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What Customer Churn Really Means

“Churn” is a term that gets used a lot in the Account Management and Customer Success conversations that we have here at Kapta. Many Account Managers and Customer Success Managers take churn very seriously (and many are compensated based on churn rates).

Churn rate does of course directly show the percentage of lost customers in any given period of time – and is a major source of stress! But measuring and understanding churn can also give you some hints about how to improve your business and what you may be doing wrong. There’s a lot more to churn than meets the eye, and understanding it could help your business grow faster.

 

Here’s a quick primer for those of you who want to learn more about churn, and how to prevent it.

 

How Much Does Losing a Customer Really Cost?

By dividing the annual sales per customer account by the number of customers lost, you’ll find your own basic company average. In most cases, B2B businesses stand to lose a very large amount of annual revenues with each lost customer, especially when the cost of acquiring another customer is considered.

 

It doesn’t matter what type of business you run; customer retention is an important part of sustainable growth. The rate at which customers leave is referred to as your customer churn. Some industries have churn rates as high as 15%, while others sit closer to 2-3%. Every customer lost takes measurable value away from your company, which is why your churn rate is a vital metric to keep your eyes on. You can’t hope to continue growing your business if you’re unable to retain the majority of the customer you already have.

 

How Customer Churn Is Measured

Usually, churn is measured as the number of lost customers over a set period of time compared to how many you had at the start of the period. The time period is up to you, based on what makes the most sense for your specific business. If you have a monthly buying cycle, you may choose to measure your churn monthly or in 3-month intervals.

For example, a business that started their Q3 with 2,000 customers and lost 32 throughout the quarter is said to have a quarterly churn rate of 1.6%. Churn does not take into account how many customers you gained throughout that same quarter, as it’s only a metric used to find out the rate at which you’re losing customers. Your churn rate won’t tell you everything, but you can use it to make sure you’re regulating customer loss as much as possible. Lower churn rates usually lead directly to higher profits.

For SaaS or other subscription businesses that offer different tiers of service, especially any level of freemium service, there is another way to look at churn that may be more informative on the actual loss. You can calculate the monthly recurring revenue (MRR) loss rather than only focusing on the number of customers lost. This is calculated the same way, but replacing customers lost with MRR lost and total customers at the beginning of the period with total monthly revenue. This measurement will show you a more accurate representation of the impact of customer loss over that period.

 

You Are Directly Responsible for Your Churn Rate

The real truth about customer churn is that your business has failed a customer. The reason customers leave, especially when they are leaving to switch to your competitor, is that you are not providing the type of value they are looking for. This is especially true for B2B companies, as you’re dealing with larger buyers who are less likely to just stop buying altogether.

When your customers switch from your company to your competitor, it’s because you are not providing them with the value they’re looking for from a vendor. You may hear excuses such as price competition, incorrect product usage, issues with performance, or defects in the product. But, in most cases, these are not the underlying issues that drive the buyers away. All of these types of issues can usually be solved through communication, which hints that something else is missing.

Sometimes the value that’s lacking will be related to one of the excuses mentioned above, or other simple explanations. But more often than not, there is a larger problem underlying all of them, which is that your company is not providing consistent value. This can be seen by customers not getting the right end outcomes from your product, a lack of trust between your company and theirs, and a lack of relevance to the customer’s needs.

  1. End Outcomes Versus Product or Service Results

Even if your product is working exactly like it should be, it may not be getting the customer what they really want. If you do not truly understand what the customer wants to get out of using your product or service, you may not be able to notice if it’s working to give them the results they want or not. It’s even worse if your product or service isn’t being used properly or if it’s not working well.

The problem is that you may be tempted to believe the outcomes they want are the same thing as the solutions your product or service provides. This is generally not the case. While your customer may be looking for a product to fix a problem they have, that solution is not the end goal they are looking for. Instead, they have goals and outcomes that are important to them as a company. If your product or service isn’t helping them reach those outcomes, they are likely to look for other options.

You can only hope to help your customers achieve their outcomes by understanding what is actually important to their company. If you do not understand your customers enough, you may not be prepared to supply them with the outcomes they really need.

  1. Lack of Trust

People don’t buy from companies; they buy from people. If you want a successful buyer-seller relationship with your customers, there must be a human-to-human element that builds up a strong sense of trust over time. In many cases, there is a lack of useful interaction between buyers and sellers after that sale has been completed. Follow-ups can sometimes be treated as unnecessary chores, even though the buyer would like more opportunities to talk about the product and service.

B2B sellers can often forget that their large customers may want a lot closer of a relationship. Not all clients are the same. Some may be okay with limited interactions, but others may want more personal interaction so they can build a greater sense of trust and investment into the seller.

If you as the seller don’t pay attention to how you’re treating the customer and the level of service you’re providing, you may be creating a relationship that lacks trust. Customers who feel neglected, betrayed, or lied to by sellers are very likely to churn.

  1. Relevance to the Customer’s Needs

Most of your competitors may be able to supply a similar product or service as you, so the way you have to compete is with the other value you offer your customers. B2B buyers are looking for sellers who can help them build their business and become a stronger player in their own industries. If you can offer useful and relevant information or services that extend beyond the initial sale, you will put yourself in a fantastic position to foster customer loyalty.

If you cannot develop a deeper understanding of your customers, their industries, and their evolving needs over time, you risk becoming irrelevant to them. Customers are less likely to find value in a company that is only interested in selling without trying to understand the client’s needs and stay relevant in changing environments. Understanding your customers on a deeper level helps you give better support and advice on how they can use your products or services to meet their needs.

 

Some Churn is Normal – But It’s Not Good

Despite its obviously negative effect on your profits, some level of customer churn is inevitable. There will always be somebody with a reason to choose another company instead of yours. As a company, you cannot be all things to all people. If you try, you may end up losing more money and driving away more customers.

This is not a statement meant to encourage you to ignore your churn rate. But, the truth is you will have to learn to accept that some churn is absolutely normal for a business. It’s your job to see how you can get your churn rate as low as possible without spending more on customer retention than you would have on new customer acquisition.

Customer retention is not free. It’s vital to focus efforts and resources on customer retention, but only to an extent that it leaves you with an acceptable amount of churn. “Acceptable” should be the lowest level of churn possible in order to sustain your growing business. Churn may be normal, but it’s not a good thing. Keeping your churn rate as low as possible may help you to get a competitive edge in your industry, especially in SaaS or other subscription-based businesses.

Acceptable churn rates vary widely from business to business. What’s acceptable for sustainable growth in one business may lead to ruin for another. You cannot set a basic benchmark for your own churn rate by looking at universal averages. You should calculate it based on a combination of your own business circumstances and your industry churn rates.

The idea is to keep a steady rate of growth. If you start a quarter with 200 customers, lose 10, and acquire 12, you are not experiencing a high growth rate. You will have only made a net gain of 2 customers. There may not be much you could have done to acquire more customers, but you can increase your overall growth by lowering the numbers of customers you’re losing. If in that same quarter you could have retained 5 of the lost customers, you would have made a net gain of 7 new customers in a quarter.

 

How to Help Prevent Customer Churn

Although some churn is inevitable for most businesses, you should try to prevent customers from churning. Your industry and specific business may require some different strategies than other industries. But, many of the same principles can apply to a wide range of B2B companies:

  • Predict Which Customers Are at Risk

By the time a customer churns, it’s already too late to save them. In reality, the point of failure may have been months ago. While you can’t save those customers, you can use the churn data to help calculate risk factors and predict who is most likely to churn in the future.

Use this data to focus efforts on lowering risk factors. Learn from whatever mistakes were made with churned customers in the past. Find the areas that you are failing to provide value to your customers and develop a better system to keep your current customers from churning later on.

  • Continuous Communication After Sales

Insincere and useless communication is not what most B2B customers want. To promote customer loyalty and reduce churn, you need to see problems coming before the customer shows signs of leaving. That requires you to be communicating well and getting to the heart of issues before they turn into reasons for customer churn. Think of this as Continuous Relationship Management.

  • Focus on Customer Retention, Not Only Growth

Maintaining growth is important. But, you can help your growth rates to have a bigger impact if you can reduce churn as well. Balance your efforts to retain existing customers versus simply acquiring new customers. By increasing your customer retention budget, you may be able to put more efforts into reducing churn, which will actually help your company grow faster in the long-term.

Retention may require some segmentation of customers. Some customers may not generate enough revenue for your business to justify a large retention budget, while others are more worth the effort. If you are developing a Key Account Management strategy, this should already be on your agenda and will help you in that as well.

 

Customer churn does not necessarily mean your business is failing as a whole. But, it is a sign that you are failing to provide the value that some of your customers are looking for. Instead of ignoring this strong signal from your customers, adjust your view of customer churn and take action to prevent the loss of customers whenever possible.