Customer churn doesn’t sound good, evoking images of choppy, stormy seas. So what is customer churn, actually? Churn rate, also sometimes called rate of attrition, refers to the rate at which your customers (or one-time customers) stop doing business with your organization. A high rate means a large turnover of customers with very few carrying over for the long haul.
Yet, why exactly is that a bad thing? After all, if you’re generating customers to begin with, that suggests you’ve got a solid business, even if they’re not in it for the long run. Right? Well, not necessarily. While it’s important to draw distinctions based on the type of company you’re operating (a subscription model company that loses a subscriber may be more concerned about churn than a tourist-focused bodega that experiences a high turnover of customers), it nonetheless suggests that something’s going wrong.
What’s so bad about churn? Read on four of the possible explanations.
#1. Churn highlights a communication breakdown
We may not immediately think that simple transactions are a form of communication, but they very much are. Even if we’re talking about the near-wordless interaction of swiping your card to pay for a morning coffee or pastry, there is a communication between the business and its customers in terms of their expectations. Failing to make customers feel listened to or addressed can be enough to sever a customer relationship.
That doesn’t necessarily mean endless follow-ups with customers in every business (that would be exhausting for customers). But it does mean giving them the opportunity to issue feedback, to be educated about the value of what you’re selling, and to be incentivized or rewarded if they’re particularly loyal. Communication is about speaking the same language. If you and your customers clearly have very different expectations, that could highlight a faultline. If you’re seeing repeated churn for the same reasons, it suggests you’re simply not interested in listening. That’s not a good look for a business.
#2. It suggests that you don’t stand out from the pack
Not every business is going to be utterly unique in terms of the product that it sells. However, it should have something about it (or, ideally, several somethings about it) that make it stand out. A business owner should have no problem articulating how their business is different from that of competitors, and what customers are going to lose out on if they decide to go elsewhere. That might be a particular quality of product, a level of customer service, or something else entirely.
If you’ve got a lot of customer churn, it indicates that your customers don’t see it that way. Despite having found a business that can seemingly solve their needs, they’re happy to go someplace else, even if this adds another job for them to do. Customer churn can suggest a core lack of identity for your business — or, perhaps, an identity customers don’t want to buy into.
#3. It suggests you’re picking the wrong target customers
This is a tricky one. On the one hand, a business should aim to be inclusive, welcoming to as broad a base of customers as possible. It’s easy to justify customer churn with “well, they weren’t a good fit for us” when, in fact, the problem is failing to listen to customers and properly address their needs. But, in some cases, repeated customer churn can suggest that you are focused on bad fit customers.
That could mean that you’re spending money appealing to customers who, ultimately, aren’t in the market for the product you’re making. More seriously, it could be a larger strategic issue about your product’s positioning. The good news is that, while this is a setback, that knowledge can help you better pursue customers who are more in line with your ideal audience.
#4. It costs a lot to win new customers
If you lose one customer, but replace them with another, that may not sound terrible. But it’s not good news. At best, losing a customer and gaining another puts you in the same position you were in to begin with. It means stagnant growth, since you’re focused on replacing customers rather than adding new ones. But most of the time you won’t be facing this best case scenario (which, in itself, isn’t all that great). It costs an estimated 5x more to gain new customers than it does to keep existing ones, meaning that you’ll be spending more to stay where you are. Established customers will also spend more, since it allows more trust to be built up. Long-term customers will have an affinity for the business that most new customers simply won’t possess.