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Glossary of Marketing Terms

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Customer Churn

Customer churn, also referred to as customer turnover, is the rate at which customers freeze doing business or discontinue using their products and services. These crucial metrics occur across industries, directly or indirectly impacting revenue and profitability.

What is customer churn?

Customer churn is defined as a business metric that measures the rate at which customers phase out from the business or cease their relationship with the company. High churn rates can be detrimental to a company's revenue and sustainability. However, lowered churn rates indicate customer loyalty to the company.

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What are the types of customer churn?

Types of customer churn are as follows:

  1. Voluntary churn
  2. Involuntary churn
  3. Passive churn
  4. Competitive churn
  5. Acute churn

  1. Voluntary churn: Voluntary churn occurs when customers deliberately decide to pause relationships with the business, which may occur due to dissatisfaction with the product and services, poor communication, or better alternatives.
  2. Involuntary churn: This occurs when customers are unintentionally lost due to other factors such as relocation, closure of business or regulations.
  3. Passive churn: Passive churn occurs when clients swiftly disengage and take alternative actions to cancel subscriptions, which may occur when customers no longer find value in the product or service.
  4. Competitive churn: This type of churn occurs when customers switch to a competitor's product or service that meets their needs or is attractive to value propositions such as pricing, features, or quality.
  5. Acute churn: Acute churn refers to an unusual spike in customer attrition within a short period of time that may be triggered by a specific event or issue that impacts a large number of customers.

What is e-commerce churn?

E-commerce churn defines the number of customers who discontinued using your product and services from online stores. The churn rate, where the percentage of customers quitting businesses is determined over a period of time.

What is customer churn prediction?

Customer churn prediction refers to forecasting or an estimate of the customers who are likely to discontinue their business with the company in the near future. It involves analyzing historical data, patterns, and trends to identify signs preceding churn.

Once you identify customers that are at risk of churn, appropriate actions must be taken to prevent or mitigate churn. Predicting churn can develop target retention strategies, allocate resources and personalize interventions to retain them.  

How to reduce customer churn?

Some strategies to help reduce customer churn:

  1. Better customer experience
  2. Better product or service quality
  3. Personalized customer interaction
  4. Proactive address customer churn
  5. Customer-centric culture
  6. Build strong relationships

  1. Better customer experience: Enhance customer services by providing services and support at all touchpoints, also respond to customer inquiries and issues promptly by offering them personal assistance.
  2. Better product or service quality: Monitor performance, quality improvement, and product or service reliability by seeking feedback and making necessary adjustments or enhancements to product or service quality.
  3. Personalized customer interaction: Leverage customer data to know them and deliver personalized experience, accordingly tailor and offer based on customer's preferences, purchase history and communicate effectively.
  4. Proactive address customer churn: Monitor and identify customer's issues before they escalate or the customer decides to discontinue business with the company. Help them resolve the issues promptly and demonstrate your commitment towards them.
  5. Customer-centric culture: Foster to build a company culture that places a strong emphasis on customer success and satisfaction and ensures that employees understand the importance of customer retention and create positive customer experiences.
  6. Build strong relationships: Enhance connections with the customers and try communicating with them through targeted cold emails, personalized messages, or newsletters.

How to calculate customer churn?

To calculate churn, first, we need to determine the number of customers who churned during a specific period relative to the total number of customers at the initial time.

The following are the steps:

  1. Determine the time period
  2. Define churn
  3. Collect the necessary data
  4. Calculation of customer churn rate

  1. Determine the time period: Determine the time period for which the calculation of customer churn needs to be done, whether monthly, quarterly or yearly.\
  2. Define churn: Define customer churn according to the business, such as whether the customer discontinues using the product or service, cancels the subscription, or any other factor.
  3. Collect the necessary data: With the help of data, calculate customer churn, and calculate the number of customers churned initially and recently.
  4. Calculation of customer churn rate: By dividing the customer churned recently by the total number of customers churned at the beginning of the same period and multiplying the result by 100 to present the churn rate as a percentage.
Customer Churn Rate = (Number of customers who churned/ Total number of customers at the beginning of the period) x 100

Understand with the help of the example below: (Calculated quarterly)

If a company had 600 at the beginning of the quarter and 30 of them churned during the quarter, the churn rate would be:

Customer churn rate = (30/600) x 100 = 5%

Hence, the customer churn rate for the quarter is 5%.

Why is predicting customer churn important?

Predicting customer churn is important because:

  1. Business performance
  2. Competitive advantage
  3. Better customer experience
  4. Helps to retain valuable customers
  5. Better resource allocation

  1. Business performance: Customer churn impacts a company's financial performance and potential. A better and high churn rate can hike revenue and shows a fall in market share and direct hamper profit. Proactively predicting churn and implementing strategies to retain customers can improve customer retention.
  2. Competitive advantage: Predicting churn rate helps the companies have the edge over other competitors as it helps the business build strategies, work towards them, anticipate the needs, and maintain a strong customer base and relationship with them.
  3. Better customer experiences: Companies identify the issues or pain points of the customer and work to improve the experience by improving quality or by aligning the offerings with the customer's needs.
  4. Helps to retain customers: Retention of customers is crucial for any business's success. So identifying customers at risk and implementing strategies to work towards their retention is important, as acquiring new customers is expensive.  
  5. Better resource allocation: After predicting the churn rate, businesses can allocate resources effectively. Companies can identify and prioritize the retention efforts of customers who are likely to churn. Retention strategies may include personalized intervention or support campaigns.

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