Customer Churn Meaning Reasons Types Vs Revenue Churn

Customer Churn Meaning

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During every business’s life cycle, there are problems related to customer churn. However, it is essential to understand that retaining old or existing customers is less costly and easy than gaining new ones at any level. Therefore, a company should always find innovative ways to gain customer loyalty and identify risks and indicators to stop customer loss.

Key Takeaways

Customer churn is when a company starts losing its customers because they stop using its product or service. There is a considerable subscriber and revenue loss, which is very difficult to regain unless an equal or more subscribers start buying its products or services.It is easy and cheap to retain existing customers through product innovation and service quality improvement.A company should do customer churn analysis by identifying early signs and risks of losing customers and taking preventive measures before it is too late.

Customer Churn Explained

Customer churn, also known as customer attrition, is a stage in business that loses buyers or subscribers of products and services due to a lack of innovation, service satisfaction, high price, competition, etc.

It silently destroys a business process if it is not taken care of at the correct time. The cost of regaining the lost consumer base is very high. It involves a lot of analysis and research, which is time-consuming and expensive. Thus, predicting customer churn before it happens is critical in any business so it does not lose the market.

The acquisition cost and the competition level of markets are rising day by day. As a result, every business must do customer churn analysis from time to time to increase profitability, expand and grow.

Gaining new customers involves generating new leads, following up, and converting them to sales, which is not only a long process but also more challenging than retaining existing ones. The business has already earned the loyalty and trust of existing consumers. The company should frequently calculate the customer churn rate to understand the areas that need improvement to remain competitive in the market.

Customer attrition helps companies identify their weaknesses and provides ideas for improvement, a continuous process in the current frequently changing and technologically advanced world.

Reasons

There are various reasons for customer churn, as follows:

Lack of professionalism – Customers want to deal with a company that understands their needs and values them. It is crucial that the business professionally deals with clients and gives them the best experience. Poor onboarding experience – If clients have a terrible experience while opting for any product or service, it creates an awful impression. The business must provide the clients with a satisfactory onboarding experience. Better competing product – There might be a better product available in the market that is similar but less costly or easy to opt for, etc. Thus, the customer tends to switch products and go for a competitor. Lack of flexibility – Technological innovations are happening continuously in the ever-changing market. Every business should be able to upgrade itself to stay ahead of the competition. Otherwise, there is a possibility of customer attrition. Fall in growth rate – Due to the rise in raw materials prices, lack of resource supply, and high overhead cost, businesses might experience a fall in growth rate, leading to a loss of revenue, and profit leads to a rise in price, which means losing customers.Poor product quality – Poor product quality is a significant reason for the high customer churn. If the product quality does not meet standards and clients are not satisfied after using them, there is a strong possibility of losing them to competitors.

Types

Let us look at the different types of customer churn:

Voluntary churn/ active churn – In this type of churn, the clients voluntarily choose to detach from a service or product. It might be due to high prices, unsatisfactory features, poor customer service, etc. Therefore, it is necessary for the business to continuously look for product upgradation, analyze competitors, include new, exciting and useful features, and give customers the best after-sales service. Involuntary churn/ passive churn – In this type of churn, a customer may leave the product or service of a business without any firm intention to do so. It mostly happens in the software industry or for products that involve the use of information. The reason for churn is not business related. For example, some new software versions may have come into the market, making the old version outdated and thus losing customers. In addition, some products need the customer’s name, address, phone number, card expiration date, account number, etc., which might have changed, resulting in customer loss for the business.

Examples

Some examples will help us understand the concept better.

Example #1

Star Industries Ltd. is a leading wooden furniture company headquartered in New York City, New York. Let us assume it gets around 25 customers every month, and each product is priced at an average rate of $150. For the next three months, the revenue generated is as follows:

(25 x 150) + (25 x 150) + (25 x 150) = $11,250.

Now, let us assume that the company takes a long time to deliver the products to the purchaser after payment. It often needs to catch the delivery date. Customers are growing increasingly dissatisfied, leading to attrition, which we take at 20%. The new revenue earned by the company is as follows:

[(25 x 80%) x 150] + [(25 x 80%) x 150] + [(25 x 80%) x 150]

= [20 x 150] + [20 x 150] + [20 x 150]

= 3000.

The above example proves that attrition can drastically reduce revenue and affect the company’s growth.

Example #2

A survey on customer loyalty shows that one-third of US customers lack loyalty towards their brand and 38% of the participants feel they are eager to switch to competitors.

The study conducted by TechSee, a company engaged in augmented reality and visual technology, shows that product satisfaction tops the list when it comes to analyzing the customer churn of a company. Almost 43% of people canceled their purchase or switched to another product due to unsatisfactory experiences during or after purchase.

Consumers are becoming increasingly intolerant of poor quality of service. It is necessary to take this trend seriously, or it will become challenging to retain customers and survive the competition.

Example #3

Another research by SugarCRM, a software company that produces Sugar, a cloud-based application, shows that the tendency of customers to switch brands is alarmingly rising, and most companies need to be more competent to handle it.

The study points out that the main reasons behind customer churn are a lack of stability at various organizational levels and the inability of outdated Customer Management Systems to meet the actual purpose. Thus, an entity must address the above issue urgently.

How To Reduce?

There are ways and means to reduce customer churn, which are listed below:

Customer Churn vs Revenue Churn vs Retention

Customer churn is when businesses lose customers due to competition, lack of innovation, changing customer preferences, etc. Revenue churn measures the loss of business subscriptions due to downgrading or canceling service. Customer Retention is the ability of an entity to prevent any churn or attrition related to revenue, customers, or employees.

The differences between them are mentioned below: