What does this rate measure? Why is it vital to measure the behavior of customers who have abandoned us? What benefits do we get from understanding the reasons why they abandon our brands, products and services?
We have prepared this article to answer all your questions about churn rate.
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Churn is an English word that means “to shake vigorously”, and when transferred to the world of commerce, and specifically to digital marketing , it does not lose that meaning: it is an indicator that should shake us up.
The churn rate (also known as “abandonment rate” or “cancellation rate”) is an indicator of the number of customers who have stopped consuming our products and services.
This is a ratio that, like any indicator, is measured as a percentage and over a certain period of time. It is a particularly useful churn rate for companies that have recurring billing services, with subscriptions that are automatically renewed month after month, unless the customer cancels.
In this context, the churn rate would indicate how many customers cancelled that subscription during the last month. This is essential for this type of company, since their business model is based on the consumption of a large customer base.
For example, all the alarm bells went off at Netflix in October 2020 when it was announced that its churn rate had gone from 2.1% to 3.5% in 30 days.
This meant, when compared with the streaming giant's growth estimates, that in three years (by adding and subtracting cancellations and new members) there would only be growth of barely 20,000 new subscriptions in the United States.
After analyzing the figures, it was established that the increase in the cancellation rate coincided with an increase in the subscription price and restrictions on the use of shared accounts.
The churn rate is an indicator that can be calculated for any company that has recurring customers and aspires to gain new and loyal ones.
Importance of measuring churn rate for your business strategy
How to measure average churn rate
As with Netflix, measuring the churn rate is both a preventive and a projective measure. It is used to measure the efficiency of the business model (monthly, quarterly, annually, etc.), establish growth forecasts and, above all, determine the causes of a “churn event.”
This is the term used to refer to the moment when a customer decides not to continue using your services or products.
For companies that are managed by renewable subscriptions, such as Netflix, Spotify, or a company that sells software licenses, these events are easy to determine by simply auditing the number of members who do not renew.
In this way, the reasons why these customers stop renewing can be analyzed: a price increase, a limitation of the benefits of the product, a loss of brand prestige, etc.
However, churn rates are not an indicator exclusive to these types of companies. Companies that manufacture tangible products (such as fashion or household appliances) can benefit from measuring churn rates.
In these cases, sophisticated data analysis comes into play , where factors such as the useful life of the products and the time it takes a customer to renew them come into play. For example: a pair of shoes is functional for 18 months and the average customer takes two months to renew them.
The churn rate , in this example, would be measured over that 20-month period, once the customer decides to buy shoes from a brand other than ours. And, even with that slack in time, this ratio will allow for measuring income and efficiency.
