In pursuit of continuous growth, many businesses fall into the trap of focusing solely on customer acquisition. While it's tempting to think that more customers automatically translates to more revenue, this growth strategy overlooks a critical factor: customer churn.
Think of it like dating. Nailing the first date is a good start, but if your goal is to put a ring on it, date number one is just the beginning. You’ll need to continually woo and pursue the object of your affection to keep the spark alive, even after you’re in a committed relationship.
To grow a healthy, successful business, your customers can't be a revolving door—coming in just to go right back out. High rates of customer churn essentially mean you're stuck in a cycle of short-term flings rather than forming meaningful, long-term relationships.
And, for any business, where each customer is a pillar of your success, those long-term commitments are what truly fuel sustainable growth.
What is customer churn rate and why should you care about it?
Ideally, every customer who purchased your product or signed up for your services would convert into a lifelong brand ambassador. But that’s not the reality of customer behavior. Practically every local business has some measure of ebbs and flows. Even the Nikes and Apples of the world will inevitably have some customers come and go. And that's where the concept of customer churn comes into play.
Put simply, customer churn is the percentage of customers who purchase your product or service within a given time frame and then decide—for whatever reason—to stop. Another term for this is customer attrition.
When it comes to churn rate, the closer you get to zero, the better off your business will be. High churn rates are red flags that signal potential issues with customer satisfaction, customer experience, or product quality.
Naturally, a high customer churn rate can threaten your business health in several different ways:
- Revenue loss – The most obvious and immediate impact of high customer churn rates is a decline in revenue. Losing long-standing customers means losing reliable, consistent income sources, not to mention potential brand ambassadors who could recommend your products or services to others at no cost to you.
- Increased marketing costs – Depending on your industry, acquiring new customers to replace the ones you've lost is 5 to 7 times more expensive than retaining existing ones. In other words, it requires much more time and resources to find and convert a new customer as opposed to keeping your loyal customers happy.
- Brand image erosion – High churn rates can tarnish your reputation, especially if they come with poor reviews, which only makes it that much harder to attract new customers or partnerships.
- Lost referral opportunities – Satisfied, loyal customers can turn into brand ambassadors who refer others to your business for free. A high churn rate diminishes this natural, low-cost marketing channel.
- Reduced customer lifetime value (CLV) – Customer churn decreases the overall lifetime value of your customer base, impacting your long-term financial forecasts.
- Missed cross-selling and up-selling opportunities – The longer existing customers stay, the more opportunities you have to sell them additional products or services—and the more receptive they’ll be to such pitches if you’ve continuously demonstrated your value over time.
- Competitive disadvantage – High churn rates can allow competitors to eat into your market share—and do so at much lower customer acquisition costs (CAC)—placing your business at a strategic disadvantage. Utilizing a customer acquisition cost formula can help your business keep track of its total CAC.
- Operational instability – Having a positive customer retention rate is highly important. Constantly replacing lost customers can lead to irregularities in cash flow and operations, making it difficult to forecast or plan for the future.
- Employee morale – High churn rates can also demoralize staff, affecting productivity and job satisfaction, as employees may feel their efforts aren’t leading to increased customer loyalty.
- Intellectual drain – Customers often represent a valuable source of first-party data, feedback, and insights. When they leave, their institutional knowledge goes with them, impeding future product or service improvements.
How to calculate customer churn
Churn rate is a relatively simple calculation. You can find your business churn rate by dividing the customers you lose in a designated period by the customer count at the start of that period.
For instance, let's say you run a landscaping business. At the beginning of the spring, your service route includes 100 homes. But, by the time summer rolls around, you're down to 90 yards.
That’s a 10% churn rate, indicating you lost one-tenth of your customer base.
Factors contributing to customer churn
Before digging into common factors contributing to customer churn, it's important to differentiate between voluntary churn and involuntary churn.
- Voluntary churn is when customers consciously decide to stop purchasing your product or paying for your services. This could be because your product didn’t meet their needs, or perhaps they found an alternative they prefer.
- Involuntary churn happens without the customer actively making that choice. This can result from scenarios like the customer moving to a location where your service is no longer available.
Interestingly, some instances may straddle both categories. For example, an existing customer may love your product but simply be unable to reconcile the cost with their budget, as a significant percentage (66%) of independent restaurants experienced in 2022 due to inflation. Or, a parent may no longer need baby products—that they loved and used daily—because their child has outgrown them. In these instances, the customers might leave with a heavy heart but still go nonetheless.
That said, the primary factors contributing to customer churn will likely depend on your specific product or service. Generally speaking, some of the common causes of customer churn that you should be aware of include:
- Poor customer service
- Subpar product quality
- High price point
- Lack of engagement and relationship-building
- Negative reviews or public perception
- Unmet expectations
- Bad product-customer fit
- External economic factors
- Contract expiration
- Service reliability issues
- Poor onboarding process
- Lack of features
- Better alternatives available
- Geographic changes
- Payment failures
- Seasonal needs
- Policy changes
Strategies to reduce and prevent customer churn
So, you’ve got the lowdown on customer churn and why it happens. Great. But the million-dollar question remains: How do you stop the revolving door? Dive into some of the most effective approaches, below.
Enhancing customer onboarding experiences
If you provide a product or service that requires some level of guidance to operate, a well-designed onboarding experience can increase your customer retention rate. Clear instructions, easy setup, a welcoming atmosphere, and on-call customer service can significantly reduce the odds of early churn.
Put simply, your goal should be to help your customers find immediate value in your offering with as little confusion or headaches as possible.
Personalizing customer interactions
In an era of information overload, a personalized customer experience will stand out. Tailoring interactions, whether through product recommendations or targeted marketing, can make a customer feel valued and understood. This often translates to increased customer engagement and a reduced likelihood of potential churn. For that, gathering and analyzing customer feedback is essential. Understanding what your customers want—and don't want—is key to reducing churn. By regularly soliciting feedback, and improving customer support, be it through surveys or direct communication, you can:
- Gain invaluable insights that you can leverage to improve your product or service
- Refine your offerings based on customer wants and needs
- Preempt issues that could lead to avoidable churn
Staying top of mind and providing great customer service
Plugging into the local conversation is key to engaging the customers who live close by. Similarly, excellent customer service isn't just a good-to-have; it's a must. Quick response times, a helpful attitude, and going the extra mile can turn even the most disgruntled customer into a loyal one.
To that end, creating a local presence can be a powerful tool for establishing and maintaining customer relationships. With an app like Nextdoor, you can easily create an online presence with a free Business Page that enhances local discoverability while also serving as a portal for direct engagement.
With Nextdoor, you can:
- Respond to client queries
- Advertise a new special
- Chime in on local discussions
- And more
The app is a modern take on the age-old practice of good neighboring—digitized and optimized for today's consumer.
Implementing loyalty and referral programs
Loyalty and referral programs are a win-win for everyone. They provide a tangible incentive for customers to keep coming back to your business and to spread the word around town. For example, a local Mexican restaurant can consider creating a loyalty program that offers 100 points per visit with a minimum spend of $15. Prizes include:
- Free churros or tamales (200 points)
- 30% discount (500 points)
- Free bean & cheese burrito (600 points)
- Free T-shirt (1000 points)
Reduce customer churn with Nextdoor
Customer churn is bad for business. It keeps you on a treadmill—working hard but not necessarily moving forward. While some churn is unavoidable, much of it is voluntary, and that's where you can make a real impact with an app like Nextdoor.
The Nextdoor advertising platform isn't just about localizing your online presence; it's a tool that equips you to directly combat potential churn. Through engaging posts, prompt responses, and active community participation, you can build a rapport with your neighbors that goes beyond transactions and become a community staple that all of your customers can count on.
Sources:
Forbes. Customer Retention Versus Customer Acquisition. https://www.forbes.com/sites/forbesbusinesscouncil/2022/12/12/customer-retention-versus-customer-acquisition/?sh=93f266f1c7d6
Restaurant Dive. Study: Over 66% of independent restaurants seeing sales declines from inflation. https://www.restaurantdive.com/news/inflation-independent-restaurants-sales-decline/628499/
