Customer Retention - Decreasing Churn to Grow Profits
Customer Retention – Service business, or companies with services marketing elements like SaaS companies, should prioritize fighting customer churn above all else. The old saying “acquiring a customer is 4 times more expensive than keeping an existing customer” still applies.
In this article we look at the impact of customer retention on your bottom-line through the lens of retained and recurring revenues.
Very few industries are exempt from calculating churn – commodity companies that sell one-off products to their customers are an exception. Since you’re probably not an exception keep reading…
Key Metrics
Current LTV Per Customer – The lifetime value of your customers at the given churn rate
New LTV Per Customer – The lifetime value of your customers if you decrease churn (-) or increase churn (+) by a given percentage
Aggregate net profit – Net profit for your entire customer base
Key Assumptions – Using the Customer Value Calculator
% Decrase / Increase (+) Churn – See how decreasing (-) and increasing (+) increasing churn affects your key metrics (unit is percentage)
Annual net profit per customer – Figure out how much net profit on average you make per customer in a year
% Churn rate – Number of customers at the start of the year divided by number of customers (from the group you started out with!) times 100
% Interest rate – If you walked into the bank today, what’s the interest rate you would get?
Number of customers – How many customers do you have?
Customer Retention Strategies
Customer retention is a marketing strategy. It describes how you will make money from your business.
Good customer retention strategies describe how your business goes about keeping your customers. And just to be clear, customer retention is not the same as loyalty – which describes a deeper relationship.
Here are some of the best ways to keep your customers if you’re a small service-minded business:
- Stick to the script and meet your customer’s expectations. There’s nothing wrong with delivering superior customer service and delighting your customers. However, for retention to work you should provide good customer service on a consistent basis.
- Anticipate your customer’s needs and communicate the offer. We know that every customer is different. Nonetheless, your customer interacts with you in predictable ways. Use this knowledge to help customers meet their needs.
- Use data to build analytical models that prevent customer churn. This one is probably the toughest to pull off without help from an expert. Customer churn models provide attrition scores for each customer. This helps focus your efforts on keeping your at risk profitable customers from defecting to the competition.
Why Keep Harping on About Customer Churn?
Because small reductions in customer churn lead to substantial profits. And on the flip-side, because small increases in churn lead to significant decreases in profit.
What, then, is churn?
Customer churn is the flip-side of retention. So everyone knows what retention is. Right..? Customer retention is simply a measure of how many customers remain with you over a given time, like a year. It’s a measure of how many customers have quit over this timespan.
What’s Your Churn Rate? An Example from Automotive Service
For automotive dealers, you’re not primarily interested in brand retention. If you have multiple brands and can retain customers by selling another brand car, you have retained that customer. The starting point for measuring the churn rate is your service history.
Of course, you don’t know precisely when the customer has left. Barring service, or maintenance contracts, customers don’t usually call to inform you that “I will never service my car with you again!”
So how do you define churn, when you can’t observe it directly?
Ideally, you would look at different servicing patterns from your customer base.
Models like recency of service visits and frequency will give you a customer-by-customer view of churn. However, for this exercise, you can do something more simple.
Simple Ideas to Increase Customer Retention Rates
Your customers expect timely communications that add value along the their journey with you. If you’re an automotive service shop or department, you’ll provide offers and helpful information for regular maintenance or service.
Think about all those opportunities that you have to communicate with your customer base at different times of the year. Winter tires? No problem, send an offer. Tires are one of the best retention tools in the business. You can also forecast the next time your customer needs to change their tires, based on their mileage data.
First, take a cohort of customers that serviced for the first time during a given period, like three years ago.
Investigate maintenance service or visits that are regular and preferably voluntary. Count the number of customers at the beginning of the period, then count the number of those customers (the cohort) that are still with you at the end of the period.
What’d you get?
For a dataset I’m currently working on, I calculated a staggering 76% churn rate. On the flipside customer retention is a measly 24% – ouch!
Well, so what?
Quantifying Churn Over a Customer Base
In the intro to this post, I said that churn has massive implications for your bottom line.
To see how much, we can plot lifetime value as a function of the churn rate. To do this, you will need to know the annual net profit per customer.
To calculate the incremental net profits, from a reduction in churn, you can use a simple Excel spreadsheet:
Download the Customer Churn Spreadsheet
Try it for free .
Meeting Customer Expectations in Service Sales
This regularity of service visits at different periods of time during the customer lifecycle helps us induce whether a customer has left. By segmenting your customer base according to different variables like car age, and mileage – you can more accurately see where the drop-off is occuring.
In contrast to contractual customer relationships automotive customers can, and do leave. Lack of customer loyalty is sometimes blamed. But you don’t need your service customers to be loyal. Don’t get me wrong. It’s great if they love you. Meeting customer expectations in a timely fashion during the service cycle is enough for retention. And your profits.
If you’re interested in how this is done, please review our partner’s case study from a large automotive dealer in the Nordics (NB! It’s a PDF).
Practical Applications of Customer Analytics
The churn rate – or inversely the customer retention rate – is a prime example of a customer analytics metric. We’ll be writing on the four different parts of customer analytics in an upcoming article. We’ll reveal them here, for context:
- Acquisition
- Base Management
- Retention
- Win-Back
Customer analytics is primarily interested in turning a product-centric organisation into a customer-centric organisation. The jargon, metrics, and examples only make sense when you view it through this lens.
Customer lifetime value is useful as input to other metrics such as net profits. The customer-centric view will allow you to arrive at an aggregate net profit from by valuing your customer base. This is not the bean-counting view of valuing assets, since we are not looking at our balance sheet to populate this value.
Lifetime values are also useful when deciding how much to spend on paid advertising.
If we know that the lifetime value of a customer we may be able to bid higher than the usual cost per acquisition metric (CPA). Not only can we bid higher, we can know how much higher we can bid.
For the churn rate metric we can measure the impact a percentage reduction in attrition means to our company, and budget for marketing or service improvements. We would of course need to track the churn rate over time, as well as map these improvements to movements in the churn rate over time
How Would You Decrease Customer Churn?
Do you think you can reduce churn and increase profits? How would you go about it?
If you find this tool useful, or not, please consider leaving some feedback through our contact page.