Churn Rate

It describes the proportion of customers who no longer use a product or cancel a contract during the period under review. This could be, for example, an app that is no longer used after an initial hype. The opposite of the churn rate is the retention rate, which expresses how many users come back or use a product again.

The churn rate, or customer loss rate, is somewhat more succinctly called the churn rate. The term “churn” is a portmanteau: the first part of the word comes from change, and the second from turn. It is calculated as a percentage and expresses how many customers no longer use a product compared to all customers. Such a comparison is limited in time, so usually the churn rate of a week, month or quarter is considered. The churn rate is a classic key performance indicator, or KPI for short, for online marketing. The measurement of such KPIs should enable faster and more comprehensible decisions in marketing and improve customer relationship management.

Calculating the churn rate

The simplest formula for calculating the churn rate counts the customers who have dropped out and relates them to the total number of customers. This figure is then related to a previously defined period of time. If the number of subscribers to a newsletter is 500 at the beginning of the month and 450 remain at the end of the month, the churn rate is ten percent. In other words, one in ten subscribers canceled the newsletter during the period under review. A churn rate of zero percent is desirable, but almost never achievable in practice.

However, this quick method neglects the fact that other interested parties also subscribed to the newsletter in the month under consideration. Thus, the formula would have to account for growth by a weighted average of the “all newsletter subscribers” benchmark.
If, instead of newsletters, the focus is on contracts with an insurance company or a mobile phone provider, the cancellation periods must be taken into account. Even if all customers were to be disgruntled in a month’s time, only that proportion whose contractual minimum term has already expired can cancel.

In e-commerce, on the other hand, a completely different approach is taken. Customer relationship managers analyze how long a customer has not ordered anything. If the last order was placed more than six months ago, the manufacturer assumes that the customer has dropped out. The time interval that makes sense in each case depends on the product range. Most people buy washing machines and refrigerators much less frequently than jeans and books.

Retaining loyal customers and bringing back customers who are willing to switch

Winning new customers is expensive and time-consuming: This rule applies equally to online and brick-and-mortar retail. That’s why it’s important to take good care of loyal existing customers and not lose them to the competition. If you keep a constant eye on the churn rate, you can take countermeasures at an early stage if a large number of customers turn out to be willing to switch and leave. It also shows how good the company’s average customer loyalty is. If the company recognizes which customers bounce and when, it can take the next step of trying to find out why the customers were dissatisfied.
There are people who always go to great lengths to find out where they can buy a product at the best price. It is difficult or impossible to retain these customers in the long term. Therefore, the company should focus on those customers who will basically stay loyal if they get a better service. If the manufacturer finds out why the customer is thinking of switching, they may be able to stop them or win the customer back. Even if that is not possible, he should try to find out the reasons for switching. In this way, the company can improve the quality of service or the quality of its products so that the churn rate is lower in the future.

Causal research: Why is the churn rate increasing?

Some companies ask about the motivations when a subscriber cancels their newsletter. Usually there is a selection of answers, such as “the topics no longer interest me” or “the newsletter appears too frequently”. Ideally, there is also a free field in which the user can name an individual reason. If the company evaluates the responses and most users indicate that the newsletter appeared too frequently to them, the company can decide to reduce the frequency. If it turns out that the content is not interesting for the customers, the content managers can plan new content for the newsletter. In e-commerce, there may be completely different reasons if a customer makes only one purchase in the online store and then no longer does so. He may have trouble finding his way around the store or the page may not load fast enough. In this case, the customer wastes too much time searching for products and, in the worst case, does not find the desired information on the landing page.

The customer may be annoyed by the fact that he cannot use his preferred payment method. The usability of the online store may be excellent, but if there are regular problems with shipping, customers are just as annoyed. Last but not least, the product may simply give rise to complaints or a competitor may offer the goods at a lower price. Ultimately, the entire customer journey should be put to the test to find out why customers are dissatisfied and switch. In order to find out the exact reason why customers do not come back and thus increase the churn rate, it is necessary to investigate more closely. To do this, the company can evaluate bad reviews from its users, provided the web store allows reviews. The manufacturer should also process, systematically evaluate and document complaints received by phone or e-mail.

The churn rate is an important indicator in online marketing and e-commerce. If this rate increases or is too high, customer relationship management should take action. First, customer relationship managers investigate why so many customers are turning their backs on the company. In the next step, the customer relationship manager can eliminate critical reasons and try to win back customers who are willing to switch. If the company does not succeed in motivating some of the customers to stay, it must develop strategies to attract new customers.

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