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Understanding Customer Churn Rate

Last editedJan 20222 min read

Acquiring and losing customers is a natural part of any business that applies to both the largest and smallest organisations in the world. This cycle of gain and loss is referred to in business circles as customer churn.

How to calculate customer churn rate

The customer churn rate is a valuable metric that can be used to help businesses understand the efficacy of their marketing and overall customer satisfaction. The easiest way to calculate customer churn rate is to divide the number of customers lost over a set period by the total number of customers from that same period.

This provides you with a percentage of your total customer base. So, for example, if a company had 1000 customers at the start of the month and 800 by the end of the month it would have a customer churn rate of 20%.

Why is a low customer churn rate important?

Generally speaking, the lower the customer churn, the more customers you retain. A higher churn rate, meanwhile, means you are losing more customers than you are gaining. As a result, low churn rates are a desirable asset. The most desirable outcome is a negative churn rate, which means the business will be gaining more customers than it’s losing.

Understanding customer churn rate

As a metric, it’s invaluable when it comes to assessing strategy. Because if churn rate is low or negative then you’re obviously doing something right and if it’s high then you must be doing something wrong. To really understand customer churn, however, you need to understand the difference between voluntary and involuntary churn and how to react to each respectively.

Voluntary churn

This refers to a customer actively deciding to leave. How they achieve this will depend on your business model. If you are a subscription service, for example, if a customer cancels their subscription then this would be voluntary churn.

Involuntary churn

If a customer loses access to your service unintentionally this is referred to as involuntary churn. This accounts for between 20% and 40% of churn and happens most regularly when customers forget to update their payment information when a card expires.

How to decrease customer churn rate

There is no catch-all customer churn rate formula and it’s something that all businesses must contend with. However, there are a few ways to prevent high levels of churn.

Direct debit

The first thing to take care of should be involuntary churn as this is arguably the easiest thing to fix. Bank-to-bank payments such as direct debit are always going to be more reliable than credit cards, as bank accounts don’t just expire or get lost without customers realising it. GoCardless offers a reliable and effective direct debit payment system with failure rates as low as 0.5%.

Understand your customers

The best way to fix voluntary customer churn is to understand why your customers are leaving. Market research is always going to be your friend here. Don’t be afraid to ask those who have left why they decided to leave.

Provide support

Customers are more likely to leave if they don’t feel like they are being listened to or can’t find the answers they are looking for. Provide them with all of the resources and information necessary to ensure they remain happy.

Target the right audience

Ensure you’re targeting the right people at the right time and that your goals and ideals are aligned with the people you want to be attracting.

Know when to step in

Have they not logged onto their account for weeks? And when they do, are their sessions decidedly short. Know what warning signs to look out for so you know when to step in and take action to retain their business.

We can help

If you’re interested in finding out more about customer churn rate, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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