Why Understanding Customer Churn Rate Is Important For Your Business

October 14, 2022
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Timothy Ojo

If there is anything we know you don't want your business to have, it is a high churn rate. You don't want that. No one wants a company to suddenly have its customers stop its patronage. Therefore, a business must constantly look out for retention and churn rates. While the former is understood at the first read, the latter may not be immediately understood, especially if this is your first time you are coming across the word. Before we go in-depth into what churn rate means, let's set the tone for why these terms are essential to your business.

The quality of your products or services is as important as how much you want to improve your services and products. Every business wants to satisfy its customers by constantly evolving with the customers' needs and having them come back again like a pendulum swing. You tend to spend more resources on getting new customers than retaining them. So, why not ensure that you get your customers hooked on your products and services?

What is Churn Rate?

A report by Indeed says, "maintaining a low churn rate can help a company grow and increase profits with fewer interruptions in its work processes, and a higher retention rate means your company can use less time seeking new customers, which can improve its overall cost-effectiveness." If you are still confused as to what churn rate means, here is a simple definition: churn rate measures the rate at which customers stop doing business with you. You may sometimes come across the name as "attrition rate" and defined as the proportion of existing customers at the beginning of a period that was lost over a given period.

However, many think a customer stops doing business with you only when they do not purchase their products or services. Unfortunately, there are many ways a customer stops interacting with your business. From unsubscribing from your newsletters to stopping their subscription service, to abruptly boycotting your brand, all of these are the customer telling you they don't want anything to do with you. You should not allow this to happen, and even if it does happen, ensure they are minimal.

Now, here is why this is dangerous; you may think one customer leaving would do zero damage to you, but you absolutely have no idea the influence of the customer. Not only do they leave your brand, they then start patronizing your competitors.

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A high churn rate is terrible for business. For once, the word "high" means something negative. The lower the churn rate, the better for you. It is important to know that there is a certainty of churn in business. However, allowing the churn rate to be higher than usual would be bad for your business.

What Does High Churn Rate Imply?

Nobody wants to be in this position of having a high churn rate. The reason is simple, you would have to constantly seek new customers. Now, that's expensive, especially in today's world economy. So a high churn rate means more money will be spent on getting new customers via marketing or advertising.

Interestingly, there is a formula to calculate the churn rate:

(Number of Customers at Start of the Year — Number of Customers at the end of the Year) / (Number of Customers at Start of Year) = Annual Churn Rate.

This can be done manually. But how about you get real-time updates on your business churn rate? There are machine learning models that help to calculate these things for you. So not only do you have a foresight of how to reduce the churn rate, but you also get to know what you are doing in real-time that results in that. It is the total package.

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