The Importance of Retaining the Right Customers

Acquiring new customers is often far more costly than keeping existing ones. Research suggests that it can be anywhere from five to 25 times more expensive to bring in a new client than to retain one you already have. Keeping a current customer happy requires fewer resources than finding and attracting new ones. Frederick Reichheld of Bain & Company, who is credited with developing the Net Promoter Score, found that a 5% increase in customer retention can lead to a 25% to 95% increase in profits.

This clearly highlights the value of retaining customers. One key metric used to evaluate how well a company is doing in this area is its customer churn rate. But what exactly is churn rate, and how do businesses use it?

What is Customer Churn Rate?

Customer churn rate is a metric that tracks the percentage of customers who end their relationship with a business over a specific time period. This can be calculated monthly, quarterly, or annually, depending on the business and product. For most companies, an annual churn rate is the default, but businesses with monthly subscriptions (such as mobile phone service providers, gyms, and software-as-a-service companies) often measure churn on a monthly basis. In industries where customer loss is a significant concern, companies may monitor churn rates more frequently.

Many companies prefer to focus on retention rate — the percentage of customers who stay — instead of churn. Both metrics reflect the same underlying trend, but churn rate is increasingly becoming a more commonly used measure.

Investors also look at churn rates as an indicator of a company’s overall health. A high churn rate raises concerns about a company’s future stability.

How Do Companies Use Churn Rate?

Understanding churn is crucial for companies that want to retain their customers. If you're focused on keeping customers, you need to understand how many are leaving and why. A change in the churn rate can indicate whether a business is doing something right (a drop in churn) or whether something needs to be addressed (a rise in churn).

By analysing churn rates, businesses can adjust their marketing strategies or improve customer service. Examining churn rates by customer segment, such as age group or geography, can help identify which customers are at risk of leaving and when intervention might be necessary. It’s a simple metric that provides insight into how and when to engage with customers.

While many companies look at churn at a broad segment level (e.g., how many 18-25 year-olds left), data-rich companies are beginning to examine churn on an individual customer basis. With the rise of big data, businesses can not only assess past churn rates but also predict future trends, enabling them to take proactive steps.

HubSpot, a Boston-based software company offering inbound marketing tools, provides a good example of an advanced approach to churn management. HubSpot tracks customer usage of its tools in real-time through cloud-based software. During the 2008 economic downturn, when their churn rate spiked, HubSpot used churn data to understand which customers were most likely to cancel. They then targeted those customers with additional services like extra training to keep them engaged. They worked to remove barriers to product usage, helping customers realise its full value.

How to Calculate Churn Rate

Calculating the churn rate is straightforward. Simply divide the number of customers who leave in a given period by the total number of customers at the start of that period. However, it's important to note that churn is a lagging indicator, meaning it only reflects past behaviour, not future trends.

Common Mistakes Companies Make When Using Churn Rate

Four common mistakes that companies make when analysing churn rates:

1. Treating churn rate as inevitable rather than an opportunity: Many companies accept churn as a given, rather than seeing it as a chance to prevent further losses. HubSpot, for example, developed a Customer Happiness Index to predict churn before it happens, helping them address issues proactively.
2. Focusing on churn as a number, not behaviour: Instead of simply tracking churn, businesses should ask what is causing customers to leave. By understanding the underlying factors, companies can improve customer retention strategies.
3. Fixating on a "magic number": Some managers believe there's an ideal churn rate, but this varies by business model. What matters more is improving upon last year's churn rate and continuously refining customer relationship management practices.
4. Not recognising poor customer acquisition as a cause of high churn: Sometimes, high churn is the result of attracting the wrong type of customers. Companies that focus heavily on price often attract deal-seekers who leave once they find a better offer. This issue was highlighted with companies like Groupon, where deep discounts led to high turnover. Before assuming you have a retention issue, it’s important to assess whether your customer acquisition strategy is at fault.

Conclusion

Focusing on customer retention is essential for long-term business success. By measuring and analysing churn rates, businesses can better understand customer behaviour, identify at-risk segments, and make data-driven decisions to improve customer loyalty.

Managing churn rate isn’t just about preventing customer loss—it’s about building a loyal community. Referred customers often exhibit lower churn rates because they come with an inherent trust in your services, referred by someone who already values what you offer. The more people participate in your referral program, the stronger the signal that your services are resonating and easy to recommend. By understanding and leveraging this dynamic, businesses can reduce churn, enhance retention, and foster a network of satisfied customers who actively champion your brand. Explore our dedicated resources on Lupo's Referral Program to discover how to create a referral strategy that drives loyalty and growth.