Churn Rate and Its Effect on Business

How do you calculate whether your marketing efforts are working? Do you look at your email open rates? Do you check your click-through percentages? Have you ever calculated your churn rate? Do you know the lifetime value of a customer?

These are all effective ways to tell if your marketing efforts are causing the desired results. An important factor to any metric is to know what your churn rate or attrition rate is on a regular basis.

The churn rate is defined by most as the number of lost customers. Whether they have discontinued their relationship with you, changed their email so they no longer open the previous inbox, or due to bounce back errors that didn’t allow them to receive the email in the first place. Churn is a good number to know, as it will help you determine what percentage of customers are leaving so you have a base number of new customers to bring in.

Do you know how to calculate your churn rate? Here is a basic example:

5 clients lost this month/100 total starting clients = 5% churn for the month

There are some key benefits to knowing your company’s attrition rate, specifically what a customer’s lifetime value is to your company.  A loyal customer is more likely to respond to email marketing, engage with you and your company through social channels, tell their friends about their positive experiences and spend more money with you than with your competition.

How do you calculate the lifetime value of a customer? There are many things to consider when evaluating this number, but according to the report “the most straightforward way to calculate CLV is to take the revenue you earn from a customer and subtract out the money spent on acquiring and serving them.”

Entrepreneur.com shows us an example that is easy to follow and understand. “The lifetime value of a gym member who spends $20 every month for 3 years. The value of that customer would be: $20 X 12 months X 3 years = $720 in total revenue (or $240 per year).” So, the gym owner knows that there is real value in acquiring a long-term client, even if there is a giveaway or discount on the front end.

Now that you know what churn is and how to calculate it, along with the lifetime value of a client, let’s look at some reasons why these calculations are important.

Marketing is expensive. It is not cheap to get your brand/company in front of people. There are many avenues that you have to pursue in order to assure that you are reaching your target audience. So, it is important to know if those avenues are working.

The churn rate directly affects your ability to grow your business. Tracking this will allow you to keep a pulse on your business’s growth patterns. It allows you to continually assess your marketing strategies, refine your approaches, and stay ahead of the competition. If you are losing more customers than you are acquiring, you are not growing your business. Instead, you are burning money on ineffective marketing, but that is a different article.

Wrapping up, knowing what works and what doesn’t work with your marketing strategy is essential for a business to grow and succeed. Keeping your finger on the pulse of your business by monitoring the churn rate, as well as the lifetime value of a customer, are important in achieving growth goals.