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What is customer churn analysis, and why do it?

Last updated

15 May 2024

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Dovetail Editorial Team

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For most businesses, retaining customers is as important as attracting new ones. Existing customers are likely to make repeat purchases, suggest your business to friends, and interact with marketing messages. These combine to organically expand your brand’s reach. 

However, not every customer is a good fit for every business. Every so often, businesses should make it a practice to conduct customer churn analysis.

Customer churn analysis can show you why certain customers stopped using your product or service. It can also give you valuable insights into how to better retain customers in the future. 

Customer churn takes many forms, and it can be one of the most effective ways to save your business time and marketing spend and improve the customer experience.

Let’s get into everything about customer churn analysis, from benefits to methods. 

What is customer churn analysis?

Customer churn analysis is the process of using data to determine why customers no longer use your product or service. 

Churn analysis, also known as evaluating a business's loss rate, can indicate which customers are likely to leave soon. 

Businesses can use these insights to enact strategies to prevent customer churn and significantly improve their products and services.

Why is it important to track churn analytics data?

Satisfied customers are the cornerstone of every successful business. Your churn rate will help you understand how well you're meeting customer needs. 

If your churn rate is too high, it might be time for significant changes. If your rate is low, give yourselves a pat on the back and evaluate how you can further improve the user experience.

Figuring out why customers are leaving means you can take steps to improve your business from all angles. 

Churn analysis gives you access to user feedback and insights from your customers about what they love and changes they’d like. This can help you optimize your products and services, which is especially useful for a new offering that hasn't been on the market for long.

Five examples of customer churn

A customer might churn for many reasons, but here are a few of the most common:

Canceled subscriptions

Canceled or expired subscriptions are a common type of churn that can indicate many things. 

Some customers cancel subscriptions because the service doesn't have the features they want. Others might cancel because the subscription cost is no longer within their budget. 

Some customers let subscriptions expire without renewal if they know they won't actively use the service anymore.

Bad some customers customer service/poor experience

No one wants customers to have a bad experience, but it happens. Customers might perceive an experience as poor, even if your customer service team did everything by the book. 

While it's relatively rare for churn to happen purely because of bad customer service or a less-than-positive experience, it is possible. 

Churn analysis can reveal whether your customer service team needs additional training and resources.

Switching to a competitor

While one goal of churn analysis is to identify areas of opportunity within an organization, you shouldn't overlook competitors. 

Customers can churn if they believe a competitor's product or service better meets their needs. 

Part of your churn analysis should always include reviewing competitors' offerings and keeping an eye out for similar products. Evaluate the products’ pricing and features and see how you can make yours more competitive.

Account closure

In many situations of account closure, customers might be thrilled with your service and products but simply have no more need for your business. 

While this results in satisfied customers, it's still a form of churn to consider. This can also suggest that your product doesn't have much value to customers past its initial uses. 

In these situations, additional research could indicate whether your company would benefit from expanding its current suite of offerings.

Failure to achieve a desired outcome

If a customer expected to get a specific outcome out of your product and that didn't happen, they will likely churn. This isn't always the organization's fault. 

It can often be a customer misunderstanding or a misalignment of expectations. 

Still, if data indicates this is a prime cause of churn at your company, it could be time to invest time and resources into streamlining and enhancing the messaging around that product.

Conducting customer churn analysis in five steps

Plan to conduct a churn analysis if you want insights into why customers are leaving your business. While these analyses are very useful, they often require many steps and input from several stakeholders, so it’s crucial to plan carefully. 

This process might look different depending on your organizational structure, but here are five basic steps involved in a customer churn analysis:

1. Define your churn rate

Before you start your analysis, take a step back and define your current churn rate

To calculate your churn rate, divide the number of customers who left your company for any reason during a set period (this can be a month, several months, or a year) by the number of customers you had at the start of that period. Multiply by 100 for your percentage.

Example: You had 300 customers last month, and 100 left. 100 / 300 x 100 = 33% per month. 

Once you have your churn rate, you can proceed with your analysis.

2. Identify churned customers

Review the churned customers based on data like purchase history and subscription status to properly perform your analysis. 

If your customer data is in a CRM platform or other data source, you can perform this fairly quickly. If data is in several sources, it will take longer to aggregate and could require work from several team members.

3. Research customer behavior and feedback

Customer feedback is one of the best ways to learn, grow, and thrive. Referring to customer feedback allows you to implement changes based on what your customers love or hate. 

During this phase of your churn analysis, collect data from your customers about why they are churning. This could be survey responses, direct feedback, or even interviews. 

Consider qualitative and quantitative data during your analysis and keep it in one place for easy review.

4. Identify reasons behind churn

Once you’ve collected and sorted the data, dive into why customers churn. 

Look for patterns and trends and see if they point to specific issues, such as a product performing poorly or bad customer service. 

Properly performing this analysis can take time, but it's important not to rush. Churn patterns and trends don't always reveal themselves quickly.

5. Develop and implement strategies to reduce churn

The final, most crucial part of your analysis involves outlining and implementing strategies to reduce customer churn. 

Base your strategies on the data you reviewed and address them in order of importance. 

For instance, if poor customer service seems to be the primary cause of customer churn, implement new training and support strategies to address this with your team. 

After implementing the new strategies, track them over time to determine success. Don't be afraid to adjust things based on customer feedback and other metrics.

Metrics used in churn analysis

You must consider several metrics when conducting a churn analysis. While the specifics might vary based on your business's structure and needs, these are some to evaluate:

Customer churn rate

This is the most important metric as the percentage of customers who leave your business in a given time for whatever reason.

Monthly recurring revenue (MRR) churn

Monthly recurring revenue (MRR) is, as you’d probably guess, your company's recurring revenue over a month. It primarily includes subscription revenue. 

Measuring this churn lets you see the percentage of new and expiring subscriptions during the month.

Customer lifetime value (CLV)

Customer lifetime value (CLV) is a metric that determines the amount of money customers will spend on your products or services over time. It can assess the value of your financial relationship with customers.

Customer acquisition cost (CAC)

The customer acquisition cost (CAC) is the estimated cost of acquiring new customers. This includes marketing campaigns, time spent, and other company resources.

Customer engagement metrics

Track metrics like active usage frequency, feature adoption rates, and session duration to understand customers' engagement with your product. 

A decrease in these metrics may indicate potential churn risk as it suggests decreasing interest or utility in the product.

Discuss with company stakeholders and other leaders what metrics to include in your churn analysis. 

While churn rate and revenue are the two most important metrics for most organizations, the others can provide valuable insights into what products your customers find most worthwhile.

The difficulties of churn analysis

While churn analysis can provide a wealth of insights and useful information, it can also be a challenge to complete successfully. 

Properly conducting churn analysis requires time and resources, including several team members. 

Many companies hire data analysts or purchase software tools to make the task easier, but these are additional expenses that might not be in some organizations' budgets.

Data quality can also be a stumbling block. Your conclusions are only as good as the raw data you're working with. Iif your data set has inconsistencies or issues, the overall analysis quality could be lacking. 

If you’re using multiple tools, check for inconsistencies or information that doesn't align before proceeding. 

Using a single source of truth, such as a CRM platform, can streamline the process.

Best practices for reducing churn

The best way to approach customer churn is to reduce it before it starts. 

Every business will inevitably lose some customers monthly, just as it onboards new ones. Still, reducing overall customer churn can set your organization up for greater revenue growth and long-term success. 

A great way to reduce churn is being proactive with customer communication. Check in regularly during the customer journey and demonstrate your willingness to provide help and support. This shows customers you care about their experience.

Providing incentives can also reduce churn. These incentives don't have to be hefty discounts, but some small loyalty rewards can go a long way. These bonuses show a customer you value their business and want to keep them around. 

You can also do a poll or survey to determine what reward your customers deem most valuable.

Finally, ask for customer feedback often. Direct feedback shows you where you're succeeding as a business and where there’s room for opportunity. 

If there's confusion around a particular product or solution, ask your customers for their thoughts. This can often show exactly where those issues come from, giving you a chance to address it and nip high churn rates in the bud.

FAQs

What is a good customer churn rate?

The ideal customer churn rate varies from business to business, depending on that organization's goals. 

However, many established companies set a goal of a monthly churn rate of 5–7%. You can use this as a benchmark to measure your ideal customer churn rate.

Can I do a churn analysis in Excel?

If you can’t afford pricey software, trusty Excel might be the first place you turn.

Here’s how to do a churn analysis in Excel: 

  • Add all relevant data to an Excel sheet

  • Insert a pivot table

  • Use the “churn rate calculation” to identify churn variables

  • Any variables with a high correlation point to customers likely to churn

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