Monitoring and improving customer retention for subscription-based businesses such as electricity, natural gas, cable, telecom and SaaS is critical to growing your company.
Your bottom line depends on the regular revenue you receive from each of your customers. When you lose a customer, you lose that revenue.
You’re forced to replace all the customers you lost last month before you can start growing your customer base. In addition, it can cost anywhere from five to 15 times more to acquire a new customer than to keep an existing one.
Knowing where you stand is half the battle
Keeping track of a few key numbers give you insight into your current situation and whether it’s improving or getting worse month to month.
Those numbers are:
- Monthly Churn Rate
- Projected Annual Churn Rate
- Lost Revenue per Month
- Annualized Lost Revenue
- Cost to Replace Lost Customers Each Month
- Annualized Cost to Replace Lost Customers
You can determine these numbers yourself with some simple—and some not so simple—formulas. We developed a set of calculators at https://turnaroundtwins.com/churn-calculators/ to make the process as easy as possible for you.
Enter the following four numbers, and the calculators do all the work.
- Number of customers at the start of the month
- Number of customers who left during the month
- Average monthly revenue per customer
- Cost of acquisition
Monthly Churn Rate
Understanding your monthly churn rate is fairly easy to determine.
Simply divide the number of customers that left last month by the total n umber of customer you had when you started the month. Do not include any new customer you acquired during that month in your calculation, or it will give you a better number than what you are actually experiencing.
For round numbers, let’s say you started the month with 250,000 customers, and 6,750 left during that month.
6,750/250,000 = 0.027 which is a churn rate of 2.7% for the month.
That doesn’t look too bad.
We made it even easier for you. Simply enter the number of customers at the start of the month and the number of customers who left during the month in the calculator and see your monthly churn rate.
Annual Churn Rate
Calculating your true annual churn rate is a bit more complicated.
You subtract the monthly churn number from 1 for each month to get your monthly retention rate.
For this example:
1-.027 = .973
You do this for every month. At the end of the year, multiply all 12 monthly retention rates to get your annual retention rate. Subtract this number from 1 and get your annual churn rate.
Besides being a bit tedious, one of the biggest drawbacks is waiting a full year before you can see the impact your annual churn rate will have on your bottom line.
Our calculator shows you the projected annual churn rate (assuming monthly churn rate remains constant for the year) right below your monthly churn rate.
Using the numbers from the example above, you would have a projected annual churn rate of 28%.
That means you need to replace nearly 30% of your entire customer base every year just to stay even.
Lost Revenue
Next, simply enter the average monthly revenue you receive per customer. Our calculator shows you how much revenue you are losing (for the month and over 12 months) from the customers who left.
Staying with our example, if your average monthly revenue per customer is $100, you will lose $675,000 per month and $8,100,000 every 12 months if your churn rate remains constant.
Cost to Replace
Enter your cost of acquisition and the calculator shows you the cost to replace those customers each month and over 12 months.
If it takes $280 to acquire a new customer, you will need to spend $1,890,000 per month and $22,680,000 every 12 months to keep your customer base where you started from.
Bottom line impact
Your numbers will likely be different, but it can be very eye-opening.
Combining the lost revenue and cost to replace from our example is $2,565,000 per month and $30,780,000 every 12 months just to stay even.
To make matters worse, if your monthly churn rate is 5.5% (not unheard of in many industries), your annual churn is 49.28%. You will need to replace almost half your customer base every year.
For our example above, lost revenue and the cost to replace the lost customers would be $62,700,000 each year to maintain the starting customer count.
This makes growing your customer base nearly impossible.
Track your progress
Go to https://turnaroundtwins.com/churn-calculators/ and bookmark the page so you can use this tool every month to monitor whether your churn rate is getting better or worse.
See if changes you are making are having a positive impact on your numbers.
Look for things that can negatively influence the numbers such as seasonality, an ad campaign that is confusing to your customers or sets unreasonable expectations, pricing changes, new customer service policies, etc.
Turning things around
If you’re having trouble getting your churn rate down, we specialize in recognizing the symptoms, identifying the underlying issues and creating customized solutions that break the current cycle and put you on a path to real, sustainable growth going forward.
Send an email to info@box2407.temp.domains or give us a call at 214.414.9014 to set up a free, no-obligation, one-hour call to discuss what’s going on and how we may be able to help you change the trajectory of your company.
So, what have you tried to lower your churn rate? How did that work for you?