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What Is Customer Churn? (And How to Prevent It)

RedPoint Global | July 19, 2018

Customer ChurnIt’s an acknowledged fact that loyal customers spend more money. One recent study found that customers spend 67 percent more in months 31 to 36 than in the first six months of a brand relationship; another study found that a five percent increase in customer retention can lead to a 25 percent increase in profit. It’s because of this profitability of repeat business that a brand’s customer churn rate, defined as customers who stop doing business with the brand, is an important indicator of overall results. Brands with low churn rates tend to have more repeat customers than those with higher average churn, and also often deliver a more personalized customer experience.

Organizations can be profitable with high churn rates, but they tend to spend more money on customer acquisition than brands with lower rates. The specifics vary, but Forrester research found that it costs 500 percent more to acquire a new customer than it does to keep a current one. This is why it’s vital to understand customer churn and how best to counteract it – retaining customers over time is more profitable, and lower cost, than needing to constantly acquire new ones.

Understanding Your Customer Churn Rate

Before you can measure customer churn, you need to decide what qualifies a customer as active. This definition is different for every brand, and can be based on factors like length of time since last purchase, length of time since last email open, or whether the person interacted recently on social media. Take Facebook as an example. Facebook could define a user as churned when they haven’t logged into the platform for three days. This is distinct from a furniture store, who may consider a customer churned only if they haven’t made a purchase in the last nine to 12 months.

It’s worth noting that most recent purchase is often not the best way to determine whether a customer has churned or not. I’m an avid hiker, and own a backpack from Gregory Mountain Products that I use regularly. I likely won’t buy a new pack in the next year, but I constantly engage with Gregory’s social media accounts. This means that I’m engaged with the brand, despite only occasionally buying something from them. If Gregory defines a churned customer as someone that hasn’t bought anything in six months, then they will inaccurately say that I’ve churned and try to win me back when they don’t need to. In this case, Gregory would likely want to consider me an active customer because I’ve shown by my level of interaction that I’m likely to buy in the future.

Customer churn rate isn’t a static judgement either. Chances are you know the rough timeframe that indicates customers are unlikely to buy anything else from you. If that timeframe is two weeks, and your sale data suddenly shows that the time between purchases is widening to three weeks for most of your customers, then the definition of a churned customer needs to change. This is why it’s so vital to monitor the customer churn rate once it’s defined, so you can spot trends that might indicate a change in overall customer behavior.

Preventing Customer Churn

Brands can counteract churn by finding ways to keep their customers engaged. Coca-Cola is a great example. Their social media profiles on Instagram, YouTube, Twitter, and Facebook constitute a perpetual flow of content that offers an opportunity for consumers to interact directly with the brand. They rarely outright sell Coca-Cola products, choosing instead to showcase emotions and tie into news events like the World Cup of Soccer. Their products are only tangentially featured because the primary purpose of this messaging is engagement instead of sales. What Coca-Cola has done with this approach is given consumers a reason to keep engaging with the brand. They’ve built a loyal following this way, and have one of the most profitable brands in the food and beverage industry as a result.

This is a key tactic to avoiding churn. Brands who develop engaging content that consumers like keep their customer base coming back. Consumers don’t buy a new mattress every year, so a mattress retailer who focuses only on selling their product might turn customers off. If that mattress retailer instead provided communication about sleep studies and the importance of getting a full night’s sleep, then customers are more likely to keep interacting with the brand and keep them top of mind. This is what Coca-Cola has done with its messaging; consumers engage with Coke and become loyal to the brand because of that consistent interaction.

Another key part of reducing customer churn is by focusing on customer service. A recent study found that 67 percent of customer churn could be avoided if brands resolved customer issues during the first interaction. With customer service playing this high a role in churn, it’s worth it for brands to pay close attention to common consumer issues and address them swiftly. Especially given how high an impact it has on the customer churn rate.

Preventing customer churn is a multifaceted effort, requiring brands to closely understand their customers’ actions and what can keep them engaged. Only through understanding that can brands reduce their churn rate and succeed in a highly competitive landscape, especially because consumers are increasingly likely to depart brands who don’t meet their expectations.

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