Customer retention : is it worth spending money on retaining your customers?
Discover a simple way of measuring whether it is worth spending your money on preventing churn and retaining your customers.
Churn is very common in every business, even some businesses are (much) more affected than others. Churn can be defined as follows:
Customer churn: when customers or subscribers stop doing business with a company
In our previous article, we have illustrated how complex churn can be and that it is different for every business. There are types of churn that are obvious, whereas other types are more difficult to notice. In this article, we are going to show a simple way of measuring whether it is worth spending your money on preventing churn and retaining your customers.
Here's a napkin math approach: calculate how much additional margin you would have made this year with no churn, i.e. all customers retained, and compare it to different levels of churn. First, several figures need to be known:
A simple ROI calculation formula
- The Average Margin per Customer - The Total Number of Clients Last Year - The Number of New Clients - The Number of Lost Clients ==> Total Additional Margin = (New clients - Lost clients) x Average Margin per Customer
Let's use an example. At the end of 2018, an online newspapers company operating on a subscription-based business model has gained 10 000 new subscribers. Last year (end of 2017), the company had 90 000 subscribers. The Average Margin per Customer is 10 EUR yearly.
- Case 1: No churn, all customers are retained.
- (10 000 - 0) x 10 = 100 000 EUR
- Case 2: 1% churn
- 1% x 90 000 = 900 clients of 2017 are lost in 2018
- (10 000 - 900) x 10 = 91 000 EUR
- Case 3: 3% churn
- 3% x 90 000 = 2700 clients of 2017 are lost in 2018
- (10 000 - 2700) x 10 = 73 000 EUR
As illustrated above, the impact of churn on additional margin increases largely even with a small difference in churn rate. The 3% churn rate has caused a 27% loss in additional margin. The net impact becomes bigger with a larger customer base.
Of course, there are other factors to evaluate whether it’s worth spending money on retaining customers, such as the costs of retaining them and costs of acquiring new customers; but our example has provided a quick and simple insight into how much impact churn could have on your business.
Want to know more about measuring the impact of churn on your specific business?
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