The churn rate helps you understand how well your offer is meeting customer needs over time: here's what it is, how to calculate it and why it is critically important to the effectiveness of your promotional strategies.
Do you ever think back to the clients you 'lost' on the way? And do you also know how many abandon you every month or every year?
No, don't get me wrong: I'm not saying your business is a failure!
I just want to make you think about this aspect, which, though alas a bit uncomfortable, is nevertheless of considerable importance to your success.
Acquiring new customers is crucial to the growth of your business: but this is all doomed to be a washout if, once won over, these people tend to leave you too easily.
So although it is true that in every project there is always someone who decides to abandon you (it is physiological and it would be foolish not to accept it), it is also true that if you are not aware of the losses in this regard, you do not even know how this will affect your entries and you will therefore not be able to devise new strategies (or modify the ones in place) to avoid it as much as possible.
I am referring in particular to a specific metric, the so-called churn rate (translated, dropout rate): an indicator that tracks precisely the loss of users and allows you to analyze your ability to retain customers accordingly.
It is a decisive element in any self-respecting marketing strategy that makes you realize the chances of long-term success of your projects.
You've probably still heard about it...
As you say, you don't really know what it is, let alone how to calculate it?
Don't worry, in this article you will find out everything you need to know about it 😉
Here it is What is churn rate, how it is calculated, and what makes it so important.
What is the churn rate?
Every customer is faced with two alternatives: to remain loyal to you or to sever their business relationship with you.
In marketing, we talk about "retention rate" and "churn rate," respectively: considering a given time interval, you can know how many of your total customers are still loyal and how many have decided to leave you.
Let's talk about the latter case: what precisely does the churn rate?
First of all, it is a metric expressed as a percentage, which falls under the famous KPI of marketing: key performance indicators, which tell you how your business is doing based on pre-set goals and targets actually achieved. It fits into the so-called data analysis, critical to the growth of your business.
The churn rate is therefore used to measure The percentage of "lost" users out of the total number of active customers: indicates the ratio of people who have left a service of yours to those who have chosen and confirmed it over a defined period of time.
Said out of the blue, it basically lets you know how many customers have grown tired of buying from you, receiving your newsletter or paying for a particular subscription.
As I mentioned above, it is the opposite concept to the loyalty rate, which instead calculates how many customers remain loyal to you in a given time frame. The two values are inversely proportional: the higher the loyalty rate, the lower the churn rate, and vice versa.
Obviously, the lower the churn rate, the better: precisely because the loss of customers over time is physiological for any business, you must constantly monitor the situation and prevent it from becoming too impactful a problem.
To keep everything under control, you can make the so-called churn analysis, i.e., a predictive analysis based on observation, understanding of causes, and predicting dropout, which helps you understand whether the path you are on is the right one or not. The goal is not so much to reduce losses to zero (that would be utopian), but to consciously work on the Fidelity: this is because doing so is less expensive than searching for and acquiring new customers.
How to calculate churn rate?
Let's start with an important premise: for some types of businesses and activities, churn rate calculation is easier than for others. These are all services that involve a subscription, or where customers are easily identifiable and need to take a specific action to leave you. However, it can also be calculated for different online sales activities: the formula may vary depending on the model considered.
That said, how is it calculated?
Let's look at it step by step.
First, you need to quantify some information:
- ✓determines a timeframe: monthly, annually or quarterly;
- ✓Identify the number of active customers At the beginning of the established time frame;
- ✓Identify the number of lost customers At the end of the stipulated time frame.
Next, apply this simple formula: divide the number of customers you lost by the number of customers you had at the beginning, then multiply by 100. The resulting percentage number will be your churn rate.
To make you understand better, let's take a practical example.
Let's say you had 200 customers at the beginning of the year and then, for various reasons, 20 customers dropped your services. Applying the formula, you would need to divide 20 by 200 and then multiply the result by 100. Doing the calculations, then, you will find your annual churn rate was 10%.
Well, now two important considerations.
The first: the result of this calculation, regardless of conditions, is likely never to be zero. While it is true that a low churn rate is synonymous with good customer management and general customer satisfaction, the chances that within a defined time frame no one will decide to discontinue or abandon what you are offering are almost nonexistent.
Clients, regardless of their level of retention, can terminate a partnership for a myriad of reasons, related to a variety of circumstances and sometimes even due to forces of force majeure.
Second, this metric, taken in isolation, leaves time to be found. It is essential that you know how to read and interpret it, also comparing it with others, to make sense of your analysis and to see if the strategy you have adopted is the right one.
Why is churn rate important?
As you may have guessed, churn rate is an essential metric for understanding the health of your business and its future prospects. But that's not all: you can also use this value for a number of additional considerations that are essential to curating your business.
You can, for example, use it to see if you are improving in customer retention month by month. It can help you identify the impact of any changes in your offering, as well as calculate customer lifetime value. It gives you insight into what type of customers are best with your product and, finally, allows you to make predictions about the future performance of your business.
Understanding customer churn rates is essential to Evaluate the effectiveness of your marketing efforts and the overall satisfaction of your customers. For example, does the service you offer make the right contribution compared to what the customer wants? Perhaps you have promised too much or what you offer does not meet the expectations of your advertising campaign.
Since it is easier and cheaper to keep the customers you already have than to acquire new ones (winning new users takes a great deal of energy, time and money), your goal must be to reduce the churn rate and instead increase the degree of loyalty by implementing the right marketing and promotion strategies.
This is why the dropout rate is a starting point, not an end point, for your analysis, making you think about where, how, and why your customers might change their minds.
The churn rate, even if minimal, highlights problems within your business processes and can result in large losses on your revenue. Undoing it is impossible, but nothing prevents you from Work in such a way as to limit it as much as possible.
Operating in this direction means avoiding nasty surprises and monitoring the progress of your work to win, keep and retain customers. Constant work, which requires full knowledge of your target audience and which, if well executed over time, always brings its results.
You need to investigate the main causes, figure out what went wrong, and take action putting in place preventive measures, to make sure that it is not repeated.
So ask yourself, does your product work as it should? Does it meet the expectations created before purchase? Do the services you offer live up to what you promise? Is the customer service prompt and adequate? Has the economic offer changed since you signed up?
Finding an answer to these questions will enable you to unearth and correct the reasons that are driving your customers to abandon, and will help you come up with ideas that encourage their retention instead, such as exclusive offers, proactive communication, or requests for feedback at crucial stages of your campaigns.
Finally, show your customers that you care about them, make them feel special, give them good reasons to stay with you, always trying to To meet their needs and requirements.