Understanding why consumers abandon products or services is essential for businesses, and knowing what churn (cancellation rate) is makes it easier to have these metrics tangible and to give new directions to strategies.
Churn is increasingly being used to measure business success and, like many other metrics available on the market, cannot be ignored within organizations.
Regardless of your field of work, you can use it and gain important insights from this metric.
Do you know what churn is and how to measure it? Check out our post to understand more about this topic and see some tips on how to reduce it in your business!
What is churn?
In simple terms, churn is an index that represents the rate of customers who abandon or cancel products or services within a given period.
This rate is important for all sectors, especially for those business models based on subscriptions.
For successful business expansion, the number of new customers must always be greater than the number of those who have stopped using the product or service.
Churn is a very important metric for Customer Success, as they are the ones who work most actively with relationships and satisfaction.
It is clear that whether or not a customer stays with a company is related to a huge range of factors, but it is the managers' responsibility to know what the churn rate has been and to understand that, generally, the reason lies within the organization.
There are two types: churn and recipe churn (MRR Churn). The difference between them is simple and it's essential to understand it.
Churn represents the number of consumers who canceled a product or service in a given period, while revenue churn represents the amount of budget lost.
How do you calculate churn?
After understanding what churn is and its importance, we move on to calculating this rate. The calculation is simple to do; just follow the formula:
Churn = customers who canceled the service during the period / customers at the beginning of the period x 100
To make it easier to understand, let's give an example: Suppose that, during a quarter, you had 100 clients and five of them canceled their service.
Following the formula, the calculation would look like this:
5 (customers who cancelled) / 100 (initial number) = 0.05 x 100 = 5%
Therefore, your churn rate would be 5%.
The calculation of revenue churn can be done as follows:
Revenue churn = total sum of the monthly amount paid by customers who canceled
Imagine that the company charges a subscription fee of R$100.00 for each customer, therefore, with these five cancellations, we are left with 5 x 100 = R$500.00.
In other words, the company lost R$ 500.00 due to these customers leaving.
It's also good practice to measure this number as a percentage to know exactly how much of your monthly revenue was affected by cancellations. The calculation would look like this:
Revenue churn rate (%) = total monthly revenue from cancellations / total revenue for the last month
By performing the calculations presented, it's possible to determine your churn rate. But is there an ideal churn rate? Clearly, the ideal is for the rate to be as low as possible.
It's nearly impossible to estimate a specific value, as there are many factors involved in business, but a rate of 5 to 7% per year is generally suggested. It's worth researching churn benchmarks in your industry.
How to reduce churn?
After understanding how this metric is performing within your company, there are some actions you can take to improve the numbers in the coming periods. Check it out!
1. Understand why your customers cancel
The first step to reducing churn is understanding why customers are canceling.
the services.
Without knowing the reasons for the losses, it will be more difficult to devise improvements to reduce these errors, won't it?
Define strategies and try to collect customer feedback , as they are usually open to satisfaction surveys . Whether by phone, email , or SMS, contact the customer soon after the cancellation to find out the reason.
Often, customers leave because they lack the money, because the product doesn't meet their needs, or because of poor customer service from the company.
There are many reasons, so it's necessary to list them and understand what's happening both internally and externally.
2. Align expectations
More than just knowing what churn is, it's necessary to have strategies that reduce this metric, right? Therefore, the best way to avoid problems is to align expectations with customers before closing sales.
It's important that they actually see something relevant in your product and service, and that's why they want to continue using it.
Understand what the client needs and make it very clear what you can realistically offer. Don't lie or invent false alternatives that won't be fulfilled in the long run.
Creating the wrong expectations causes the customer to cancel services as soon as possible. Have a sales team that is aligned, honest, and has realistic goals.
3. Deliver the best experience
Customer experience is very important, especially at a time when consumers are increasingly demanding and informed, and competition is becoming ever fiercer.
From the first contact with the company, the consumer needs to be well attended to and feel comfortable clarifying any doubts.
In addition to the Sales team, the Customer Success and Support teams must put the customer first and ensure that every interaction with the company is a unique and positive experience.
When a customer needs to get in touch and their request isn't resolved quickly, the frustration is significant, leading to high churn rates.
Furthermore, rude and impolite service drives anyone away; after all, nobody likes to be treated badly, right? Putting yourself in the customer's shoes is essential in any business!
In addition to providing excellent individual customer service, it's essential to maintain a positive image across social media and customer service channels. After all, consumers are heavily influenced by what they see on these platforms.
Conclusion
Churn rate is an excellent way to visualize customer losses and understand more about the problems within the company that are leading to this loss.
Using this metric is important for making important decisions and investing in different areas of the company in order to generate more customer satisfaction, win new customers and, most importantly, retain and build loyalty with existing ones.
By better understanding what churn and how it is calculated, it becomes easier to see the company from other perspectives.
And you, have you been calculating churn in your organization? Now that you know what churn is, adopt this practice now! Take advantage of this topic and learn about some of our solutions that can improve your customer experience!