{"id":2428,"date":"2015-04-15T11:00:35","date_gmt":"2015-04-15T19:00:35","guid":{"rendered":"http:\/\/thinkapps.com\/blog\/?p=2428"},"modified":"2015-04-15T15:51:33","modified_gmt":"2015-04-15T23:51:33","slug":"customer-churn-most-important-metric","status":"publish","type":"post","link":"https:\/\/thinkapps.com\/blog\/post-launch\/customer-churn-most-important-metric\/","title":{"rendered":"Customer Churn: Why It Should Be Your Most Important Metric"},"content":{"rendered":"

Keeping an existing customer is much\u00a0cheaper than acquiring\u00a0a new customer. Here’s a guide to analyzing customer churn in order to improve retention.<\/em><\/p>\n

\"leakybucket\"<\/a><\/p>\n

“Leaky Bucket” Approach<\/h2>\n

Historically, companies have focused primarily on customer acquisition to solve customer retention problems.<\/p>\n

\u201cGet a lot of people through the door and we are bound to keep some.\u201d<\/i><\/strong><\/p>\n

\u201cCustomers are leaving, let\u2019s spend on acquiring more customers.<\/i>\u201d<\/strong><\/p><\/blockquote>\n

This is what is referred to as the Leaky Bucket<\/b> approach. The problem with focusing solely on customer acquisition is that you\u2019re filling a bucket with a leak and hence, you\u2019ll always be spending more and more on acquisition without ever filling that bucket.<\/p>\n

Focusing on customer retention<\/a> and expanding the revenues from your existing customers by up-selling them is a much more profitable strategy for growth than spending just on acquisition.<\/p>\n

The cost of keeping an existing customer is at least 5 times cheaper<\/strong> than the cost of acquisition of a new customer. In addition, positive word-of-mouth from your existing customers leads to cheap, almost free customer acquisition.<\/p>\n

Watch Your Churn Rate<\/h2>\n

In recent times, especially with the growth of subscription business models, churn is becoming one of the most important metrics that should be tracked by every business – be it a service like Netflix, or a SaaS company like Box<\/a>.<\/p>\n

The impact of even a 5% increase in churn can have significant effects on the revenues of a company. Consider a scenario\u00a0where\u00a0two companies have the same customer acquisition rate of 15%. Both companies start with 200 customers in 2015. Company A has 5% monthly churn and Company B has 10% monthly churn.<\/p>\n

On the surface, a 5% difference doesn\u2019t seem like a lot. But over the course of three years, these companies end at very different customer growth milestones simply because of the compounding effect of churn. Company A has 6,183 customers at the end of 2017, whereas Company B has 1,158.<\/p>\n

That’s a 5.3X difference in customers due to a mere 5% difference in monthly churn!<\/strong><\/p>\n

\"Churn<\/a><\/p>\n

Analyzing Churn<\/h2>\n

Given that churn is such a critical measure of success for a company, it\u2019s surprising how few companies understand why churn occurs.<\/p>\n

One of the biggest mistakes I see companies make is that they assume that if they bucket their churn by demographics or plan type, it gives them enough insight into why churn happens.<\/p>\n

For example, Company A finds that, when segmenting by plan type, 15% of their churn was in the starter plan<\/i>, and 5% in the enterprise plan<\/i>. From this observation, they draw the conclusion that there\u2019s an issue with the starter plan <\/i>that needs to be fixed.<\/p>\n

But Company A\u2019s customer base has 15% starter plans<\/i> and 5% enterprise plans<\/i>, hence those churn rates are as expected. They mirror the exact makeup of their customer base!<\/p>\n

The problem with analyzing only churned customers is that this approach may not always expose the real causes of churn. Moreover, it doesn\u2019t give you enough insight to make changes in your product or business strategy. For example, with the above insight, I can do nothing more than just know that 15% of customers churned are from the starter plan<\/i>.<\/p>\n

The other issue is that such ways of looking at churn are very simplistic and don\u2019t fully reflect real world conditions. Customer churn can happen due to a lot of causes:<\/p>\n