Churn is something you never want but still you need to know!
Churn analysis is used to identify the loss of revenue or subscription for the existing client base. In our earlier topics we have discussed the importance of retaining and growing the existing customer base vis-a-vis acquiring new clients. Just to reiterate, in today’s scenario, when the client acquisition cost is soaring high and doubles your marketing efforts, it becomes imperative to know when, how and why one is losing a customer or the revenue.
How is Churn calculated?
Churn Rate is defined as a percentage of Customers lost to Customers acquired during a defined time period. Churn is calculated for both Customers and Revenue as given below:
Customer Churn = Customers lost during a period / Existing customers during that period
Revenue Churn = Revenue loss during a period / Existing Revenue base during that period
It is important to define the period for which churn is being calculated. Take for example, a company ABC acquired a total of 100 customers in the month of March but lost 10 out of them, the Churn Rate is 10% for the month of March. Same formula applies to calculate the Revenue Churn. It is important to have both the perspective to have an holistic view of the health of your business.
Churn Analysis for SAAS Vs Ecommerce
The factor that makes Churn different for different industries is the chosen time period. Not just with the industry, but the stipulated time period also varies with the product offered. For example, an apparel company has customers for both undergarments and fashion clothes. The purchase frequency for undergarments will always be higher compared to the Formal Suits. Therefore the owner needs to fix the time period for these products separately.
Likewise, the time period will differ for a subscription based company from an ecommerce. A company who gives an antivirus subscription under a quarterly, half yearly or annual package would exactly know when a customer is churned if he doesn't return. However, for an ecommerce company, like a beauty cosmetics company, churn will depend on the product as well the customer’s buying behavior.
Lets look at real life example of the following 5 customers and their buying behavior on an Ecommerce website:
In the above case scenario, Jack spends $100 on Flip Flops on an average of 90 days while Billy takes almost 6 months to return to purchase. This could be because of the intensity of their usage, so even if the product is similar the customers return period varies.
Will spends a hefty $1000 but returns once a year to purchase probably because formal suits are worn only on special occasions and therefore his frequency is the least in the above group. Whereas, Poppy, a college goer, loves to buy a new nail color every next month.
So you will see how the Buying behavior varies from customer to customer depending upon so many factors. Therefore, an ecommerce website will have to judiciously evaluate and choose a time period according to the customer. Any deviation from the usual buying behavior should work as an alarm and the marketing team should have a tactic ready to not let the customer get distracted elsewhere.
Why is Churn Analysis Important?
Customer’s Lifetime Value: If Customer is churned, the CLTV is affected. Even if the customer was not contributing to the higher revenue category, they can always be persuaded to become one. Losing a client is not just a revenue loss but also leads to impact on brand value in case of badmouthing.
Tab on Attrition: Churn Analysis indicates when a relationship is at risk. Looking at the buying behavior as also given in previous examples, we can predict if the customer is going to leave you. This helps the marketing team to take corrective action to save such relationships.
Expensive Client Acquisition Cost: With the soaring acquisitions costs like Ads and other marketing tactics like SEOs, content etc., it’s best to retain the existing ones and focus on growing them and Churn Analysis is an important tool to achieve this.
Overall Health of the business: Churn Analysis gives a broader perspective of a business health. Both customer and Revenue Churn rate helps the business owner understand overall performance in terms of Revenue, growth and goodwill.
Competition is ruthless: Every industry has huge competition and with the ongoing innovations everywhere, customers tend to get distracted every now and then. Churn Analysis keeps you on toes and tells when it's time to come up with promotional offers or innovation to win back your client.