How churn prediction can help you retain customers and grow your business faster

· 3AG blog,CHFA

To say that the subscription-based business model is picking up steam is a massive understatement. While not too long ago it seemed to be mainly the purview of telecommunications, software and media companies, today businesses of all sizes are selling groceries, organic produce, meal kits, cosmetics, personal grooming products, health supplements and much more as weekly, monthly or annual subscriptions.

Consumers have enthusiastically embraced the model because of the convenience it offers, while businesses welcome the promise of steady recurring revenues. And just as the pandemic (with its stay-at-home orders) has accelerated the shift to ecommerce, it has also hastened the adoption of retail subscriber models.

If you operate a subscription-based business, you should be concerned about cancelled subscriptions, often referred to as customer churn.

GIF of Marge Simpson selling pretzels

Why should you care about customer churn?

As the owner-operator or manager of a startup or growing businesses, you’re likely focused on customer acquisition. It’s in an entrepreneur’s DNA to strive to grow the business.

You should be just as fixated on customer retention. Why? Because it’s much more costly to acquire new customers than it is to keep current ones — five times more expensive, according to some studies. If you’re continually spending to win new customers, you could be digging a big financial hole to fall into. Reducing by even a small percentage the number of customers who leave you each month can result in a big revenue lift over time.

So, staying on top of customer churn is important for business growth. But with so many other things to take care of, including fulfilling and shipping orders, restocking supplies, managing company finances, updating your digital storefront and more, you may not even know what your churn rate is.

A formula for customer churn

Businesses calculate churn in different ways. Here is one common formula shared by Salesforce:

Customer churn = (customers at beginning of month - customers at end of month) ÷ customers at beginning of month

Don’t include new customers in the customers at the end of the month, because you’re trying to calculate the customers you lost.

Why is it important to calculate and report on customer churn? Because it allows you to forecast future revenues more accurately. It’s also a key metric for the health of your business — a leading indicator of the perceived value of your brand and your promised customer experience.

Predicting the future is a science, not a dark art