In the words of the great lyrical poet that is Ash:
✨Churn baby churn, revenue inferno✨
Ok, I might be paraphrasing slightly, but if your churn rate is on the up and up, your revenue will be a dumpster fire.
That’s why you need to know what your churn rate is, how to measure it, and most importantly, how to leverage it from a problem to a strategy.
What does churn rate mean for you?
If you don’t know already, your churn rate is the percentage of customers you’re losing in a given time period.
Churn is crucial because it doesn’t matter how great your products are if you don’t have customers. There is no business without buyers.
And if you’re not keeping an eye on churn, for all you know you could be needlessly losing customers (and revenue) without realizing it. So, rather than letting your churn rate get the better of you, keep it measured and in check.
Your churn rate can also be indicative of a lot of things going on further up the line, like positioning and messaging missing the mark, or onboarding not being done properly. Basically, you can learn a lot from this metric.
Don’t shy away from it for fear that your churn rate will be overwhelmingly high and you won’t know where to start reigning it in. The sooner you start measuring it, the more control you’ll have.
But understanding what churn rate really means for your business can be hard to visualize, so let’s take a look at a real-world example.
Netflix and the curse of the killer churn rate
Take a look at Netflix. In 2021 their monthly churn rate was 2.5%, but by August 2022 it hit 3.3%. That might not seem like a huge difference, but Netflix’s churn is on the rise.
In the first quarter of 2022, Netflix bumped up their monthly subscription cost by $5, the biggest singular fee increase they’ve made in history. In that same quarter, they also saw their first drop in users since they began.
And coupled with a dip in share prices of approximately 67% and revenue falling short of projections, we can start to paint a picture of a company really suffering because of customer churn.
So where did Netflix, until now a seemingly untouchable streaming giant, go wrong?
There are two big somethings that stand out.
a. Market saturation
It used to be that Netflix was THE streaming service. But now, we have an endless choice of streaming options to choose from such as Amazon Prime, Disney+, Hulu, and so on. With all this competition and many platforms offering a broader experience than Netflix, like Prime’s music subscription included in the cost, it’s easy to see why audiences would look elsewhere.
Netflix is no longer effectively marketing itself as the must-have streaming service or standing out against its competitors. In terms of reputation, they’re really hanging onto the fact that they did it first, rather than doing it best.
b. Worth < Cost
Netflix has hiked up its prices, reportedly to develop a gaming interface for the platform. But now customers are paying a higher price for a reward they can’t reap.
The value Netflix offers is, for many users, no longer worth the cost. Especially with much of the beloved content that’s been available on Netflix in previous years moving to competing platforms.
But what both of these problems boil down to, is that customers no longer perceive the same value in their experience with Netflix. And when customers aren’t getting the value they want or expect out of a product, they jump ship. AKA, your churn rate goes up.
If you can learn anything from Netflix, it's that no matter how well established you may be, no company is invincible. Even Apple got caught in the crossfire recently, with Steve Jobs’ own daughter offering a scathing review of the latest iPhone.
For years users have leveled complaints against Netflix for the gaps in their library, the third season cancellation curse and now serious price increases that have transformed the platform from a household staple into a pricey extra that’s nice to have, but not essential.
Now Netflix is reaping the consequences of assuming your customer base are locked in and you don’t need to pay them any attention. Remember, your company is nothing without customers, whatever market you’re in.
Taking charge of your churn rate.
So, how can you keep your churn rate under control?
First things first, you need to work out what your churn rate actually is. Luckily, the formula to calculate your churn rate is pretty simple.
It's really important that when you’re calculating churn rate, you pick a fixed period of time. With Netflix, we looked at monthly stats, but other companies go quarterly, and it's probably good to have a yearly figure as well. That way, you can start to paint a clear picture of where churn is happening, and track it back to the source.
Identifying metrics like customer lifetime value (CLV) and where in that lifetime the majority of churn is happening, is really key. You need all the information you can get on customer behavior to keep churn under control.
To get your monthly churn rate you need to know the number of customers you had at the start of the month and the number you’ve lost in that month. Then you can plug those figures into this pretty simple equation to get your monthly churn percentage:
(number of customers lost ÷ total customers at the start of the month) x 100.
You can put this equation into an Excel spreadsheet and easily keep track of your churn rate month by month.
By taking an active approach to your churn rate, monitoring it and analyzing when and why it changes, you can start to prevent churn before it happens and keep your customer and revenue metrics happy.
What’s the next step?
Tracking your churn rate is important. But when you’re caught up in a busy schedule, there often isn’t time to do everything manually. That’s why you need a reliable, repeatable system for keeping churn in check.
Enter stage left, customer relationship management systems (CRMs).
Salesforce is a well known CRM that you may already be familiar with, so let’s take it as an example.
Using the different ‘clouds’ in Salesforce you can track interactions, get to know each customer as an individual and personalize their experience. This gives you the power to not only know what your churn rate is, but understand the meaning behind the numbers.
You can see the lifetime value of your customers, know where in that lifetime churn is most likely to happen and establish a feedback loop so you’re continuously refining your process.
There are plenty of CRMs out there, so be sure to look around and find the one that’s the best fit for your business. It may seem like a big upfront cost, but when you get your churn rate in hand, ROI will follow.
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