Understanding customer retention and churn

Blurred image of shoppers leaving a shopping centre representing customer retention and churnTwo of the most important metrics a start-up needs to look at are customer retention and customer churn. These figures should be two of your key performance indicators (KPIs). Getting systems in place track and minimise issues in these areas will set your business in great stead

The importance of customer retention

Customer retention is a measure of how many of your customers are loyal to your brand and return to make further purchases. Customer retention only deals with existing customers, with no consideration for new customers. All companies spend a lot of money acquiring customers, so 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 (eg a discount) and not having contact details to initiate a conversation.

Calculating customer retention

First things first, you need to establish a 'churn time', ie a period in which you would expect a customer to make a repeat purchase. In my company, an average user would be expected to re-order every three months. We'd expect the vast majority of customers to have ordered at least once every six months before we start to think something is wrong. This will obviously vary by product, so a supermarket's churn time will be vastly different to a holiday bookings 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. For example:

Customers ordered from Jan to Mar = 500

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

Customer retention rate - 400 / 500 = 80%

What is customer churn?

Churn, sometimes known as customer attrition, is the opposite end of the spectrum. Churn is the number of customers that 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 customer 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. This makes churn 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, email, online, in person and 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 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

Written by Matt Bird of printer cartridge supplier, StinkyInk

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