Customer retention is vital to business profitability and long-term success. Loyal customers are more likely to make repeat purchases, contribute to a stable revenue stream, and advocate for the brand by referring new customers.
However, when customer churn rates rise because customers stop using a product or service, the consequences can be damaging, with retailers facing increased costs as they scramble to replace lost customers. High churn rates can be symptomatic of deeper issues with customer satisfaction.
Learn more about practical ways to combat customer churn and secure the longevity of your business.
What is customer churn?
Customer churn is the percentage of customers who stop using a company’s product or service during a specific time frame. Since it allows businesses to gauge how satisfied customers are with their products or services, customer churn is a critical metric, particularly for companies that depend on monthly recurring revenue (like a coffee retailer with a monthly subscription service).
Calculating customer churn rate helps businesses understand how many existing customers they lose over a specific period. High churn rates can strain marketing budgets, as retailers find ways to attract new customers to maintain revenue levels.
There are two types of customer churn:
- Voluntary churn: This happens when a customer chooses to cancel a subscription or service.
- Involuntary churn: This type of churn takes place when a customer’s subscription ends without the customer initiating it. For example, their payment method expires, making it impossible to draw funds from their bank account.
How do you calculate customer churn rate?
To calculate churn rate, measure the ratio of churned customers to the existing customer base. You can calculate churn rate for a specific time period, such as a month, quarter, or year. Customer churn doesn’t include any new customers that you gained during this time period. For example, If you lost 50 customers in a month and gained 60 new ones, your churn rate will only look at the first number.
Use this formula to calculate calculate churn:
Customer churn rate = (Number of customers lost during period / Number of customers at start of period) x 100
Customer churn rate calculation example
An online fashion retailer with a monthly clothing box subscription starts Q1 with 5,000 customers. By the end of the quarter, 500 customers canceled their subscriptions.
Customer churn rate = (500 / 5,000) x 100
Customer churn rate = 0.1 x 100
Customer churn rate = 10%
In this example, the fashion retailer has a customer churn rate of 10% for the quarter, indicating that it lost 10% of its customer base during this period. According to experts, established businesses should aim for a 5% to 7% annual churn rate.
What causes customer churn?
- Poor customer service
- Subpar product quality
- High prices
- Stock issues
- Lack of loyalty programs or incentives
- Difficult return or exchange policies
Understanding the root causes of customer churn can help you form effective customer retention strategies. Here are some factors that contribute to a high customer churn rate:
Poor customer service
Customers often leave because poor customer service makes them feel undervalued or neglected. For retailers, this leads to lost customers, more revenue churn (which measures lost revenue), and a decline in recurring business. A negative customer experience can tarnish a brand’s reputation and cause customer attrition.
Subpar product quality
Products that fail to meet customer expectations can increase your churn rate. Dissatisfied customers not only cease their business relationship with you but may also dissuade potential new customers.
High prices
High pricing without equivalent value can result in customers churning, which increases customer acquisition costs as retailers work to replace the customers lost. Meanwhile, existing loyal customers may also reconsider their options, putting further strain on retention.
Stock issues
Frequent stockout instances can be frustrating for customers and signal poor inventory management. This disrupts recurring business and diminishes customer loyalty. Furthermore, stock issues can provide an opening for competitors to gain market share, as customers may seek alternative options for their immediate needs.
Lack of loyalty programs or incentives
The absence of a loyalty program or customer incentives can make customers churn if they feel unappreciated. Even when product quality is high, existing customers may switch to competitors that offer freebies, discounts, and rewards for each additional purchase.
Difficult return or exchange policies
Complicated or restrictive exchange and return policies can deter customers from continuing their business relationship with a retailer. Unfavorable policies can result in losing existing customers and discouraging new customers who hear about these experiences.
Tips to reduce customer churn
- Prioritize good customer service
- Implement a loyalty program
- Optimize pricing strategies
- Leverage customer feedback
- Simplify the return process
- Audit operations for product quality and availability
Reducing customer churn can enhance a retailer’s profitability and increase customer lifetime value. Here are some tips retailers can implement to reduce customer churn:
Prioritize good customer service
Exceptional customer service is key to retaining existing customers and reducing customer churn. Implement a training program to ensure employees provide courteous and efficient service. Retailers who excel in customer service often see increased revenue and a lower churn rate than the industry’s average churn rate. One study found that businesses can avoid 67% of customer churn if they resolve issues in the first customer service interaction.
Implement a loyalty program
A well-designed loyalty program can improve retention and lower customer churn rates. Offer points or rewards for purchases and customer referrals. Providing extra incentives can increase customer loyalty and lower customer acquisition costs.
Optimize pricing strategies
The balance between cost and value can significantly affect your customer churn rate. Conduct a churn analysis to identify the price sensitivity (how different pricing affects customer behavior) among your customer base. Adapting your pricing strategies can help you retain customers who might otherwise stop purchasing your products.
For instance, psychological pricing (when you appeal to a customer’s psychological needs) can make an item or service appear less expensive. Bundle pricing offers customers perceived value through package deals.
Leverage customer feedback
Collecting and tracking customer feedback provides valuable insights into customer behavior and potential reasons for churn. Use this data to implement changes that will improve customer satisfaction.
For example, if customer feedback consistently points to slow shipping times, the retailer could invest in improving its logistics and distribution channels to speed up deliveries. Effective implementation of customer feedback can make customers feel heard, which can help reduce customer churn.
Simplify the return process
Facilitate a hassle-free return or exchange policy to boost customer happiness. For example, offer a 30-day, no-questions-asked return policy and provide a free return shipping label with each order. This simple change can result in greater customer loyalty and reduce customer churn. Retailers that make returns easy for customers typically see less recurring business lost and a more stable customer base.
Audit operations for product quality and availability
Another way to reduce churn is by implementing inventory management software to monitor stock levels. Set up automatic reordering and maintain open communication with suppliers to ensure high-quality products and timely deliveries. Reviewing your customer lifecycle for inefficiencies, and solving for them, reduces customer churn by guaranteeing product availability and quality.
Customer churn FAQ
Why is customer churn important?
Customer churn directly impacts a company’s revenue, potentially increasing costs associated with acquiring new customers. A high churn rate can also reflect problems such as underlying customer satisfaction or product quality issues that lead to losing customers.
What are the two types of customer churn?
The two types of customer churn are voluntary churn, where customers actively choose to leave, and involuntary churn, where businesses lose customers due to failed payments.
How is customer churn different from customer retention?
Customer churn refers to losing existing customers, while customer retention focuses on keeping current customers engaged and satisfied with your products or service.
What is considered a good customer churn rate?
A good customer churn rate varies by industry, timeframe, and business stage, but experts consider rates of 5% to 7% to indicate customer loyalty and satisfaction.
