Companies lose $1.6 trillion per year due to customer churn. And yet most businesses have no process in place to reduce churn. In this post, let me talk about why churn matters. I will be doing a series of posts in the next few days explaining how you can be more proactive in avoiding churn.
There are many ways your customer can be called churned. It can be -
• Lost contracts or cancellations
• Downgrades to a cheaper plan
• Customer acquisition by a competitor
• Customer going bankrupt
All the above causes are in your control except the last one, which largely depends on the quality of service you provide to your customers. Companies spend significant dollar amounts to acquire customers. There are many reasons why keeping existing customers is more critical than new client acquisitions. For example, the cost of acquiring a new customer is far more than retaining an existing one. It's between 5 and 25 times more! When a customer churns or leaves, you lose business, thus impacting your recurring revenue.
Customer relationships also become more valuable over time, as operating costs to serve them decline and their inclination to purchase increases. Loyal clients may also refer new customers through their social networking interactions.
In concrete terms, research by Bain & Company found that just a 5% increase in customer retention improved profits by over 25% in some sectors. Another McKinsey report estimated that reducing customer churn could increase earnings for a company by as much as 9.9 percent. Management's problem is that it is challenging to determine which subscribers left the company and for what reasons. It is, therefore, even more, challenging to predict which customers are likely to leave the company. It is also more challenging to devise cost-effective incentives that will persuade likely "churners" to stay.
Marketing Metrics claims that the probability of selling to an existing customer is 60-70%, and only 5-20% to sell to a new prospect. That means companies can improve the topline and the bottom line by improving customer retention.