Churn: The Vampire That Will Destroy Your Business

Churn is the slow bleed that kills businesses. It’s the rate at which customers or employees leave a business. For a company to be expanding, its growth needs to exceed its churn. This is most visible in subscription-based businesses — Netflix, Hulu, Adobe. The key thing about churn is the silent killer nature. If unnoticed, it can drown out a business. They also dictate how much you can spend per customer. If a customer takes 100 dollars to acquire, and they cancel their subscription before earning you at least the same amount, then your customer acquisition costs are too high for your business.

Its critical for anyone looking to succeed to understand the concept of churn. Your growth has to exceed your churn, else you die. The product may be faulty, the customer service poor, or the cost higher than utility to customers. When your churn exceeds your growth for a long enough time, the company ceases to exist. Same applies to employees. If people are leaving your firm at a higher rate than the industry average, something is off. They might not be satisfied with their salary, leadership could suck, or your calculations of work-life balance are completely out of whack according to their expectations.

You have to remember that retention is more cost-effective. This is why customer service, satisfying products, competitive offers, and product-market-fit is so crucial. Acquiring new customers is cool and all. But it is much more expensive than retaining your existing user base. If you have anything to do with business, be wary of this vampire. It’s a subtle process that creeps up gradually. Tracking your rates of turnover is a must to identify negative trends before they turn into crises. The imperceptible decline might be unstoppable once it becomes evident.

Real-world examples of churn:

• Telecommunications: a mobile network operator loses 2 percent of their customers monthly. Their service is rather poor and competitors have better offers. Over a year, this churn rate results in a significant reduction of their customer base. Costly marketing is needed to replace lost revenue. They might never recover.

• Software-as-a-Service (SaaS): a SaaS company experiences steady monthly churn as users cancel subscriptions due to usability issues or lack of desired features. The company’s growth stagnates. Though at this point, the churn can still be addressed. It’s not too late to upgrade their services before they face the downward spiral in revenue.

• Retail and E-commerce: an online store sees a slow but consistent decline in repeat customers. They have a poor return policy and substandard customer support. The loss of loyal customers gradually erodes profit margins. The firm becomes financially unstable, since there are spikes of new customers from marketing campaigns, and plummets since there are little repeat purchases and referrals.

• Fitness Center: a gym experiences a gradual drop in membership renewals. Members feel that their needs are not being met. The equipment is outdated. Without corrective measures, the gym’s revenue declines. It eventually reaches a point that is unsustainable and it has to close shop, no matter how high initial membership numbers were.

How you might use churn as a mental model: (1) find the wound — track customer retention rates, renewal frequency, and satisfaction scores to detect early signs of bleeding in your business; (2) address the man with the scalpel — analyze customer feedback and conduct surveys, as you may perhaps find a pattern in complaints or reasons for cancellation that pinpoint you to specific areas for improvement; (3) dress the wound — focus on enhancing the customer experience through better support, product, and loyalty programs; (4) don’t hurt yourself again — ensure that your customer acquisition strategies are balanced by retention, allocating effort both to attract new customers and nurture old ones; (5) rinse and repeat — knowing that churn rates pose a significant risk to long-term business viability, repeat this process regularly.