Why keeping the right customers matters most

Retention beats acquisition on cost

Acquiring a new customer costs five to twenty-five times more than retaining an existing one, depending on industry. Companies save money by keeping customers happy rather than finding new ones.

Retention drives profit growth

Research by Frederick Reichheld of Bain and Company shows increasing customer retention rates by five percent increases profits by twenty-five to ninety-five percent. Keeping the right customers is valuable.

What is customer churn rate?

Customer churn rate measures the percentage of customers who end their relationship with a company in a particular period. Jill Avery, a senior lecturer at Harvard Business School, explains this key metric.

“Customer churn rate is a metric that measures the percentage of customers who end their relationship with a company in a particular period.”

Measurement varies by business model

Most companies measure churn annually, but monthly-pricing businesses like mobile providers, gyms, and software as a service companies track it monthly. Some firms with faster churn also monitor monthly.

Retention rate tells the same story

Many executives prefer monitoring retention rate, the opposite of churn, showing how many customers stay. Both figures measure the same thing. Avery says churn is being used more often these days.

Investors use churn to assess health

Investors use churn rate to evaluate a company's underlying health. The higher the churn rate, the more they question the company's viability. It signals whether the business is sustainable.

Churn signals what needs fixing

Changes in churn rate show what is working well or needs addressing.When more customers leave, companies can adjust marketing strategy or customer service.Avery says looking at churn by segment reveals which customers are at risk.

“Looking at churn rates by customer segment illuminates which types of customers are at risk and which may require an intervention.”

Big data enables prediction

Sophisticated, data-rich firms now look at churn on an individual customer level. The rise of big data lets firms predict what will happen next, not just understand what happened last period.

HubSpot's proactive approach

HubSpot, a Boston-based inbound marketing software firm, is a sophisticated churn manager. When churn shot up in two thousand eight, the company analyzed data to identify at-risk customers and offered extra training to keep them.

Four common churn mistakes

Avery identifies four mistakes managers make. First, they treat churn as inevitable rather than an opportunity. Second, they see it as a number instead of a behavior indicator. Third, they fixate on a magic number.

No universal churn benchmark

What is acceptable churn varies widely by business model and depends on customer acquisition speed and profitability. Some models thrive with high churn, others need low churn. Compare your performance to last year instead.

“The truth is that what's acceptable varies widely by business model and is largely dependent on how quickly and efficiently a company can acquire customers and how profitable customers are in the short and long term.”

Acquisition problems masquerade as retention

High churn often results from poor customer acquisition. Companies attracting deal seekers through heavy promotions get customers who leave quickly for better deals elsewhere. Groupon faced this problem. Focus on acquiring the right customers.

“Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you.”