It’s hard to think of customers leaving after one experience or transaction, but it happens. I know of one incident where thousands of customers came in the acquisition door only to drop straight through the floor and were gone. Where did all that investment go?

You can use a simple or more complex method for working out the cost of acquiring customers (CAC), but it’s only one important calculation. Customer churn factors and customer lifetime value are others.

Many marketers watch customer churn factors, but is there a clear understanding of how it affects profitability? Are they monitoring it close enough to know when to launch reactivation strategies?

With 3.1 years being the average breakeven on new customers, revisiting the importance of customer churn and lifetime value is needed. Who can survive a 10% or even a 5% customer churn monthly? Churn is the antitheses of growth. It kills and destroys profitability. Without profitability, everything, including acquisition campaigning, grinds to a halt.

I chuckle sometimes when I read reports about the upswing in media spending, and especially now with mobile booming as well as TV advertising and catalog spending. Are we really spending that much more, or is it just costing us more? You can work hard and negotiate better rates or shift more spending to per-inquiry, even pay someone to sit on AdWords all day, but the cost to acquire is making profitability more difficult. Where do you look to increase revenues?

Slow down customer churn and increase lifetime value

The days of 2.3 ROI on the front-end and a single customer touch point are long gone. Today you have to optimize the customer experience across multiple channels. Therefore, completing the big picture of success today has to include slowing down customer churn, especially with an emphasis toward onboarding and customer service. This idea may seem extremely foreign to many traditional groups who focus everyone on the first step of the customer’s journey, but let me challenge you with this:

If saving one customer helps to create profitability and sustainability for the company, can it also lead to expanding acquisition campaigning?

Harvard Business Review found that a 5% increase in customer retention, can lead to increasing profits 25 to 95%. Other research by John Fleming and Jim Asplund noted that engaged customers generate 1.7 x more revenue than normal customers. At the same time, engaged employees and engaged customers show a 3.4 x higher revenue gain than the norm.

You may be getting the phone to ring or seeing increasing page views, but keeping customers month after month takes more than wishful thinking. It will take a thoughtful review of what customer churn looks like, how it affects profitability and why it happened.

Measuring customer churn

Churn is a “view” at a certain point in the customer lifecycle. It can come at different points for different businesses. The very nature of the products and/or services sold affects the lifecycle. Because of this, churn can be measured monthly, quarterly, or annually. There are actually two different views to calculate: customer churn rate (CCR) and dollar churn rate (DCR) – the financial impact of the customer churn.

One of my personal favorites is a 30, 60, 90-day view. I like this because the risk of customers not onboarding properly or dropping out in the first couple months is higher. In those first days, customer usage trends begin to appear. It’s here where you need to move your fastest. Negative trends need to be resolved immediately, or you risk the relationship starting off in the wrong direction.

The customer churn rate (CCR) is the number of customers lost during a period.

Example: a campaign acquired 125,000 new customers and 30-days later there were 112,500 actively remaining. During the period the campaign lost 12,500 or 10% of its customers.

A – Number of customers at the beginning of the period 125,000

B – Number of customer at the end of the period 112,500

Step one: A-B = 12,500 (customers lost)

Step two: divide the 12,500 by A (125,000) x 100 = 10% (churn rate)     

CCR is a very simple calculation, but there is value in it. Some disagree and think revenue and bottom line matter more, and that losing customers is like collateral damage along the way. Perhaps, but never lose sight of the investment it took to acquire those customers.

How customer churn affects profitability

The dollar churn rate (DCR) is all about the money and not customers. It can actually fluctuate based on the average purchase calculation during the period measured.

For our example we will use $25 as the base revenue mark. The campaign generated 125,000 customers, which represents $3,125,000 in projected revenues. During the 30-day period measured, 12,500 customers were lost. That represents $312,500 in revenues, lowering the campaign revenues to $2,812,500.

Churn rates can fluctuate from measurement period and by campaign, and while a 10% churn rate at 30-days might be acceptable in this case, what if the churn rate continues to increase?

I’ve used this exact model across a multi-channel campaign to determine:

(1) The churn rate per media type customer.

(2) The financial impact on each media channel because of churn.

(3) The profitability of reinvesting in each media channel.

Why customer churn happens

Customers leave for all sorts of reasons. Many are industry specific and others are not. People move, pass away, they have a bad product experience, or they are lured away by competitors.

Most often customer churn is caused around issues that can be overcome:

Poor customer service – Customers require personal attention. The one size fits all method does not work to retain a customer, and poor employee attitudes can ruin the experience.

There is no perceived value – Value is not always acquitted with price. Customizing your service to what the customers value increases engagement. Talk to them on their level of interest.

Poor-quality communications – All your communications need to be personalized and relevant to the relationship, and feature brand identity. This includes both written and email communications.

No brand loyalty – Without brand loyalty, the competition’s prices are enticing. Combine brand foundations and business strategy with consumer visual and behavior insights to establish a framework for brand identity and visual language that is extended across all marketing touch points.

Unmet expectations – Make it a point to deliver on your acquisition promise. Never leave it to the customer to figure things out – you connect the dots. Customers love when all the pieces come together and you’ve exceeded their expectations.

Expired credit cards – Don’t be too surprised by this one. Customers give their credit card number without knowing if they are near or over their limit. This is especially true with continuity or subscription programs. Club memberships can also be affected by this. Part of your service should be to notify customers to regularly update their information. Develop a tracking system to identify and notify customers of issues in this area.

In order to increase customer lifetime value, reducing customer churn is an absolute for business success. Bain & Company noted that retaining just 10% of the customers you already have will result in a 30% increase in the value of your company. A supporting study by Marketing Metrics indicates, you have a much higher chance of selling an existing customer than a prospect, at 60%-70% versus 5%-20%, respectively.

Make understanding customer churn a priority in your company today.