketing, sales, and customer service
- Identify at-risk customers using real-time analytics
- Improve customer interactions by creating a continuous feedback loop
- Compare your churn rates to industry benchmarks
Winback Customers
Slightly different from customer churn, winback involves targeted outreach campaigns to customers who have stopped engaging with your brand or no longer make purchases from your business. It’s important to remember, however, that not every customer is worth winning back. For instance, if your offerings are no longer a fit for the customer, targeting them with winback campaigns is a futile and costly endeavor.
Targeted towards customers at risk of churning, winback campaigns typically span several weeks or months. With a goal to reduce churn, these campaigns involve a mix of channels such as email, paid advertisement, social media, push notifications, and text messages, geared towards reconnecting with customers.
Set Your Winback Campaign up for Success
To maximize the effectiveness of your winback campaigns, be sure to use the following high-level best practices.
- Segment your audience
- Communicate in a timely manner
- Offer incentives
Let’s look at these and other best practices in a bit more depth.
Identify and segment by cancellation reason(s): By understanding the reason why the customer(s) left, you can address their dissatisfaction in your outreach campaign.
Personalize the campaign: Personalized communication, more often than not, will make the churned customer feel valued. Use the winback campaign to promote hyper-personalization, such as understanding their frustration and providing the right offer.
Create a strong engagement strategy: Messaging should include a sense of urgency, provide opportunities to engage, promote feedback, and include a strong call-to-action (CTA).
Test and optimize the campaign: A/B test the offers within your winback campaign.
Re-engage at the right time: The timing of your winback campaign is critical. Reach out too early and that may serve as a reminder to the customer why they became inactive. Reach out too late and it becomes harder to re-engage, and above all –refrain from spamming.
By using proven winback practices, you’ll be on track to enhance your customer insights, improve the customer experience, and increase revenue.
Frequently Asked Questions (FAQs)
With so much at stake, there’s bound to be questions. To help you on your churn analysis and winback journey, we’ve highlighted the top 12 FAQs.
1) What are the key metrics for measuring churn rate and retention success?
While there are many metrics you can track, the following are key to providing valuable insight into customer churn and retention.
Churn rate metrics, include:
- Customer churn rate
- Gross revenue churn rate
- Net churn rate
- Voluntary vs. involuntary churn
Retention metrics, include:
- Customer retention rate (CRR)
- Customer retention analysis
- Customer engagement
- Repeat purchase rate
- Time to churn
- Engagement metrics (typically used by SaaS companies and for digital products)
- Product usage metrics
- Customer support interactions
- Customer lifetime value (CLV)
- Customer satisfaction (CSAT)
- Net promoter score (NPS)
- Time between purchases
- Average order value
2) How can winback strategies boost revenue?
Winback strategies capitalize on the value of customer relationships to re-engage inactive customers and return them to paying clients. This is accomplished by offering incentives or personalized experiences that will promote re-entry into the sales cycle. Winback strategies can boost revenue by:
- Reactivating inactive customers.
- Creating stronger customer relationships.
- Improving customer retention and CLV.
- Initiating proactive engagements.
- Motivating customers to take advantage of exclusive deals or promotions.
3) How does predictive analytics enhance churn forecasting?
Predictive analytics leverages historical data, statistical algorithms, and machine learning (ML) techniques to identify patterns and predict future trends and customer behavior(s). By implementing predictive analytics in your churn retention strategy, you’ll be able to analyze customer behavior to identify patterns and trends and when high-risk customers are flagged, you can preemptively implement targeted retention strategies.
4) What are the most common reasons for customer churn?
While the most common reasons for customer churn are poor onboarding, faulty products, difficult user experiences, indifference to customer complaints, failure to innovate, and unmet expectations, there are others. For example, features/functionality that don’t or no longer align with the customer’s needs, poor customer service, higher costs than the competition, perceived lack of value, financial hardships/payment failures, competitor influence, and seasonal purchasing patterns – to name a few.
5) How can businesses leverage customer data to improve winback efforts?
The right data can provide insights into customer preferences, enabling you to better segment the target base and personalize the campaign with the right message(s) and offers. For instance, customer data can be used to:
- Identify at-risk customers.
- Analyze customer feedback.
- Personalize outreach campaigns and discounts.
- Target high-value customers.
- Improve the customer experience.
- Optimize multi-channel engagements.
6) What techniques can be used to personalize winback campaigns?
Personalized win-back campaigns can take many forms, such as gamification and engagement tactics like loyalty program perks, emotional and social proof triggers like ‘We Miss You’ campaigns, and using past purchases, browsing history, and interests to tailor offers.
7) How does analyzing voluntary vs. involuntary churn inform retention efforts?
By distinguishing why your customers churned, you’re able to implement exact strategies to improve retention efforts. In the case of voluntary churn, customers typically leave because of poor customer experiences, high price, lack of perceived value, attractiveness of competitor offering, unmet expectations, and product-market misalignment. Retention strategies for voluntary churn may include improving your onboarding processes, enhancing your products/services, improving customer support, and offering incentives and loyalty programs.
The three main reasons for involuntary churn, include payment failures, technical/account issues, and failed renewals. To re-engage customers that have churned due to involuntary reasons you can use dunning management, offer alternative payment methods, simplify how customers update their payment information, and provide preemptive notifications before a payment failure occurs.
8) What are the best tools for tracking and managing churn metrics?
While the best tools depend on the company’s specific needs, tracking and managing churn is especially critical for SaaS and subscription-based businesses. To get you started, here’s a list of some of the most prevalent tools/apps.
- Subscription and revenue analytics
- Customer analytics and churn prediction
- Customer relationship management and engagement
- Customer feedback and sentiment analysis
- Automation and retention
- Artificial intelligence (AI) and ML for churn prediction
9) How can customer journey mapping improve retention strategies?
A powerful tool for improving customer retention strategies, customer journey mapping can be used to improve the customer experience by reducing friction points, obstacles or difficulties along the journey. By understanding how customers interact with your company, you can streamline the journey – improving customer satisfaction and lessening attrition.
Customer journey mapping works by identifying pain points, enhancing personalization, optimizing communication channels, improving the customer experience, and strengthening the customer relationship. By leveraging customer journey mapping you’re able to create a more customer-centric approach which results in higher customer satisfaction, increased loyalty, and improved retention rates.
10) What role does customer lifetime value (CLV) play in churn analysis?
CLV contributes to churn analysis by prioritizing retention efforts, predicting revenue loss from churn, segmenting customers for targeted interventions, assessing churn prevention ROI, improving customer acquisition strategies, and enhancing predictive churn models.
11) How can businesses measure ROI of winback campaigns?
There are several KPIs, such as re-engagement rate, CLV, conversation rate, revenue generated, and cost per reactivation. To track the successfulness of winback campaigns, we’re going to focus on two key ROI measures.
Reactivation rate: This measure calculates the percentage of customers that have returned to your brand. To calculate the reactivation rate, divide the number of customers won back over a specified period over the number of churned customers during the same period and multiply by 100.
CLV: CLV provides the measure of churned customers that remain with your organization. You can calculate CLV by multiplying the average revenue per user (ARPU) by your gross margin and multiplying that figure by the average duration of customer contracts.
12) What strategies are effective for segmenting churned customers?
Segmenting churned customers enables businesses to tailor their winback strategies and improve retention. Here are some proven segmentation strategies that will enable you to re-engage churned customers.
- Behavioral segmentation: Usage-based churn, support-related churn, and feature/functionality-specific churn.
- Channel preference segmentation: Engage using the churned customer’s preferred interaction channel like email, text, social media, etc.
- Churn reason segmentation: Price, service issues, competitive switchers, lack of engagement.
- Churn type segmentation: Voluntary vs. involuntary
- Customer value segmentation: High-value churned customers vs. low-value churned customers.
- Demographic segmentation: Age, location, and job-role function
- Time-based segmentation: Recent churners vs. long-term churners.
Don’t Let Churn Take a Bite out of Your Profitability
Customer churn creates more than just revenue gaps, often, it’s a signal of missed opportunities. Opportunities that can be used to better understand and address customer needs and requirements. When customer needs are met, the chances of them drifting from your company becomes significantly lower. In addition to lowering your churn rate, you’ll also benefit from less resources needed for winback campaigns and new customer acquisitions. This ultimately equates to saved revenue and improved profitability.
With the right tools, a churn reduction strategy, and customer commitment, you can improve retention rates, while boosting cash flow. By knowing your customers and delivering the products, services and personalization they desire, you’ll be positioned to ebb the flow of customer churn – and we’re here to help. Reach out today.
