What is a good customer churn rate?
In a recent article, we introduced the concept of customer churn and how to reduce it. Having dangled the carrot of customer churn, we need to give you the next layer of knowledge: how to understand your customer churn.
A quick recap:
Customer churn is the number of customers who stop using your business in a given time frame, stated as a percentage.
How to calculate your customer churn
Different businesses measure their customer churn rate using different formulas. Indeed, there are over 40 different ways you can calculate it!
However, a good basic customer churn formula is:
Total number of customers lost in a given time period divided by the total number of new customers gained in the same period. Multiply by 100 to give you a percentage.
The most important thing is to keep your formula consistent. So, once you have decided which formula best encompasses the idiosyncrasies of your business, stick to it. This will enable you to compare customer churn metrics over time. You’ll be able to see improvements, but also spot trends which mean you need to take concerted action to reduce your customer churn.
How to tell if your customer churn rates are good or bad
Comparing with your own historical metrics will enable you to see how your business fares over time. However, it doesn’t tell you how you compare to similar businesses in your own industry.
Different sectors typically have quite different customer churn rates. There are also different factors which come into play which determine how significant customer churn is, and indeed how complicated it is.
For example, in banking, customers tend to have one main bank and so churn rates are very low. Measuring customer churn is also quite simple. However, with grocery shopping, customers may be more fluid, moving their loyalty between different stores for different aspects of their grocery shopping on a weekly basis, and also more likely to switch overall. Therefore, their measurements are more complicated, and customer churn rates tend to be higher.
This is why it important to look at your sector. Consider which formula other businesses use to measure their customer churn and consider how your rates compare with theirs.
Understanding your customer churn in the context of other businesses
To understand this further, let’s look at two industries with quite different customer churn rates. Our two industries are mobile phone contracts and motor insurance. Mobile phones, as an industry, have customer churn rates averaging around 13%. Motor insurance is more like 25%.
To understand the differences, you need to understand the industries. In motor insurance, competitor comparisons are actively encouraged and expected. Regulators push this, and customers are comfortable with provider-hopping. Insurance companies are also fairly restricted in terms of how they can offer promotions. In mobile phone companies, customers can price-hop, but they also tend to have their favourite provider.
But what it does show is that if you are a mobile business and your customer churn is 20%, that’s not great. But in motor insurance, it’s brilliant. Likewise, if you are in motor insurance and your customer churn was 20% last year and 23% this year, yes measurement against yourself shows improvements can be made, but against your industry, you’re still doing well.
Accurate data is vital
In order to use customer churn rates as a reliable performance metric, you need to be able to rely on your data or you will fall foul of the saying ‘lies, damned lies, and statistics’. That all comes down to utilising an excellent CRM system and ensuring all those within your business fully use it and do so appropriately.
