“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
-Sam Walton
Customer churn in the current milieu is a fact of life for every business in every industry. Customers in today’s digital age have unprecedented access to data, thus enabling easy comparisons of competitive products and hassle-free provider changes with a simple click of a button.
Churn has a very significant impact on the business as it lowers revenues and ultimately reducing profits. Yet very surprisingly, more than 3 out of 4 companies have no strategy for preventing or reducing customer churn.5 times lower Retailers typically focus and spend most of their effort and marketing spend on customer acquisition, even though as its widely known that the cost of retaining an existing customer is nearly than acquiring a new one.
Churn is a complex problem. The evidence of this complexity appears in the variety of articles, guides, e-books written on the subject. HubSpot has an entire e-book on this topic. Shopify explains it in this article. Consulting firms have hundreds of articles on this topic. Every firm has their own view of understanding and managing Churn. However, the underlying principle of business remains same: Customers will churn, when the value delivered by you is less than the inertia of Customers to visit your competitor or to not use the product/service entirely.
Table of Contents
A very famous story explains the importance of Churn definition. In the year 2004, Netflix was sued by its shareholders over its reported churn rates. The shareholders argued in the court that Netflix used an “improper calculation of the rate that produced an artificially low churn rate”.
The judge threw out the case on the ground that “there is no single industry-wide definition of churn rate”.
The most basic definition for Customer Churn is defined as the number of customers who stops doing business with you during a given timeframe.
Churn or Rate of Attrition is a business term and can be calculated in a few different ways:
- Total number of customers lost during a specific time period
- Percentage of customers lost during a time period
- Recurring business value lost
- Percentage of recurring business value lost
We can calculate Churn by using this Churn Formula:
Churn Rate (in%) = Customers Lost During the Period/Customers at the start of the Period
The basic churn formula will remain same, but we should modify this according to the business and the shopping cycle of its customers.
As an example, suppose if we had 100 customers at the beginning of January 2020, and during January, we lost 18 of those customers, our churn rate for January is 18%.
Churn Rate or Churn = 18/100=18%
Yay, it’s SO SIMPLE. Not Really!! We need to put few things into perspective before we study churn.
There are many things that you need to consider before getting this easy metric of churn %. These metrics add more context to the churn% and at most of the time, it changes the entire equation if one of them is not accounted for.
Let’s imagine a classic gold-tier shopper for a Fashion Retailer: Nicky, loyal customer who visits once every 60-90 days, shops more than 2-3 departments or categories each time, maintains a high average shopping basket. Nicky, however, has not been to the store for more than 2 months now. Should we be worried that she has churned? Is she on vacation, has she switched to competitors?
Every retailer searches for the pieces to this puzzle. Because visit frequency changes for a variety of reasons, how should retailers define churn and detect churn propensity to react to it before it’s too late? In Nicky’s case, when should she be targeted with personalized offers to get her back to the store?
These challenges require a robust definition of churn or churn propensity that accounts for each customer’s shopping pattern, a set of parameters rigorous enough to alert for churn propensity and early enough to take remedial action.
1. Company Churn or Product Category Churn
As in the above case of Nicky, what would the retailer do if Nicky still visits every 60-90 days but Nicky now visits to only 1 category and her Average Shopping Basket value has also decreased.
After some data exploratory analysis, the retailer found that Nicky has stopped buying in formal and office wear sections. The retailer found out that Nicky used to buy XXL size Formal wear and off late customers are visiting less to this section who used to buy Plus size products. Data showed that Churn rate for the Formal Wear Plus size category has increased a lot.
After a Customer Focus Study, the retailer found out that the design choice of that category was not good and a competitor had very good designs in the category. Hence the Churn of the Formal wear went up driving up the overall the Churn Rate of the store as Customers who used to shop in only that category stopped visiting the store.
The above example shows that Churn can happen at Brand/Store Level and also at Department or Product Category level.
2. Customer Churn vs Revenue Churn
If Nicky stops visiting the store than its Customer Churn. What if Nicky still visits the store regularly, but now the Average Transaction Value is 60% of what she used to spend earlier. This is known as Revenue Churn.
The Revenue Churn will come into play when we consider the Customer Lifetime Value (CLTV) while creating Churn Propensity based Reactivation Campaigns. The Customers who has higher CLTV, are given priority.
As every reactivation or engagement campaign is associated with Marketing Spend and Promotional giveaway, it is better to start the campaign giving priority (Net Score) to the Customers who has high Propensity to come back and also has high CLTV.
- There are numerous other factors that needs to be considered like Seasonality, Trialists & Repeaters profile, Sample size of churn segments, impact by different Customer Segment Cohorts, etc.
Every retailer knows why churn is important. Below are few facts just to give some perspective to it.
- Companies lose $1.6 trillion per year due to customer churn! (Accenture Report)
- The Harvard Business School report claims that on average, a 5% increase in customer retention rates results in 25% – 95% increase of profits. And the lion’s share – 65% of a company’s business comes from existing customers!
- 50% of customers naturally churn every 5 years. However, only 1 out of 26 unhappy customers complain; the rest simply churn. (Kolsky)
1. Voluntary & Involuntary
Firstly, we need to understand that Customer Churn happens both voluntarily and involuntarily.
In this article we will focus on voluntary churn, because voluntary churn has actionable prevention steps, while involuntary churn is mostly unavoidable, like when a customer stops visiting the retailer due to death, relocation, etc.
2. Contractual & Non-Contractual Churn
In Contractual business settings or so-called access services where we observe customer usage while “under contract” or autopay. The cancellation of service is considered as “Churn” event and is notified by customer and recorded like Netflix, cell phone service providers, etc.
In Non-Contractual businesses like Retail, customers are free to buy or not at any time. The “Churn” event is not explicitly observed. The Churn is defined based on signature shopping cycle of customer’s transaction history.
3. Customer & Revenue Churn
- Customer / Account Churn- Where the customer is completely lost and is no longer visiting the store / using or paying for the service.
- Product Category Churn- Where the customer has lowered their engagement and reduced the number of categories they used to buy / lowered subscription profile but remains a paying user.
- Decreased Spend- Where the customer has reduced their spending like reduced Visit Frequency / Average Transaction Value without stopping shopping entirely or reduced their subscription profile, like watching movies from a lower tier for On Demand Movie Service provider.
Churn is inevitable. One cannot stop involuntary churn and in retail there will always be voluntary churn as well. We cannot make it 0% but we can surely manage churn and reduce it. Here are few suggestions on how we can reduce churn:
1. Improve Customer Experience
The seeds of churn are sown throughout the customer experience, so it’s necessary to have a clear engagement strategy for each instance of the customer journey. Treating only the last episode rarely leads to a complete solution that addresses the customer’s discontent which resulted in churn.
The entire customer journey is very important in understanding the Customer Experience and to know the touch points that can increase or decrease spend or visits of a customer. Experience is very important in retail, right from store location, pre-entry experience to instore experience like customer service, product Price & ranging, store layout, queue wait time, after sales service, product return policy, right ambience, etc.
For example, Zumtobel claims a fashion retailer in Germany saw its sales go up by around 12% compared to another local store, after it installed a new lighting scheme specially designed to appeal to the personality profile of its target customers
2. Talk to Customers
The best way to reduce churn is to understand the reason behind. One of the best ways to understand why your customers are churning is to talk to them. One can try sending a Customer Survey like N.P.S., etc. or one can go straight to the source by calling a group of customers and talk to them individually by creating a Focus Group and having an honest, open conversation about why they have stopped shopping. The feedback might be harsh and most of the time they will not reply when approached for feedbacks, but few of them will reply and then at least you’ll get more context to the reason behind churn.
It is very important that a brand creates a customised Customer Happiness Index Score (or any Satisfaction/NPS Score) & track it consistently. Take pro-active actions on the feedback to improve the customer experience with your brand.
3. Create Segment and Microsegments of Your Customers
McKinsey did a case study on Churn and found out that companies with the best retention rates employed a rigorous process of segmentation and micro segmentation. Segmentation helps companies to focus on group of customer with similar attributes. Segments can be based on behavioural attributes that we can get by analysing past transactions, based on demographic attributes, etc. This approach helps to personalise the reactivation offers while keeping the cost very low as compared to any blanket reactivation campaign where a brand sends communication to all the lapsed customers.
For example, RFV Segmentation can help companies to focus on reactivating customers who lapsed recently and had High Frequency & High LTV earlier. This approach enables you to spend your limited marketing budget on the customers who had high revenue churn and have high probability to come back to the store.
4. Increase Customer Engagement
How to Increase Customer Engagement? Well, this is much easier said than done, but when done well, this can-do wonder to reduce churn. Engaged Customers, are the ones who are interacting more with your product and your company, participating in your loyalty program (if any) and they tend to be more satisfied customers.
A team at HubSpot realized the importance of understanding churn and being able to look at it through the eyes of measuring customer engagement. The team developed a customer engagement system which delivered a Customer Happiness Index Score or more commonly known as CHI Score. HubSpot used this CHI score to identify customers that were at risk of churning and used to call those customers and improve their usage of the product.
5. Customer Journey Analytics
According to a study, Customer Journeys are 30-40% more predictive of customer satisfaction and churn. Brands that analyse the customer journey and effectively communicates at the critical touchpoints, has high customer satisfaction and less probability to Churn.
The right customer journey analytics solution will give brands the customer insight in terms of the macro picture, so that you know the persona and signature shopping style of your customers, what are the mission & goals of their shopping trips, and which channels they are utilising to interact with your brand at every step of their customer journey.
6. Be Agile, A/B Test, Refine, Reject, Repeat & Learn as Fast as Possible
As per Mckinsey, most successful companies use test-and-learn processes by continually developing new offers or benefits for customers and deploy them to test their effectiveness.
Every month new Segments, customer attribute, journey related feature is developed, and these segments or features are tested as soon as possible through A/B Testing. Whenever there is a significant impact driven by this new feature, it is being rolled out across relevant customer target groups.
Churn is a Lag Indicator i.e. the loss has already happened, and it's just a measurement of the damage inflicted. To reduce or manage churn, one needs to create EWS (Early Warning Systems) based on lead indicators or churn drivers. This will help the brand to find customers are at risk to churn, find the customers (based on CLTV & response model score) on whom the brand should focus on to retain and take remedial pro-active actions.
According to Seongjoon Koo, Chief Data Officer, J.D. Power, “Predictive analysis can be used to identify the customers at the brink of a high churn level and help organisations take requisite actions by paying more attention to such customers in a personalised manner.”
A BCG study reveals that by employing predictive analytics and arming business managers with data driven insights, corporate banks can reduce churn by 20%-30%. This can help the bank to increase their revenue growth by 2X. A Mckinsey study explains how an analytics-based approach to base management of a telecom company can reduce their churn by as much as 15%.
There are many Predictive Analytics methods which can be used to reduce churn effectively. Let’s discuss just few steps briefly how Analytics helps to reduce churn.
1. Define Churn as Per Your Business
Churn is defined based on various methods, and you need to create your churn formula based on your customer shopping cycle. To name a few how it can be defined or tweaked in different retail scenarios:
- Those who do not visit after a time period, let’s say 90 days, might be defined as Churned. In this case business might want to act on customers who did not shop in 45 days and see those customers as at-risk customers.
- Brands or category managers might want to define churn if a customer does not come back to buy a product category based on its signature shopping cycle or interpurchase time
- Based on its likelihood to return, decay functions, survival functions of churn distributions, etc.
2. Create Segments
Create segments and micro segments using clustering based on CLTV, RFV, Profitability, etc.
3. Predict the Propensity to Churn
Predict the Propensity to Churn and give a churn propensity score based on Predictive AI-ML Models. Using Predictive Models will improve ROI by nearly 10-20% and lower the marketing cost by 50%-70%.
4. Use the Churn Score
Using the Churn Score and CLTV-RFV segments, we form micro segments or cohorts and then create cohort specific marketing plans to retain/reactivate the at-risk customers. We focus more time and effort on customers who has medium - high CLTV and high probability to respond to the reactivation campaigns.
Based on buying behaviour of each individual, we can create a Product Recommendation Engine and find the best products based on which we can send customised offers. A research found that for online retail browsers who engaged with a recommended product had a 70% higher conversion rate during that session.
These personalised offers then can be send to the at-risk customers at the right time (Morning/Evening/etc.) on the right day (Saturday/Friday/etc.) using the right communication channel (SMS/Email/App/Call/Combination/etc.) using Customer Journey Analytics.
5. Measure the Impact
Measure the impact of your reactivation campaigns: both in short term and long term. Test, Refine, Reject & Learn based on outcome of your Retention or Reactivation campaigns. It is very important that you measure your campaigns correctly and find out which cohort is responding better to which type of campaign metrics and refine the Churn Predictive Models accordingly. This will also help you to find & improve the ROI of your campaigns and CLTV of the at-risk customers over time.
6. Get Customer Satisfaction Surveys
Get Customer feedback surveys and do sentiment analysis on the feedbacks to get the churn drivers. Improve business processes based on your findings that is driving churn. Make sure that customers have great experience in their entire shopping journey with your brand.
As shared by Neil Patel, implementing and responding to NPS surveys had a direct 30% decrease in the churn rate.
1. First Impression Matters: Send a Welcome Mail
In a survey by ClickFox it was found out that:
- 48% of surveyed consumers shared that the most critical time for a brand to gain their trust or loyalty is with the very first purchase or service.
- 40% of surveyed consumers shared that the most critical moment was when a brand had the opportunity to resolve any issue.
A simple step like sending a welcome email can make a customer feel good and help them remember the brand. It is very important for brands to follow the customer journey of a new customer from the moment they find you online or enters a store until the feedback received from customer post sales to ensure that there is a seamless and awesome customer experience.
2. Good Customer Service and Prompt Issue Resolution
The relationship of a brand with its customers only begins with the sale. Quickly and efficiently handling any issues that a customer may have with your product or any service is the second most critical moment in the journey to generate trust or brand loyalty.
According to Zendesk, 82% of consumers have churned because of bad customer service and not just because of bad product. In another study, Churn because of poor service stands at 70%, according to Forum Corporation’s research. Studies show that nearly 60% will never use a company again after 1 bad experience, and nearly 50% who had a negative experience will tell 10+ people about it.
3. Give More Value to Customers, Consistently
If your customers are getting more high value for money, there is less chance for them to leave you or your brand. Many brands say that failing to deliver on a promise is one of the main reasons for customers to churn. Making a great first impression is not enough for a brand to retain customers, brand also must consistently meet customers’ expectations and exceed them whenever possible.
4. Focus on Your Best Customers Who Are at Risk
For most of businesses, reducing churn or reactivating lapsed customers means identifying a pool of customers and refocusing your efforts to keep them on board.
However contrary to this idea, Mr. Sunil Gupta, the Edward W. Carter Professor of Business Administration at Harvard Business School, suggests that this strategy to target all at risk customers is lacking.
Rather than redirecting efforts and resources to retaining any customers on the brink of churning, Gupta recommends brans should focus their attention on the most profitable customers on the brink of churning.
Sunil Gupta explains "If I offer an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for me? The traditional method is focused on reducing churn, but we contend the goal should be maximising profits, rather than only reducing churn."
5. Personalize Communications and Engage with Your Customers by Getting A Good CRM
Reach out to your customers before they need you as this will help to increase customer’s mindshare for your brand. But the old way of sending standard mail or SMS wont work anymore. The communication must be personalised based on the signature product usage of the customer.
A good CRM helps brands to send personalised communications to customers regarding the products they love at the right time delivered through the right marketing channel.
Few impact driven uses of CRMs:
- Send personalised Welcome Mail, Upsell/Cross-Sell mailers, etc. based on Product Recommendation driven dynamic emailers
- Send Offers on Birthdays, Anniversary, and other important days of your customers
- Send customised Offers, other incentives, product updates, etc. to reactivate customers, increase visit frequency, etc.
- Create Customer Journey based campaigns. For example: specific offers for new customers so that they can come back within 30 days of visiting the store
For example, a customised emailer from SEMrush after signing up to motivate customers to explore more features of the tool.
Customer churn is inevitable. We must admit that saving every customer might not be realistic. We have to understand which customer churns are voluntary and how we can manage it efficiently and effectively.
We need to use the power of analytics, business intelligence & marketing to effectively manage churn over time and strive continuously to create an awesome customer experience for our loyal customers. A predictive analytics enabled customer retention strategy can be a very powerful addition to the marketers tools and techniques as it reduces costs and boost ROI of reactivation marketing efforts.
If you have questions related to churn or other problems in your business, don't be afraid to ask us.
How do you approach to reduce churn in your business? Let us know in the comments below!
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