Customer Churn: The Struggle is Real
Client retention is often overlooked or treated as an afterthought. This series will explore the impact of churn and the strategies to avoid it.
Client retention is an often overlooked area of one's business. Reducing churn is also one of the most controllable ways to increase revenue and profitability. We have a five-part series discussing the problem, the highly effective solutions that can be easily implemented, and the data-driven approach that should be used.
Client retention is critical for every business. For some industries, like B2B SaaS, client retention can decide whether a business survives. Despite the importance, too many businesses treat client retention as an afterthought. They relegate it to the Customer Support Department who usually is so busy putting out fires, that they have little or no time for proactive client care. We believe that client retention is a company issue, and there are roles to be played by Marketing, Sales, and Customer Support. We call this Growth Enablement.
We will discuss the role we believe each department owns and several methods that we implement to help ensure that churn is reduced to the lowest possible number. First, let’s examine what is a respectable retention rate and the cost of failure.
How Serious is Customer Churn?
Churn is a HUGE problem for all businesses. On the macro scale, the financial aspect of poor client retention is huge, with companies losing $1.6 trillion per year due to customer churn! Not only are these revenue dollars lost, but the cost of acquiring and onboarding new clients takes appreciably more time, energy, talent, and costs. According to Forrester, it costs 5 TIMES MORE to acquire new customers than it does to keep an existing one. This does not even factor in the onboarding expenses of that new organization.
When that is factored in, the real cost of client attrition becomes apparent. It will cost you 16 times more to bring a new customer up to the same level as an existing customer.
There is a Harvard Business School study that puts this into perspective. It showed that, on average, a 5% increase in customer retention rates results in a 25% – 95% increase in profits. And the lion’s share – 65% of a company’s business comes from existing customers!
The same truths are revealed by KPMG, who found that customer retention is the main driver of a company’s revenue.
What is a Respectable Churn Rate?
Every industry has its own rate of what is considered “acceptable churn.” You will always have some churn, as some clients will merge, go out of business, or new leadership wants to take them in another direction. The key is to reduce the churn created by every other reason.
The average client retention rate is 75% (Exploring Topics). From a B2B outlook, most have a higher client retention rate:
Professional Services - 84%
Insurance – 83%
IT Services – 81%
Construction/Engineering – 80%
Financial Services – 78%
Telecommunications – 78%
Healthcare – 77%
Software – 77%
Manufacturing – 67%
Just because these retention rates are the normal rates for these industries, does not mean that they are acceptable retention rates. For most businesses, these retention rates are simply too low to provide a reasonable rate of growth. For a B2B SaaS business, losing 23% of your clients each year can be catastrophic. We tell our clients that a 10% client loss is the ABSOLUTE highest you should find reasonable and customary. We believe that achieving a 5-7% churn rate is perfectly reasonable (ChartMogul). Our clients have found by implementing the strategies outlined in this article, they were able to keep customers and achieve that rate.
How do you Calculate Your Customer Retention Rate?
The calculation for the customer retention rate is very simple. You take the total number of customers divided by the total number of new customers acquired during that period (total customers/number of new customers). We recommend that this analysis be conducted for each month, quarter, and for the year. The first set of numbers you pull will be your baseline for tracking your progress.
If you want to determine the churn, it is a simple subtraction process. Subtract the customer retention rate from one hundred. That, however, is just the start of the analysis. Every effort needs to be made to determine the cause of the churn. A post-engagement analysis needs to be made. Review the client's history. Were there customer complaints? How often were they contacted? Did they attend customer update webinars? Did they open customer engagement emails?
We also recommend that a third-party representative reaches out to the stakeholders or representatives as soon as they can after the cancellation notice to inquire as to the reasons. The former client’s representatives are more likely to respond if they don’t believe it is an attempt to reacquire their account.
Customer's Impact on Financials
To really put the impact of customers’ churn into focus and possibly help motivate the need for improvement, calculate both the actual dollars lost to churn and determine the revenue churn. The revenue churn rate is calculated by dividing the lost monthly recurring revenue (MRR) by the previous MRR for the desired period. We recommend calculating this monthly, quarterly, and yearly. When you calculate for the year, you will use the annual recurring revenue (ARR) in place of MRR.
For example, if in one month you lose a client who paid $1,000 for their monthly subscription, and your previous month’s MRR was $100,000, that month would have had a 1% churn rate.
$1,000 churred MRR/$100,000 MRR = 1% churn rate
Each month, quarter, and year, the C-suite and representatives from Marketing, Sales, Product Development, and Customer Support should meet and discuss how effective they have been in reducing churn, the reasons for the churn, and steps to be taken to improve client retention.
What are the Main Reasons for Customer Churn?
Churn is preventable. Most clients don’t want to have to change vendors. The process is always disruptive and impacts their productivity. The situation usually needs to get extremely bad and often multiple attempts are made to find a resolution before they leave. Companies who are caught “off-guard” are usually not paying attention.
Over 70% of churn is avoidable simply by properly engaging your customer. Many organizations don’t pay attention to customers until their renewal date or when they have issues and complaints. This makes the client feel ignored and underappreciated.
In a 2020 report by CallMiner, they reported that 70% of the time, customer churns are because of poor customer service. They specifically mentioned three categories that were responsible for driving them away:
Unfair Treatment – Customer felt poorly treated by the company.
Customer Experience – Pricing is the major driving factor, but most would rather stay if their overall experience was positive. Often, the leaving customer will speak about how they were ignored, left on hold, calls were not returned, or treated rudely.
Lack of Human Service – Bots are fine for getting a quick resolution to a simple problem, but when a customer can’t readily find an answer, they need to speak to a real person. Companies trying to save costs by using a bot (even an AI direct bot), usually find it ends with complaining ex-customers.
Competitor Influence - Customers may be enticed by competitors offering better prices, terms, product features, or more attractive incentives.
Unmet Expectations - When a company fails to meet customer expectations, whether in terms of product quality, delivery, or customer service, it can lead to customer dissatisfaction and churn.
The specific breakdown as to why customers leave are:
Customer Service - 70%
Product Quality - 30%
Price - 24%
Product Features - 13%
UX/UI of Product - 8%
Needs a Change - 8%
Other - 14%
Client churn is a problem that can be avoided largely by improved customer engagement. By taking proactive measures to engage with customers and meet their needs, companies can prevent them from reaching the tipping point where they decide to leave.
When customers feel valued and supported by a company, they are more likely to remain loyal and continue their business. In part 2, we will discuss the importance of having a growth mentality that places customer retention on the same level as customer acquisition. We will explain the role that each department has to achieve this standard.