What is Customer Churn?

customer churn what is it

As business owners, we dream of a world in which the sales funnel leads to never-ending customer retention. In this magical, mythical land, our customers discover our business, fall in love with our product or services, and never, ever leave us. They continue to make us their main supplier for nearly everything they need in life. Best of all, all of their friends and family come with them, providing you with hundreds of happy customers for the rest of forever.

The real world…

Unfortunately, this is not the world in which many business owners live. Every business experiences what we call “customer churn”. Despite the somewhat terrifying name, customer churn is perfectly natural, and something to expect to some degree.

So what causes customer churn? Are there ways to avoid it? And how do I decide whether my business is experiencing an acceptable level of customer churn or not?

What Is Customer Churn?

First things first: What is customer churn? The phrase “customer churn” refers to losing customers when they choose to stop doing business with your company.

Just as you’re excited for the “in with the new”, it’s always disappointing when you experience “out with the old”. Retaining customers costs far less than gaining new customers, and having long-term clients is always helpful for the bottom line.

As disappointing as it is to lose a long-standing member of your book of business, it is very natural. There are instances in which churn may have little-to-no impact on your business.

If you have a client who has made just a handful of small purchases over the course of several years, the impact on your bottom line will be pretty minimal.

Why Does Churn Happen?

There are also plenty of reasons why a customer may withdraw business that have absolutely no bearing on you, your business, or your product or services. For example, they may retire or move on from their current role, and no longer have need for your product.

Budget constraints are another valid and non-personal reason for customers to stop doing business, as well. 

On the other hand, there are plenty of ways in which you can influence a customer’s decision to continue to use your business as their main provider for your goods and services.

As a business owner, it’s your job to ensure your customers are aware of the value you, your company, and your products provide. They should look to you as a trusted advisor in your niche. And if they start to see better value somewhere else, or doubt your knowledge or quality of service, they will start to shop elsewhere.

How To Avoid Churn?

Churn is not 100% avoidable. Every business has some level of churn, from the highest ranked retail outlets to award-winning newspapers and magazines. Not every person needs every product or service in their life, and some businesses will provide customers with their needs better than others.

This is simply a fact of business.

However, it is in your best interest as a business owner to understand the causes behind your customer churn. This isn’t always obvious, because most customers won’t send you a detailed email explaining why they’re leaving.

In fact, most of them will try to disappear as quickly and quietly as possible to avoid having to speak up.

A Method to Understand the reasons of Churn

One of the least intrusive ways to gauge the reasons behind customer churn is the exit survey. Commonly used with subscription packages, this is often a very brief questionnaire that must be completed during the cancellation process.

Through a brief series of multiple-choice questions, customers can indicate the primary factors for ending their partnership.

This may even include a section for them to write out their own comments and thoughts. It’s non-confrontational, and gives you greater insight into what might need to change within your business.

Some of the most popular reasons for customer churn include price or perceived value and overall customer experience.

Providing Value

When it comes to price, customers are willing to pay more when they get more. At the same time, everyone wants a good deal. That means paying as little as possible for as much product as possible.

customers preceived value in churn

It’s a delicate dance that all business owners must learn in order to make a decent profit while keeping customers very happy.

Providing customers with value often means going above and beyond in ways that involve giving them things they want without giving away so many freebies that you lose the company. This can take many faces, such as posting informational videos on YouTube, posting useful tips and tricks in your blog, or frequent sales and coupon codes for subscribers who are already paying a set rate.

Read also: Why your Business should have a Blog.

When customers feel that they’re not getting enough for their money, or when someone offers them even more for the same price, that’s when you’ll experience churn.

Therefore, it’s important to keep value consistent. Keep those videos and blog posts regular, with equally useful information on each post. Rotate discount offers so everyone has the chance to take advantage of a really big deal.

Make sure your content is entertaining and informative so that people have your business in the front of their minds at all times. This creates brand loyalty, and loyal customers have no really pressing reason to shop around.

You can Limit Churn with this…

Customer service is another way in which you can prevent churn. It starts with the first experience. You absolutely must make a stellar first impression in order to retain a customer.

Even if their order got lost or destroyed in transit, how your business handles that error can still create customer loyalty. In fact, if you handle it just the right way, they may be more impressed with your recovery than they would have been with a normal first order.

But that doesn’t mean you can wander away for their subsequent orders. As a business owner, you should constantly exceed the expectations and desires of your customers. Communication is key.

Be proactive, instead of reactive.

Check in with your existing customers from time to time- whether it’s through a survey, interaction in blog or social media comments, or asking for feedback in your newsletter. Don’t let it be a one-sided relationship: extend that sense of value beyond your product or service and to the customers themselves.

How Do I Know If I Have Too Much Churn?

There are multiple ways to calculate churn, or the impact that churn has to your business. The most popular methods for recording churn are:

  • Total number of customers lost during a specific time period (month, fiscal year, etc)
  • Percentage of customers lost during a specific time period
  • Amount of business value lost
  • Overall percentage of business value lost

In the first, you’re looking for a flat, total number. If you start the month with 78 subscribers or clients, and at the end of the month, you have 72 subscribers, then your churn rate is 6 for the month. 

This number doesn’t tell a complete story, though, which is why some business owners prefer to dig deeper.

Looking at the percentage of customers lost tells a more meaningful story, as it demonstrates the chunk of business impacted by that loss. If you start the month with 100 customers and end with 75, then you have lost 25% of your business. 

The last two figures will tell you the financial impact of churn. If you start with 100 customers and end with 75 in a given month, but the average spend of those lost customers was $20, that puts that loss into perspective.

Even more telling is the percentage of business value lost. If the same 25 customers who walked represented only 10% of your overall business value, then losing them means a little less than the big spenders who stayed!

In Conclusion…

Customer churn is natural, but still a very dreaded part of the business experience. With some investigation and finesse on your end, you can control whether your long-time customers stay or start looking elsewhere.

Regardless, it’s best to keep your eye on the overall impact of churn. Only you can tell when the numbers are a big deal. Still, it’s always best to be proactive and on your A-game at all times to keep the churn at bay.

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Teachingbiz provides internet marketing services and education to digital entrepreneurs and marketers who want to learn how to build and scale their businesses.

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