Understanding customer retention and churn

By: Matt Bird

Date: 11 April 2012

Two of the most important metrics a start-up needs to look at are customer retention and churn. These figures should be two of your key performance indicators (KPIs), and getting systems in place early to track and minimise issues in these areas will set you in great stead for your business life.

Customer retention

Customer retention is a measure of how many of your customers are loyal to your brand and return for another visit. Customer retention only deals with existing customers, with no consideration for new customers.

All companies spend a lot of money to acquire customers so sometimes it can be shocking how easily we let them walk away. It costs an estimated seven times more to acquire a new customer than it does to sell to an old one, due to factors such as lack of brand recognition, offering new customers incentives (e.g. a discount) and not having contact details to initiate a conversation.

Calculating customer retention

First things first, decide on a ‘churn time’, i.e. a period in which you would expect a customer to make a repeat purchase. Where I work an average user would be expected to re-order every three months, and in total we’d expect the vast majority of customers to have ordered at least every six months before thinking something is wrong.

This will obviously vary by product, so a supermarket’s churn time will be vastly different to a holiday booking’s company.

Next, you simply take whatever date period you wish to calculate retention for, and compare how many existing customers ordered within the expected time frame.

For example: to calculate our recent retention rate, we’d look at existing customer repeat orders in the past three months, and compare these customers to how many ordered in the three months before.

Customers ordered from Jan to Mar = 500

How many of these customers ordered again between Apr-Jun = 400

Customer retention rate - 400 / 500 = 80%

Customer churn

Churn, sometimes known as customer attrition, is the opposite end of the spectrum, i.e. how many customers don’t return to your company after making a purchase. Customer churn takes into account new customers in its calculation, which is a major difference to retention metrics.

Churn is obviously something you want to avoid, as it’s nigh on impossible for a business to grow with a high churn rate. Thus it is a fantastic indicator of whether something is wrong with your product or service.

Calculating customer churn

Again, the first step is to decide on a churn time as we did above.

Next, ensure you can accurately track the total customers you have in a given time period. Don’t forget to include all the different ways a customer can reach you. For example, website, fax or phone orders all count as conversions in our system even though they are processed and recorded differently.

Now to calculate! Imagine a company with a churn period of 30 days.

Day 1 - you have 100 customers

During the next 30 days you acquire 30 new customers.

During the same 30 days, 5 of your existing 100 customers do not convert, or cancel a subscription for whatever reason (assumed lost).

Total customers = 100 + 30 - 5 = 125

Churn rate = 5 / 125 = 4%

Monitoring these two metrics gives a great performance benchmark that you can aim to better each period. If you implement any service changes or new features, these two KPIs will give you an accurate idea of the possible benefits to your company's performance. Couple this with some long-term customer value estimations and you’re well on your way to some fantastic performance data!

In my next post I’ll cover some easy methods of reducing churn and increasing your customer retention rates.

Matt Bird of printer cartridge supplier, StinkyInk