What Is Churn?

Customer churn measures the number of clients who discontinue a service or stop buying products in a given time period.

To many companies, Customer churn is a challenging issue. Customer churn (also called attrition) measures the number of clients who discontinue a service (cell phone plan, bank account, software...) or stop buying products (retail, e-commerce...) in a given time period.

Even if Finance and Sales managers are aware that churn costs money, they sometimes have difficulties to have a common cross-company understanding of churn. And this for a good reason: depending on your business model or activity, you can combine several forms of churn. In this post, we have listed 3 main definitions of churn.

  • Passive vs active churn: companies are well aware of active churn, which is when customers choose on their own to leave a service and actively end the contract. Passive churn, however, can be more subtle when customers reduce their usage or simply cease to use a service. For example, in banking, passive churn can happen when a customer finds another bank while still being subscribed to the first. Although the relationship with the original bank is kept, he/she uses less of it and more of the new bank.

  • Explicit vs implicit churn: many companies notice explicit churn when the contract ends and the customer doesn’t renew it. But the decision to churn could have occurred implicitly way before if the customer had already decreased or stopped using the service. This is implicit churn: churn that becomes noticeable by the lack of repeated use or purchase of a customer. Implicit churn is the most common form of churn for businesses that do not require customers to notify an end of a contract or subscription but can also exist for businesses that do. For example, this can apply for music streaming services, in which a customer can stop using the service while the subscription is still active. Such behaviour, if unaddressed, could eventually lead to explicit churn when the subscription expires.

  • Actionable vs non-actionable churn: Actionable churn, such as customers dissatisfaction with the service, can be identified and prevented. Non-actionable causes are causes that you cannot influence such as a customer moving away, deceased, or going out of business. This is out of our hands to prevent, but this can, in some cases, be predicted. For instance, you can predict the chances of your client to go bankrupt. For companies such as insurance companies, both actionable and non-actionable churn may have an impact.

For some businesses, all three definitions can apply and have to be implemented in your churn calculation and prevention strategy. If you are interested in further understanding how to define customer churn specific to your case and your data sources, Contact us!

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