Customer Churn Rate is a KPI used to measure customer attrition. It is calculated by dividing the number of customers who discontinue a service during a specified time period by the average total number of customers over that same time period. It provides feedback on customers’ responses to service, pricing, and competition. Plus, it provides a basis for the average length of time an individual remains a customer.
Companies should look to their industry to determine if their customer churn rate is acceptable. Some industries, such as cell phone providers, have high churn rates and must take extra steps to minimize the number of customers who leave and go to their competitors. Other industries have very low churn rates. Utility companies have very little competition and provide crucial services; therefore their customer churn rates are very low.
Businesses that do not provide a continuous service can also calculate their customer churn rate. They can define when they consider a customer has discontinued their services. For instance, manufacturing or distributing companies could determine that if a customer has not purchased anything from their company in the past six months then this customer has been lost. The number of lost customers in a certain time period divided by the average number of active customers during that time period would be the company’s customer churn rate.
Tracking a company’s customer churn rate is the first step in understanding how good the company is at retaining customers. Lower churn rates indicate higher customer retention and less expense and effort needed for the company’s next sale. In most industries, it is usually cheaper and easier to retain customers than it is to acquire new ones. By monitoring the customer churn rate, trends can be analyzed and traced to changes made to service, price, or marketing efforts. If the churn rate is increasing, actions can be taken to assess the reason and take actions to find ways to retain customers and build customer loyalty.
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