In the planning stages of a startup, all bases should be covered, but have you thought about how customer churn will affect your business? Churn is an important metric used for any business that gains profits with subscriptions. Developing a great team, having an effective business model, and plotting out your target audience is great, but the growth for your business resides in retaining existing customers and drawing in new ones on your e-commerce platform. Therefore, it is important to understand how consumer churn can plummet your startup.
Understanding Consumer Churn
Consumer churn, interchangeable with the term customer churn, is a metric used to analyze how much of your customers terminate their services with your business over a specific time period. For instance, a 10% monthly churn rate equals 10% of your customers who leave your business in a specific time span. So, 35% annual churn rate equals 35% of your customer base that has left within that annual time frame.
How Customer Churn Affects Your Business
Consumer churn should be on the low end for your startup to thrive. To give a precise number on your churn rate, divide the number of customers lost at the end of the month by the number of customers you had at the beginning of the month. This does not include new customers. The number you get is your company’s churn rate.
Is There An Acceptable Churn Rate?
The term acceptable is broad concept word. When it involves the churn rate it differs depending on your industry. Changing your sticker prices is different from simply changing your social media or marketing scheme.
Understand where you stand in the industry and how the churn rate is currently affecting your business profits and investments. For example, using the formula above, losing 5% may look ok, but for startups, if a company has 800 customers and the medium revenue/customer is $20, then the company is losing 40 customers the next month. So, the churn rate is 5% for that time frame. With a 5% rate, there is not enough information about the prospect of the company.
Acceptable is once again a broad concept. It truly depends on your industry. If you are in the software or computer server industry, it might be even higher but that could still be alright.
What Your Startup Needs To Know About Churn
You want to keep your rate down. So, if you are gaining 50 new customers a month then a rate of 5% or lower is a good start. Take into account your growth wall and growth ceiling.
The growth wall is when a company has only acquired about 75% of most possible company growth. The growth ceiling is your company’s lifecycle where customers churned equals new customers acquired within a specific time period. This is unbelievably bad for a business churn rate. This is the percentages that you want to avoid at all costs.
Reeling in the example of the 800 customers; if the existing number of customers is 800 and the draw in rate for new customers is 50 per month with a churn rate of 5%, then the company’s projected growth wall will be made near July 2019.
That gives the impression of exciting numbers. The business is steady; existing customers are not equaling newly acquired customers and the rate of customers leaving is minimal. Observe how close the loss rate is to the newly acquired. Normally, new customers are great for a business reputation, but this is about lowering the churn rate.
Consider this, the business is acquiring 50 new customers per month and pulling in $16,000 from 800 customers as of March 2018, it will hit a growth wall in July 2019 – a 16-month time period – during which it will have reached that 75% of possible growth. Why is this not good? Because salaries for employees will not move, no promotions or growth, any investments placed into the company will have been used, customer turnover will affect morale, and the cash-flow for the business will be impacted negatively.
In Conclusion
Understanding how consumer churn can affect your startup is very important for its success. Continue to bring in new customers, but maintain your existing subscription-based customers to keep your churn rate down. Remember that a high churn rate is bad for your business because you are losing loyal customers s easily as you are making new customers. If your rate is too high, consider revamping your customer retention strategy.
Douglas Pitassi is a small business blogger and freelance writer.
I hope you enjoyed this article about what your lean startup should know about customer churn and how to reduce it.
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