Customer churn is like a bad break-up: heart-breaking and financially devastating.
Alright, so we took this line from one of our eBooks (don’t worry, the author won’t mind—pst, I’m the author), but we’ve found the sentiment to be, well, timeless.
Typically, one might assume that well-established customer experience programs should have the tools in place to notify companies of “churn warning” signs. However, that isn’t always, or even most often, the case.
The below image is taken from CustomerGauge’s 2018 NPS & CX Benchmarks report. According to the report, the highest average retention rate across 15 different industries is 84%—denoting an average 16% churn.
And these are just the companies that KNOW their retention rate. In the same survey on which this report is based, CustomerGauge found that 44% of respondents didn’t even know their retention rate.
So, what does all this information tell us:
- Customer churn isn’t a single industry problem: Depending on your industry, your definition of churn may differ. For industries like retail and consumer services, churn can often feel difficult to define, let alone track (don’t worry, we’ll tackle this further down). However, it's silly to think that just these industries feel the full wrath of customer churn. Churn is an every industry problem: period.
Moreover, as our Director of Marketing Ian Luck puts it, a little churn can go a long way:
“...does a 2.3% reduction of churn a year really impact bottom line revenue in a significant way? The short answer is yes. Say you’re a $500m company with a 20% churn rate per year. Keeping revenue growth completely flat, if you reduce churn by 2.3% every year over a 5-year period, you’re adding $234 million back to your bottom line over that entire period.”
- Companies aren’t transparent about their churn and retention: 44% of companies not knowing their retention rate is staggering. However, only 32% of senior management could say the same. So, how does this disparity happen? Lack of transparency is a likely culprit. Generally, this happens when only one department owns churn and retention metrics, or churn and retention metrics are only visible to management. For example, in many businesses, Customer Success departments are at the forefront of churn—and often the very tools they use can gate this information to the rest of the company. However, the success of customer experience programs rely on these metrics being visible throughout the entire organization—not only at a departmental level, but at an organizational hierarchy level as well.
In a previous blog post, we walked through retention and best practices for measuring it. In this article we’ll discuss customer churn similarly, in detail, but more than that, we’ll look at what how to spot warning signs of possible churn within your customer base. But, first thing’s first:
What is Customer Churn and How Do You Measure It?
Whether you call it customer churn, customer turnover, or customer attrition—the answer remains the same: customer churn is when a client stops doing business with you. The big bad break-up that breaks the bank.
Now, that’s the simple definition.
Depending on your particular business or industry the long-form description gets a bit more complicated, and as mentioned: how your business defines churn may differ.
For industries like retail and consumer services, where churn may be more difficult to define, start by defining churn as those customers with no purchases for the last 12 months. For B2B companies difficulty with tracking churn can come from internal gating of the metric (unintentionally) by departments and senior management.
In our previous article we did some fancy math when it comes to calculating retention metrics, but much of the same teachings can be applied here. However, the churn rate can be defined simply as:
Churn rate: 100% - Retention Rate
Where retention is measured on a scale of 0% and 100%.
There are two important retention rate metrics worth focusing on: Customer Retention Rate and Revenue Retention Rate. According to our retention guru Jørgen:
“Retention is usually measured as the ratio of customers or revenue you have kept in a given period.” Therefore, is important to monitor both CRR and RRR as “the Revenue Retention Rate captures the financial impact better but if you lose a lot of newly acquired and less valuable customers, the RRR will not capture this.”
As churn is the other side of the coin here, we can apply a similar principle to our churn metric: Churn should be tracked from two standpoints, the number of customers leaving a company and the amount of revenue leaving a company.
Now that you understand how to define and measure churn, you might be wondering: “Welp, shouldn’t acquisition growth cover the average 16% churn you’re seeing within industries?” Great question! And maybe 10-20 years ago, this might have been true. However, hyper growth companies can no longer just rely on acquisitions to Band-Aid their customer churn boo-boos. The competition has evolved.
Why So Much Hype Around Customer Churn?
According to HubSpot, a rise in booming business has also steadily introduced a decline in trust among consumers. The result? Customers have become less interested brand loyalty, and less receptive in “taking your business' word for it.” In fact, 81% of customers trust the advice of friends and family over that of businesses.
In her article, Customer Success: The Third Growth Engine of Business,VP of Customer Success at HubSpot, Eva Klein, dived deeper into the environment this has created for businesses, stating that alongside sales and marketing, customer success has become the third growth funnel for companies:
“Growing business[es] today understand something very important: selling to less-than-ideal customers just to hit a number is not cost-efficient, spending money to acquire a customer that will churn in three months, is not cost-efficient. The most cost-efficient way to run a business today is ensuring that your customers are happy and successful — that takes customer success.”
Churn was always the big bad monster in business. What’s changed is that businesses can no longer depend on traditional growth strategies (acquisitions) to stay ahead of the competition. It’s not about just retaining customers; it’s about making those relationships thrive. Having a loyal, satisfied customer base is necessary for reaping up-sell, cross-sell and referral opportunities.
In fact, according to annexcloud.com, the benefits of a referred customer can be staggering:
- Referral marketing generates 3-5x higher conversion rates than other channels
- Acquisitions through referrals spend 200% more than other customers
- The lifetime value of a new referral customer is 16% higher than your average customer
So, that hype? It’s coming from a place of necessity. To remain profitable and competitive companies need to do more than seek new faces, they need to nurture the familiar ones. And this starts with tackling customer churn.
5 Warning Signs of Customer Churn
You know what it is, how to measure it, and its importance to your company's growth strategy. Now, how do you tackle it? While every customer is different, there are 5 tell-tale warning signs that you can use to stay on top of customer churn.
Low customer engagement
Customer engagement is a broad, encompassing term to describe the depth of a customer relationship with a company. This evergreen article by Brandon Carter of Access does a great job of describing characteristics of a highly engaged customer:
- Purchasers: Perhaps an obvious choice, but engaged customers are those willing not to just buy into your product or services—but continue doing so moving into the future.
- Loyal: Loyal customers are those in for the long-haul. They have a developed a strong relationship with your brand. We’ll talk more about utilizing customer loyalty metrics further down in this article, however, many companies utilize methods like the Net Promoter Score® to better understand satisfaction and loyalty.
- Evangelist: Evangelist go a step beyond purchasers and loyalists. They not only continue to use your company’s offerings, but encourage others to do so as well. In our 2018 NPS benchmarks report, we found that 2 out of 3 companies registered if a sales win came from a referral, though very few could answer if the referrer was a promoter, passive, or detractor. Companies like H&R Block Canada use their Net Promoter® programs to identify and reach out to promoters for referral marketing purposes. NPS® is a good indication of which segment of your customers (promoters) might be willing to refer others to your brand.
In fact, in the same benchmarks study, companies that linked their NPS programs to referral marketing experienced 2x the referral sales volume.
Moreover, in an article on Entrepreneur.com, Jeffery Epstein, the CEO of the SaaS referral marketing company, Ambassador, stresses the importance of not just expecting customers to refer your brand, but rewarding and encouraging them to do so:
“While referrals do happen organically, they’re never a given -- even if a customer loves your products and services. In fact, a Texas Tech University study found that while 83 percent of customers say they’re willing to provide referrals after a positive brand experience, only 29 percent actually do. That chasm exists for many reasons, but it’s often exacerbated by a failure to properly prioritize and manage a referral program.”
- Responders: Response rates are a very good indication of how engaged customers are. In fact, we’ve found a unique correlation between response rates and customer loyalty metrics like Net Promoter Score:
This tells us that typically, more engaged customer are more satisfied. Low response rates can also be an indication of some other warning signs we’ll mention further down.
Low customer satisfaction over time
Net Promoter Score is a customer loyalty metric that companies use to gauge the help of their customer base. The NPS question asks, on a scale from 0 to 10: “How likely are you to recommend (this company, this product, this experience, this representative) to your friends, family or business associates?” Customers are then segmented into three buckets: detractors (0-6), passives (7-8) and promoters (9-10).
You then take the % of detractors from the % of promoters to determine your overall NPS score.
Companies can conduct both relationship and transactional surveys to gauge their Net Promoter Score quarterly and per transaction.
Quarterly Business Reviews (QBRs) are an even more in-depth method for gathering NPS and customer sentiment across multiple levels of an organization. B2B companies should use this method to increase transparency, align goals and improve business processes by corresponding with frontline, middle management and executives in the organization.
Decreased usage and activity
Decreased usage or activity is a pretty good indication of possible churn. It’s also a warning sign of other disengagement activities to come, such as feature attrition or loss of a champion.
Monitoring customer usage and activity is typically a customer success activity, however it is an important part of any customer experience program. Usage and activity patterns are a good indicator of buy-in within a company and possible up-sell opportunities.
Customer success often finds its place in the SaaS space, however, it has expanded beyond this industry as well. That being said, some of the best tips and tricks when it comes to customer success can often be traced back to the SaaS industry. Process St has a good rundown of customer success advice from some of the most knowledgeable people in the business:
“We are starting to identify red flag metrics that should warrant outreach from our customer success team. Some of these flags include accounts that are past due (and not responding to our dunning notifications), accounts that could save money by upgrading (currently paying overages), accounts where activity has dropped off, etc. The goal is to reach out and re-engage with these customers before they churn.” – Adam Feber, Chargify
At CustomerGauge, we use a tool called the 360 Customer Tracking, which tracks activity and provides a warning system based on different types of engagement. Tools like these are great for assisting your customer success team with real-time information.
Feature and service attrition
Feature attrition is a strong, if not the strongest, indicator of customer churn. When customers notify companies that they are looking to decrease their use of certain features or services, this should be an immediate red flag. Your company should have a good understanding of your client’s business needs to build strong cases for product adoption.
We mention QBRs here AGAIN, because gosh darn it, they work. If you get a sense that a stakeholder or user is becoming less engaged with using the product—or worse yet, don’t show up for the QBR meeting at all—put the account on high alert for churn.
Loss of a champion(s)
A strong sale typically has a number of players involved. One of those players is often described as a champion. A champion is an individual or, hopefully, a grow of individuals, who push for the adoption of your company’s product or services. This champion should then continue to push for buy-in during the lifecycle.
However, very often companies fall into a dangerous trap: they rely on a single champion to push adoption. But—what happens if that champion leaves? Relying on a single champion may work in a sales win, but it does little to help long-term customer relationships.
Onboarding is, therefore, the best time to establish an ideal contact list within your accounts. While there is no “magic number” of contacts that work for every customer to ensure you are reaching the optimal range of users, there is some common sense here in terms of circumstances such as, larger or high value accounts should have a larger amount of contacts. More importantly, companies should look to have a diversity of contacts at the following levels of an organization:
- Executive (Decision-maker)
- Management (Influencer)
- Frontline (User)
Customer churn isn’t always avoidable. We’re the first to admit that saving every customer might not be realistic. In many cases, as your business grows, some customer may simply no longer fit into your ideal customer profile. When you out grow a customer, or maybe even vice versa, in some cases, calling it quits might be the best for not only your long-term growth plan, but your customer’s as well.
However, as we mentioned earlier, even a small amount of customer or revenue churn can have a big impact on your bottom line ($234 million is nothing to turn your nose up at). We hope the warning signs provided above not only protect against future churn, but strengthen the relationships with your current customers.
And, as always, if you have questions—don't be afraid to ask.