A server hands a cup of coffee to a customer.

Understanding Your Customers: How to Reduce Churn & Increase Retention

Your customer base is a fluid entity that changes regularly when some leave and new ones arrive. This phenomenon, called 'customer churn,' can have a far-reaching impact on your business.

But First, A Definition

Hubspot, a leading digital platform for businesses, defines customer churn as 'the percentage of customers that stopped using your company's product or service during a certain time frame.'

Put into a story-problem format, it looks like this:

Customers at End of Time Frame ÷ Customers at Beginning of Time Frame

Suppose your business has 920 customers at the end of a month. If you had started with 1,000 customers, that month's churn rate would be calculated as:

920 ÷ 1000 = .92 or
.08 fewer customers (1.00 - .92) due to churn

Churn Rate for Month: 8%

Churn rates can change due to seasonal shifts, special promotions, customers aging out, and other factors.

Churn's Impact on Customer Retention

Tracking your churn rate is critical because it sets the bar for customer retention.

Because attracting new customers is costlier than keeping existing ones, knowing your customer churn rate tells you where to focus. If your rate is high, focusing on existing customers can keep runoff to a minimum. And if your churn rate is low, you can spend more to attract new customers.

Churn, Sales, and Profits

Even a minimal change in churn rate can positively impact your bottom line.

For example, according to Hubspot, a 5% reduction in customer churn can create a minimum 25% increase in profit. Why? Because returning customers generally spend 67% more on your company's products and services than new customers.

Moreover, you don't have to expend resources, time, or money convincing existing customers to choose your business because they've already made this decision.

Churn and Employee Retention

You might not think customer churn would affect employee retention. However, it can be tied to job satisfaction.

For instance, employees who invest in customers in the sales and support area can become disillusioned when customers leave, especially if they do so regularly.

Long-term customers get easier to serve as their needs become familiar, and your staff gets better at helping them and understanding what to sell them next. A customer base that's continually churning makes this problematic.

So, How Do You Reduce Churn?

While a small amount of churn is expected, reducing your rate to something close to one or two percent is ideal.

So, how do you get there? Reducing customer churn is possible if you apply your energy and resources in the right areas. 

Look Inward

Ask yourself, 'why are my customers leaving?' There might be obvious reasons, such as road construction limiting access to your physical location or losing a high-performing worker. The key is to create a mindset that asks this question periodically.

Look to Your Employees and Reviews

Your employees may have insights into why customers are leaving that you can quickly address. For example, they might inform you about an employee driving away customers with routinely rude behavior. Online reviews and surveys can also shed light on areas you can't see.

Look to Your Customers

Your best customers spend more and recommend your business to others. Engage them for insights into why they stay. Ensure they're getting the service they expect and aren't overlooked when new offers are available, or new employees are added.

Create Products and Services That Make Leaving Difficult

Banks compete with each other for checking accounts knowing that once they have this relationship, it's difficult to switch to another financial institution. Do you offer a product or service that can be structured this way? In most cases, the answer is yes, if you're willing to get creative and take chances.

Don't Overlook Social Media

Few mediums allow you to stay in touch with customers and increase the likelihood of keeping them, like social media. Facebook, Instagram, Tik Tok, and other platforms can help you minimize churn by maintaining a dialogue between you and your customers. 

So, if you're not using social media to its potential, consider getting up to speed or hiring someone who can.